Arlo Technologies, Inc. - Quarter Report: 2022 July (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 3, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-38618

ARLO TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


Delaware		38-4061754
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2200 Faraday Ave.,	Suite #150
Carlsbad,	California	92008
(Address of principal executive offices)		(Zip Code)

(408) 890-3900

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

ARLO

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer

☐

Accelerated filer

☒

Non-Accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 87,631,698 as of August 5, 2022.

Table of Contents

ARLO TECHNOLOGIES, INC.

TABLE OF CONTENTS


PART I: FINANCIAL INFORMATION
		Page No.
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets	3
	Unaudited Condensed Consolidated Statements of Operations	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)	5
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity	6
	Unaudited Condensed Consolidated Statements of Cash Flows	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47

PART II: OTHER INFORMATION

Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 6.	Exhibits	51
Signatures		52

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1.Financial Statements

ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	As of
	July 3, 2022		December 31, 2021
	(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	85,537	$	175,749
Short-term investments (amortized cost of $49,901 and $—)	49,721		—
Accounts receivable (net of allowance for credit losses of $405 and $337)	73,998		79,564
Inventories	39,208		38,390

Prepaid expenses and other current assets	8,890		9,919
Total current assets	257,354		303,622
Property and equipment, net	7,478		9,595
Operating lease right-of-use assets, net	15,242		14,814

Goodwill	11,038		11,038
Restricted cash	4,125		4,107
Other non-current assets	4,441		4,314
Total assets	$	299,678	$	347,490
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	77,423	$	84,098
Deferred revenue	13,445		29,442
Accrued liabilities	82,225		97,377
Income tax payable	138		12
Total current liabilities	173,231		210,929
Non-current deferred revenue	577		1,344
Non-current operating lease liabilities	21,469		21,470

Non-current income taxes payable	94		94
Other non-current liabilities	1,906		1,001
Total liabilities	197,277		234,838
Commitments and contingencies (Note 9)
Stockholders’ Equity:
Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding	—		—
Common stock: $0.001 par value; 500,000,000 shares authorized; shares issued and outstanding: 87,529,758 at July 3, 2022 and 84,453,212 at December 31, 2021	88		84
Additional paid-in capital	411,316		401,367
Accumulated other comprehensive income	(168)		—
Accumulated deficit	(308,835)		(288,799)
Total stockholders’ equity	102,401		112,652
Total liabilities and stockholders’ equity	$	299,678	$	347,490

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended				Six Months Ended
	July 3, 2022		June 27, 2021		July 3, 2022		June 27, 2021
	(In thousands, except per share data)
Revenue:
Products	$	86,191	$	73,311	$	181,016	$	133,072


Services	32,788		25,260		62,714		48,055

Total revenue	118,979		98,571		243,730		181,127
Cost of revenue:
Products	73,829		62,019		154,606		109,176


Services	11,410		10,383		21,809		19,975

Total cost of revenue	85,239		72,402		176,415		129,151
Gross profit	33,740		26,169		67,315		51,976

Operating expenses:
Research and development	17,402		16,251		33,781		31,042
Sales and marketing	14,506		12,459		27,674		23,666
General and administrative	13,149		13,559		25,770		24,786
Impairment charges	—		9,116		—		9,116
Separation expense	25		605		104		659

Total operating expenses	45,082		51,990		87,329		89,269

Loss from operations	(11,342)		(25,821)		(20,014)		(37,293)
Interest income (expense), net	129		3		124		27
Other income (expense), net	(116)		2,662		295		3,571
Loss before income taxes	(11,329)		(23,156)		(19,595)		(33,695)
Provision for income taxes	228		164		441		344
Net loss	$	(11,557)	$	(23,320)	$	(20,036)	$	(34,039)

Net loss per share:
Basic	$	(0.13)	$	(0.28)	$	(0.23)	$	(0.42)
Diluted	$	(0.13)	$	(0.28)	$	(0.23)	$	(0.42)
Weighted average shares used to compute net loss per share:
Basic	86,868		82,134		85,966		81,275
Diluted	86,868		82,134		85,966		81,275

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Three Months Ended				Six Months Ended
	July 3, 2022		June 27, 2021		July 3, 2022		June 27, 2021
	(In thousands)
Net loss	$	(11,557)	$	(23,320)	$	(20,036)	$	(34,039)
Other comprehensive income (loss), before tax:
Unrealized gain (loss) on derivative instruments	—		—		—		(2)
Unrealized gain (loss) on available-for-sale securities	(122)		—		(168)		(1)
Total other comprehensive income (loss), before tax	(122)		—		(168)		(3)


Total other comprehensive income (loss), net of tax	(122)		—		(168)		(3)
Comprehensive loss	$	(11,679)	$	(23,320)	$	(20,204)	$	(34,042)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total
	(In thousands)
Balance as of April 3, 2022	85,835	$	86	$	409,242	$	(46)	$	(297,278)	$	112,004
Net loss	—	—		—		—		(11,557)		(11,557)
Stock-based compensation expense	—	—		7,093		—		—		7,093
Settlement of liability classified RSUs	—	—		95		—		—		95
Issuance of common stock under stock-based compensation plans	2,294	2		34		—		—		36
Issuance of common stock under Employee Stock Purchase Plan	304	1		1,746						1,747
Restricted stock unit withholdings	(903)	(1)		(6,894)		—		—		(6,895)
Change in unrealized gains and losses on available-for-sale securities, net of tax	—	—		—		(122)		—		(122)

Balance as of July 3, 2022	87,530	$	88	$	411,316	$	(168)	$	(308,835)	$	102,401

	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total
	(In thousands)
Balance as of March 28, 2021	81,250	$	81	$	379,738	$	—	$	(243,489)	$	136,330
Net loss	—	—		—		—		(23,320)		(23,320)
Stock-based compensation expense	—	—		6,575		—		—		6,575
Settlement of liability classified RSUs	—	—		104		—		—		104
Issuance of common stock under stock-based compensation plans	2,465	3		—		—		—		3

Restricted stock unit withholdings	(798)	(1)		(4,906)		—		—		(4,907)


Balance as of June 27, 2021	82,917	$	83	$	381,511	$	—	$	(266,809)	$	114,785

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ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)

	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total
	(In thousands)
Balance as of December 31, 2021	84,453	$	84	$	401,367	$	—	$	(288,799)	$	112,652
Net loss	—	—		—		—		(20,036)		(20,036)
Stock-based compensation expense	—	—		15,276		—		—		15,276
Settlement of liability classified RSUs	—	—		5,061		—		—		5,061
Issuance of common stock under stock-based compensation plans	4,421	5		1,419		—		—		1,424
Issuance of common stock under Employee Stock Purchase Plan	304	1		1,746		—		—		1,747
Restricted stock unit withholdings	(1,648)	(2)		(13,553)		—		—		(13,555)
Change in unrealized gains and losses on available-for-sale securities, net of tax	—	—		—		(168)		—		(168)

Balance as of July 3, 2022	87,530	$	88	$	411,316	$	(168)	$	(308,835)	$	102,401

	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total
	(In thousands)
Balance as of December 31, 2020	79,336	$	79	$	366,455	$	3	$	(232,770)	$	133,767
Net loss	—	—		—		—		(34,039)		(34,039)
Stock-based compensation expense	—	—		11,446		—		—		11,446
Settlement of liability classified RSUs	—	—		6,562		—		—		6,562
Issuance of common stock under stock-based compensation plans	4,598	6		4,433		—		—		4,439
Issuance of common stock under Employee Stock Purchase Plan	353	—		1,697		—		—		1,697
Restricted stock unit withholdings	(1,370)	(2)		(9,082)		—		—		(9,084)
Change in unrealized gains and losses on available-for-sale securities, net of tax	—	—		—		(1)		—		(1)
Change in unrealized gains and losses on derivatives, net of tax	—	—		—		(2)		—		(2)
Balance as of June 27, 2021	82,917	$	83	$	381,511	$	—	$	(266,809)	$	114,785

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	July 3, 2022		June 27, 2021
	(In thousands)
Cash flows from operating activities:
Net loss	$	(20,036)	$	(34,039)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	21,834		19,949
Impairment charges	—		9,116
Depreciation and amortization	2,523		3,169
Allowance for credit losses and inventory reserves	(120)		(1,085)
Deferred income taxes	133		(115)

Premium amortization (discount accretion) on investments, net	89		(3)

Changes in assets and liabilities:
Accounts receivable, net	5,498		25,736
Inventories	(628)		22,652

Prepaid expenses and other assets	767		(4,782)
Accounts payable	(6,565)		(19,189)
Deferred revenue	(16,763)		(18,802)
Accrued and other liabilities	(16,113)		(26,073)

Net cash used in operating activities	(29,381)		(23,466)
Cash flows from investing activities:
Purchases of property and equipment	(451)		(1,066)

Purchases of short-term investments	(59,490)		—
Proceeds from maturities of short-term investments	9,512		20,000
Net cash provided by (used in) investing activities	(50,429)		18,934
Cash flows from financing activities:


Proceeds related to employee benefit plans	3,171		6,136
Restricted stock unit withholdings	(13,555)		(9,084)

Net cash used in financing activities	(10,384)		(2,948)
Net decrease in cash and cash equivalents and restricted cash	(90,194)		(7,480)
Cash and cash equivalents and restricted cash, at beginning of period	179,856		190,291
Cash and cash equivalents and restricted cash, at end of period	$	89,662	$	182,811

Non-cash investing and financing activities:
Purchases of property and equipment included in accounts payable and accrued liabilities	$	333	$	549

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and Basis of Presentation

The Company

Arlo Technologies, Inc. ("Arlo" or the "Company") combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle. The Company's deep expertise in product design, wireless connectivity, cloud infrastructure and cutting-edge AI capabilities focuses on delivering a seamless, smart home experience for Arlo users that is easy to setup and interact with every day. The Company's cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection. The Company conducts business across three geographic regions - Americas; Europe, Middle-East and Africa (“EMEA”); and Asia Pacific (“APAC”), and primarily generates revenue by selling devices through retail channels, wholesale distribution, wireless carrier channels, security solution providers, and Arlo's direct to consumer store and paid subscription services.

The Company's corporate headquarters is located in Carlsbad, California with other satellite offices across North America and various other global locations.

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All periods presented have been accounted for in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”).

These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair statement of the unaudited condensed consolidated financial statements for interim periods.

Fiscal periods

The Company’s fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. The Company reports its results on a fiscal quarter basis rather than on a calendar quarter basis. Under the fiscal quarter basis, each of the first three fiscal quarters ends on the Sunday closest to the calendar quarter end, with the fourth quarter ending on December 31.

Use of estimates

The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Management bases its estimates on various assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates and operating results for the six months ended July 3, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or any future period.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 2. Significant Accounting Policies and Recent Accounting Pronouncements

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes during the six months ended July 3, 2022.

Recent accounting pronouncements

Emerging Growth Company Status

As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless the Company otherwise irrevocably elects not to avail itself of this exemption. The Company did not make such an irrevocable election and has not delayed the adoption of any applicable accounting standards.

Accounting Pronouncements Recently Adopted

There were no accounting pronouncements adopted during the six months ended July 3, 2022.

Accounting Pronouncements Not Yet Effective

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its financial statements and related disclosures.

With the exception of the new standard discussed above, there have been no other new accounting pronouncements that have significance, or potential significance, to the Company’s financial position, results of operations, or cash flows.

Note 3. Deferred Revenue

Deferred Revenue

Deferred revenue consists of advance payments and deferred revenue, where the Company has unsatisfied performance obligations. Deferred revenue consists of prepaid services and customer billings in advance of revenues being recognized from the Company's subscription contracts. Advance payments include prepayments for products and Non-Recurring Engineering ("NRE") services under the Supply Agreement with Verisure S.à.r.l. (“Verisure”).

Transaction Price Allocated to the Remaining Performance Obligations

Remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities, in-transit orders with destination terms, and non-cancellable backlog. Non-cancellable backlog includes goods and services for which customer purchase orders have been accepted and that are scheduled or in the process of being scheduled for shipment.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of July 3, 2022:


	1 year		2 years		Greater than 2 years		Total
	(In thousands)
Performance obligations	$	18,054	$	529	$	49	$	18,632

The performance obligation classified as greater than one year pertains to revenue deferral from prepaid services.

For the six months ended July 3, 2022 and June 27, 2021, $53.4 million and $39.6 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $70.1 million and $45.3 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. $11.9 million and $16.1 million of this recognized revenue was included in the contract liability balance at the beginning of the periods. There were no significant changes in estimates during the period that would affect the contract balances.

Disaggregation of Revenue

The Company conducts business across three geographic regions: Americas, EMEA, and APAC. Sales and usage-based taxes are excluded from revenue. Refer to Note 13, Segment and Geographic Information, for revenue by geography.

Note 4. Balance Sheet Components

Cash and Cash Equivalents and Restricted cash

The Company maintains certain cash balances restricted as to withdrawal or use. The restricted cash is comprised primarily of cash used as collateral for a letter of credit associated with the Company’s lease agreement in San Jose, California. The Company deposits restricted cash with high credit quality financial institutions. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same amounts shown on the statements of cash flows:


	As of
	July 3, 2022		December 31, 2021
	(In thousands)
Cash and cash equivalents	$	85,537	$	175,749
Restricted cash	4,125		4,107
Total as presented on the unaudited condensed consolidated statements of cash flows	$	89,662	$	179,856



	As of
	June 27, 2021		December 31, 2020
	(In thousands)
Cash and cash equivalents	$	178,698	$	186,127
Restricted cash	4,113		4,164
Total as presented on the unaudited condensed consolidated statements of cash flows	$	182,811	$	190,291

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Available-for-sale short-term investments


	As of July 3, 2022								As of December 31, 2021
	Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
	(In thousands)
U.S. treasuries	$	49,901	$	—	$	(180)	$	49,721	$	—	$	—	$	—	$	—

The Company’s short-term investments are classified as available-for-sale and consist of government securities with an original maturity or remaining maturity at the time of purchase of greater than three months and no more than twelve months. Accordingly, none of the available-for-sale securities have unrealized losses greater than twelve months. The Company did not recognize any allowance for credit losses related to available for sale short-term investments for the three months ended July 3, 2022.

Accounts receivable, net


	As of
	July 3, 2022		December 31, 2021
	(In thousands)
Gross accounts receivable	$	74,403	$	79,901
Allowance for credit losses	(405)		(337)
Total accounts receivable, net	$	73,998	$	79,564

The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected.


	Three Months Ended				Six Months Ended
	July 3, 2022		June 27, 2021		July 3, 2022		June 27, 2021
	(In thousands)
Balance at the beginning of the period	$	339	$	519	$	337	$	519

Provision for expected credit losses	66		17		68		17
Amounts recovered due to collection	—		—		—		—
Balance at the end of the period	$	405	$	536	$	405	$	536

Inventories

Inventories consist of finished goods which are valued at the lower of cost or net realizable value, with cost being determined using the first-in, first-out method as of July 3, 2022.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Property and equipment, net

The components of property and equipment are as follows:


	As of
	July 3, 2022		December 31, 2021
	(In thousands)
Machinery and equipment	$	13,488	$	13,302
Software	13,755		13,928
Computer equipment	4,083		4,062
Furniture and fixtures	2,562		2,404
Leasehold improvements	5,032		4,922

Total property and equipment, gross	38,920		38,618
Accumulated depreciation and amortization	(31,442)		(29,023)
Total property and equipment, net (1)	$	7,478	$	9,595

_________________________

(1) $2.0 million and $2.4 million property and equipment, net, respectively, was included in the sublease arrangement for the San Jose office building as of July 3, 2022 and December 31, 2021.

Depreciation and amortization expense pertaining to property and equipment was $1.2 million and $2.5 million for the three and six months ended July 3, 2022, respectively, and $1.6 million and $3.1 million for the three and six months ended June 27, 2021, respectively.

Long-lived Assets and Right-of-use Assets Impairment

During the second quarter of 2021, the Company evaluated its real estate lease portfolio in light of the COVID-19 pandemic and the changing nature of office space use by its workforce. This evaluation included the decision to sublease its office space in San Jose, California. This change in the circumstances for the San Jose office space use led management to test the recoverability of the carrying amount of the asset group related to the sublease. At May 25, 2021, the carrying amount of the asset group exceeds the Company's anticipated undiscounted value of the sublease income over the sublease term. Accordingly, the Company reviewed certain of its right-of-use assets and other lease related assets including leasehold improvements, furniture, fixtures and equipment under the sublease asset group for impairment in accordance with Accounting Standards Codification ("ASC") 360 "Property, Plant, and Equipment".

As a result of the evaluation, the Company recorded an impairment charge of $9.1 million, which includes $6.8 million associated with the right-of-use assets and $2.3 million associated with other lease related property and equipment assets, for the three and six months ended June 27, 2021.The assets indicated as impaired were written down to fair value as calculated using a discounted cash flow method (income approach). The fair value of the asset group was determined by utilizing projected cash flows from the sublease, discounted by a risk-adjusted discount rate that reflects the level of risk associated with receiving future cash flows. The inputs utilized in the analyses were classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement". Refer to Note 5, Fair Value Measurements for additional information about the fair value measured on a non-recurring basis and Note 9, Commitments and Contingencies, for further information about the sublease.

Goodwill

There was no change in the carrying amount of goodwill during the six months ended July 3, 2022. The goodwill as of December 31, 2021 and July 3, 2022 was $11.0 million.

Goodwill Impairment

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The Company performs an annual assessment of goodwill at the reporting unit level on the first day of the fourth fiscal quarter and during interim periods if there are triggering events to reassess goodwill. The Company operates as one operating and reportable segment.

The Company determined that no events occurred or circumstances changed during the six months ended July 3, 2022 that would more likely than not reduce the fair value of the Company below its carrying amount. If there is a significant decline in the Company’s stock price based on market conditions and deterioration of the Company’s business, the Company may have to record a charge to its earnings for the goodwill impairment of up to $11.0 million.

Other non-current assets


	As of
	July 3, 2022		December 31, 2021
	(In thousands)
Net deferred tax assets	$	1,432	$	1,565
Sublease	1,708		1,471
Deposits	122		122
Other	1,179		1,156
Total other non-current assets	$	4,441	$	4,314

Accrued liabilities


	As of
	July 3, 2022		December 31, 2021
	(In thousands)
Sales and marketing	$	27,409	$	31,417
Sales returns	15,386		19,960
Accrued employee compensation	14,218		12,367
Current operating lease liabilities	4,584		4,609
Freight	2,424		8,086
Warranty obligation	1,285		1,330

Other	16,919		19,608
Total accrued liabilities	$	82,225	$	97,377

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Note 5. Fair Value Measurements

Fair Value Measurements - Recurring Basis

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of July 3, 2022 and December 31, 2021:


	As of July 3, 2022						As of December 31, 2021
	Total		Quoted market prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Total		Quoted market prices in active markets (Level 1)		Significant other observable inputs (Level 2)
	(In thousands)
Assets:
Cash equivalents: money-market funds (<90 days)	$	22,038	$	22,038	$	—	$	21,935	$	21,935	$	—
Available-for-sale securities: U.S. treasuries (1)	49,721		49,721		—		—		—		—
Foreign currency forward contracts (2)	20		—		20		65		—		65
Total assets measured at fair value	$	71,779	$	71,759	$	20	$	22,000	$	21,935	$	65
Liabilities:
Foreign currency forward contracts (3)	$	—	$	—	$	—	$	47	$	—	$	47
Total liabilities measured at fair value	$	—	$	—	$	—	$	47	$	—	$	47

_________________________

(1)Included in Short-term investments on the Company’s unaudited condensed consolidated balance sheets.

(2)Included in Prepaid expenses and other current assets on the Company’s unaudited condensed consolidated balance sheets.

(3)Included in Accrued liabilities on the Company’s unaudited condensed consolidated balance sheets.

The Company’s investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company enters into foreign currency forward contracts with only those counterparties that have long-term credit ratings of A-/A3 or higher. The Company’s foreign currency forward contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that take into account the contract terms as well as currency rates and counterparty credit rates. The Company verifies the reasonableness of these pricing models using observable market data for related inputs into such models. Additionally, the Company includes an adjustment for non-performance risk in the recognized measure of fair value of derivative instruments. As of July 3, 2022 and December 31, 2021, the adjustment for non-performance risk did not have a material impact on the fair value of the Company’s foreign currency forward contracts. The carrying value of non-financial assets and liabilities measured at fair value in the financial statements on a recurring basis, including accounts receivable and accounts payable, approximate fair value due to their short maturities. As of July 3, 2022 and December 31, 2021, the Company had no Level 3 fair value assets or liabilities measured on a recurring basis.

Fair Value Measurements - Nonrecurring Basis

The Company measures the fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying amount the asset may not be recoverable. For the three and six months ended July 3, 2022, the Company had no assets or liabilities measured on a nonrecurring basis. In the second quarter of 2021, in connection with the long-lived assets impairment analysis, certain lease related property and equipment assets and right-of-use asset were measured and written down to fair value on a nonrecurring basis as a result of impairment. The fair

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value measurements were determined using a discounted cash flow method with unobservable inputs and were classified within Level 3 of the fair value hierarchy. The fair value of the asset group was calculated by utilizing projected cash flows from the sublease, discounted by a market derived discount rate at 8.0%. As of May 25, 2021, the date of measurement, the fair value of the right-of-use asset and other lease related property and equipment assets were $8.1 million and $2.8 million, respectively. The Company recorded an impairment charge of $9.1 million on the assets measured at fair value on a non-recurring basis, which includes $6.8 million associated with the right-of-use assets and $2.3 million associated with other lease related property and equipment assets, for the three and six months ended June 27, 2021. Refer to Note 4, Balance Sheet Components, for further information about the impairment of the right-of-use asset and long-lived assets.

Note 6. Derivative Financial Instruments

The Company’s subsidiaries have had, and will continue to have material future cash flows, including revenue and expenses, which are denominated in currencies other than the Company’s functional currency. The Company and all its subsidiaries designate the U.S. dollar as the functional currency. Changes in exchange rates between the Company’s functional currency and other currencies in which the Company transacts business will cause fluctuations in cash flow expectations and cash flow realized or settled. Accordingly, the Company uses derivatives to mitigate its business exposure to foreign exchange risk. The Company enters into foreign currency forward contracts in Australian dollars and Canadian dollars to manage its exposure to foreign exchange risk related to expected future cash flows on certain forecasted revenue, costs of revenue, operating expenses and existing assets and liabilities.

The Company’s foreign currency forward contracts do not contain any credit risk-related contingent features. The Company is exposed to credit losses in the event of nonperformance by the counter-parties of its forward contracts. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any one counter-party. In addition, the derivative contracts typically mature in less than six months and the Company continuously evaluates the credit standing of its counter-party financial institutions. The counter-parties to these arrangements are large highly rated financial institutions and the Company does not consider non-performance a material risk.

The Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, materiality, accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign exchange rates. The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with the authoritative guidance for derivatives and hedging. The Company records all derivatives on the balance sheets at fair value. Cash flow hedge gains and losses are recorded in other comprehensive income (“OCI”) until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in Other income (expense), net in the unaudited condensed consolidated statements of operations.

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Fair value of derivative instruments

The fair values of the Company’s derivative instruments and the line items on the unaudited condensed consolidated balance sheets to which they were recorded as of July 3, 2022 and December 31, 2021 are summarized as follows:


Derivative Assets	Balance Sheet Location	July 3, 2022		December 31, 2021		Balance Sheet Location	July 3, 2022		December 31, 2021
		(In thousands)					(In thousands)
Derivative assets not designated as hedging instruments	Prepaid expenses and other current assets	$	20	$	65	Accrued liabilities	$	—	$	47

Refer to Note 5, Fair Value Measurements, for detailed disclosures regarding fair value measurements in accordance with the authoritative guidance for fair value measurements and disclosures.

Gross amounts offsetting of derivative instruments

The Company has entered into master netting arrangements which allow net settlements under certain conditions. Although netting is permitted, it is currently the Company’s policy and practice to record all derivative assets and liabilities on a gross basis in the unaudited condensed consolidated balance sheets.

The following tables set forth the offsetting of derivative assets as of July 3, 2022 and December 31, 2021:


July 3, 2022							Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets		Net Amounts Of Assets Presented in the Unaudited Condensed Consolidated Balance Sheets		Financial Instruments		Cash Collateral Pledged		Net Amount
	(In thousands)
HSBC	$	18	$	—	$	18	$	—	$	—	$	18

Wells Fargo Bank	$	2	$	—	$	2	$	—	$	—	$	2
Total	$	20	$	—	$	20	$	—	$	—	$	20


December 31, 2021							Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets		Net Amounts Of Assets Presented in the Unaudited Condensed Consolidated Balance Sheets		Financial Instruments		Cash Collateral Pledged		Net Amount
	(In thousands)


Wells Fargo Bank	$	65	$	—	$	65	$	(47)	$	—	$	18

There were no derivative liabilities recorded as of July 3, 2022. The following table sets forth the offsetting of derivative liabilities as of December 31, 2021:

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December 31, 2021							Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets		Net Amounts Of Liabilities Presented in the Unaudited Condensed Consolidated Balance Sheets		Financial Instruments		Cash Collateral Pledged		Net Amount
	(In thousands)


Wells Fargo Bank	$	47	$	—	$	47	$	(47)	$	—	$	—

Cash flow hedges

The Company typically hedges portions of its anticipated foreign currency exposure which generally are less than six months. The Company did not enter into any forward contracts related to its cash flow hedging program for the three and six months ended July 3, 2022. There were no cash flow hedge effects on the unaudited condensed consolidated statements of operations for the three months ended July 3, 2022.

The effects of the Company’s cash flow hedges on the unaudited condensed consolidated statements of operations for the three and six months ended June 27, 2021 are summarized as follows:


	Three Months Ended June 27, 2021
	Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges
	Revenue		Cost of revenue		Research and development		Sales and marketing		General and administrative
	(In thousands)
Statements of operations	$	98,571	$	72,402	$	16,251	$	12,459	$	13,559
Gains (losses) on cash flow hedge	—		—		—		—		—

	Six Months Ended June 27, 2021
	Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges
	Revenue		Cost of revenue		Research and development		Sales and marketing		General and administrative
	(In thousands)
Statements of operations	$	181,127	$	129,151	$	31,042	$	23,666	$	24,786
Gains (losses) on cash flow hedge	—		—		—		2		—

The Company expects to reclassify to earnings all of the amounts recorded in AOCI (as defined below) associated with its cash flow hedges over the next twelve months. For information on the unrealized gains or losses on derivatives reclassified out of AOCI into the unaudited condensed consolidated statements of operations, refer to Note 7, Accumulated Other Comprehensive Income (Loss).

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur within the designated hedge period or if not recognized within 60 days following the end of the hedge period. The Company did not recognize any material net gains or losses related to the loss of hedge designation as there were no discontinued cash flow hedges during the six months ended July 3, 2022 and June 27, 2021.

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Non-designated hedges

The Company adjusts its non-designated hedges monthly and enters into about six non-designated derivatives per quarter with an average size of $1.8 million. The hedges range typically from one to three months in duration. The effects of the Company’s non-designated hedges, which are included in Other income (expense), net in the unaudited condensed consolidated statements of operations for the three and six months ended July 3, 2022 and June 27, 2021, were as follows:


Derivatives Not Designated as Hedging Instruments	Location of Gains (Losses) Recognized in Income on Derivative	Three Months Ended				Six Months Ended
		July 3, 2022		June 27, 2021		July 3, 2022		June 27, 2021
		(In thousands)
Foreign currency forward contracts	Other income (expense), net	$	59	$	(80)	$	187	$	(85)

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Note 7. Accumulated Other Comprehensive Income (Loss)

The following table sets forth the changes in accumulated other comprehensive income (loss) (“AOCI”) by component for the three and six months ended July 3, 2022 and June 27, 2021.


	Unrealized gains (losses) on available-for-sale securities		Unrealized gains (losses) on derivatives		Estimated tax benefit (provision)		Total
	(In thousands)
Balance as of April 3, 2022	$	(46)	$	—	$	—	$	(46)
Other comprehensive income (loss) before reclassifications	(122)		—		—		(122)
Less: Amount reclassified from accumulated other comprehensive income (loss)	—		—		—		—
Net current period other comprehensive income (loss)	(122)		—		—		(122)
Balance as of July 3, 2022	$	(168)	$	—	$	—	$	(168)

	Unrealized gains (losses) on available-for-sale securities		Unrealized gains (losses) on derivatives		Estimated tax benefit (provision)		Total
	(In thousands)
Balance as of December 31, 2021	$	—	$	—	$	—	$	—
Other comprehensive income (loss) before reclassifications	(168)		—		—		(168)
Less: Amount reclassified from accumulated other comprehensive income (loss)	—		—		—		—
Net current period other comprehensive income (loss)	(168)		—		—		(168)
Balance as of July 3, 2022	$	(168)	$	—	$	—	$	(168)


	Unrealized gains (losses) on available-for-sale securities		Unrealized gains (losses) on derivatives		Estimated tax benefit (provision)		Total
	(In thousands)
Balance as of March 28, 2021	$	—	$	—	$	—	$	—
Other comprehensive income (loss) before reclassifications	—		—		—		—
Less: Amount reclassified from accumulated other comprehensive income (loss)	—		—		—		—
Net current period other comprehensive income (loss)	—		—		—		—
Balance as of June 27, 2021	$	—	$	—	$	—	$	—

	Unrealized gains (losses) on available-for-sale securities		Unrealized gains (losses) on derivatives		Estimated tax benefit (provision)		Total
	(In thousands)
Balance as of December 31, 2020	$	1	$	2	$	—	$	3
Other comprehensive income (loss) before reclassifications	(1)		—		—		(1)
Less: Amount reclassified from accumulated other comprehensive income (loss)	—		2		—		2
Net current period other comprehensive income (loss)	(1)		(2)		—		(3)
Balance as of June 27, 2021	$	—	$	—	$	—	$	—

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following tables provide details about significant amounts reclassified out of each component of AOCI for the three and six months ended July 3, 2022 and June 27, 2021:


	Three Months Ended
	July 3, 2022				June 27, 2021
	Gains (Losses) Recognized in OCI - Effective Portion		Gains (Losses) Reclassified from OCI to Income - Effective Portion		Gains (Losses) Recognized in OCI - Effective Portion		Gains (Losses) Reclassified from OCI to Income - Effective Portion		Affected Line Item in the Statements of Operations
	(In thousands)
Gains (losses) on cash flow hedge:
Foreign currency contracts	$	—	$	—	$	—	$	—	Revenue
Foreign currency contracts	—		—		—		—		Cost of revenue
Foreign currency contracts	—		—		—		—		Research and development
Foreign currency contracts	—		—		—		—		Sales and marketing
Foreign currency contracts	—		—		—		—		General and administrative
	$	—	$	—	$	—	$	—	Total *

	Six Months Ended
	July 3, 2022				June 27, 2021
	Gains (Losses) Recognized in OCI - Effective Portion		Gains (Losses) Reclassified from OCI to Income - Effective Portion		Gains (Losses) Recognized in OCI - Effective Portion		Gains (Losses) Reclassified from OCI to Income - Effective Portion		Affected Line Item in the Statements of Operations
	(In thousands)
Gains (losses) on cash flow hedge:
Foreign currency contracts	$	—	$	—	$	—	$	—	Revenue
Foreign currency contracts	—		—		—		—		Cost of revenue
Foreign currency contracts	—		—		—		—		Research and development
Foreign currency contracts	—		—		—		2		Sales and marketing
Foreign currency contracts	—		—		—		—		General and administrative
	$	—	$	—	$	—	$	2	Total *

_________________________

* Tax impact to hedging gains and losses from derivative contracts was immaterial.

Note 8. Debt

Revolving Credit Facility

On October 27, 2021, the Company entered into a Loan and Security Agreement (the “Credit Agreement”) with Bank of America, N.A., a national banking association, as lender (the “Lender”).

The Credit Agreement provides for a three-year revolving credit facility (the “Credit Facility”) that matures on October 27, 2024. Borrowings under the Credit Facility are limited to the lesser of (x) $40.0 million, and (y) an amount equal to the borrowing base. The borrowing base will be the sum of (i) 90% of investment grade eligible receivables and (ii) 85% of non-investment grade eligible accounts, less applicable reserves established by the Lender. The Credit Agreement also includes a $5.0 million sublimit for the issuance by the Lender of letters of credit. In addition, the Credit Agreement includes an uncommitted accordion feature that allows the Company to request, from time to time, that the Lender increase the aggregate revolving loan commitments by up to an additional $25.0 million in the aggregate, subject to the satisfaction of certain conditions, including obtaining the Lender’s agreement to participate in each increase. The proceeds of the borrowings under the Credit Facility may be used for working capital and general corporate purposes.

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The obligations of the Company under the Credit Agreement are secured by substantially all of the Company’s domestic working capital assets, including accounts receivable, cash and cash equivalents, inventory, and other assets of the Company to the extent related to such working capital assets.

At the Company’s option, borrowings under the Credit Agreement will bear interest at a floating rate equal to: (i) the Bloomberg Short-Term Bank Yield Index rate plus the applicable rate of 2.0% to 2.5% determined based on the Company’s average daily availability for the prior fiscal quarter, or (ii) the base rate plus the applicable rate of 1.0% to 1.5% based on the Company’s average daily availability for the prior fiscal quarter. Among other fees, the Company is required to pay a monthly unused fee of 0.2% per annum on the amount by which the Lender’s aggregate commitment under the Credit Facility exceeds the average daily revolver usage during such month.

The Credit Agreement contains events of default, representations and warranties, and affirmative and negative covenants customary for credit facilities of this type. The Credit Agreement also contains financial covenants that require the Company to (a) until the Company achieves a fixed charge coverage ratio of at least 1.00 to 1.00 for two consecutive quarters, maintain minimum liquidity of not less than $20.0 million at all times and (b) thereafter, maintain a fixed charge coverage ratio, tested quarterly on a trailing twelve month basis, of at least 1.00 to 1.00 at any time a Financial Covenant Trigger Period (as defined in the Credit Agreement) is in effect. As of July 3, 2022, the Company is in compliance with all the covenants of the Credit Agreement.

If an event of default under the Credit Agreement occurs, then the Lender may cease making advances under the Credit Agreement and declare any outstanding obligations under the Credit Agreement to be immediately due and payable. In addition, if the Company files a bankruptcy petition, a bankruptcy petition is filed against the Company and is not dismissed or stayed within thirty days, or the Company makes a general assignment for the benefit of creditors, then any outstanding obligations under the Credit Agreement will automatically and without notice or demand become immediately due and payable.

No amounts had been drawn under the Credit Facility as of July 3, 2022.

Note 9. Commitments and Contingencies

Operating Leases

The Company primarily leases office space, with various expiration dates through June 2029. Some of the leases include options to extend such leases for up to five years, and some include options to terminate such leases within one year. The terms of certain of the Company's leases provide for rental payments on a graduated scale. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, accrued liabilities, and non-current operating lease liabilities in the unaudited condensed consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for fixed lease payments are recognized in the unaudited condensed consolidated statements of operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. Gross lease expense was $1.8 million and $1.4 million for the three months ended July 3, 2022 and June 27, 2021, respectively, and $3.6 million and $3.1 million for the six months ended July 3, 2022 and June 27, 2021, respectively. The lease expense was recorded within Cost of revenue, Research and development, Sales and marketing, and General and administrative expense in the Company's unaudited condensed consolidated statements of operations. Short-term leases and variable lease costs were included in the lease expense and they were immaterial. The Company recorded sublease income as reduction of lease expense, in the amount of $0.5 million and $1.0 million for the three and six months ended July 3, 2022.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Supplemental cash flow information related to operating leases for the six months ended July 3, 2022 and June 27, 2021 was as follows:


	July 3, 2022		June 27, 2021
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	3,618	$	3,055
Right-of-use assets obtained in exchange for lease liabilities
Operating leases	$	2,670	$	—

Weighted average remaining lease term and weighted average discount rate related to operating leases were as follows:

As of

July 3, 2022

December 31, 2021

Weighted average remaining lease term

5.3 years

6.1 years

Weighted average discount rate

5.71

5.77

The Company's future minimum undiscounted lease payments under operating leases and future non-cancelable rent payments from its subtenants for each of the next five years and thereafter as of July 3, 2022 were as follows:


	Operating Lease Payments		Sublease Payments		Net
	(In thousands)
2022 (Remaining six months)	$	2,779	$	(1,004)	$	1,775
2023	6,091		(1,891)		4,200
2024	5,448		(1,947)		3,501
2025	3,761		(2,006)		1,755
2026	3,872		(2,066)		1,806
Thereafter	8,794		(5,942)		2,852
Total future lease payments	30,745		$	(14,856)	$	15,889
Less: interest (1)	(4,692)
Present value of future minimum lease payments	$	26,053

Accrued liabilities	$	4,584
Non-current operating lease liabilities	21,469
Total lease liabilities	$	26,053

________________________

(1) Leases that commenced before November 5, 2019 were calculated using the Company’s incremental borrowing rate on a collateralized basis plus LIBOR rate that closely matches contractual term of most leases. Leases that commenced between November 5, 2019 and October 27, 2021 were calculated using the Company's borrowing rate defined in the credit agreement with Western Alliance Bank. Leases that commenced after October 27, 2021 were calculated using the Company's borrowing rate defined in the Credit Agreement with Bank of America, N.A.

During the second quarter of 2021, the Company reviewed certain of its right-of-use assets and other lease related assets in conjunction with the evaluation of its real estate lease portfolio and recorded an impairment charge of $9.1 million, which includes $6.8 million associated with the right-of-use asset and $2.3 million associated with other lease related property and equipment assets, for the three and six months ended June 27, 2021. Subsequent to the impairment, lease expense for the lease payments related to the impaired right-of-use asset is no longer recognized on a straight-line basis. The associated lease liability is amortized using the same effective interest method as before the impairment charge. The impaired right-of-use asset, however, is subsequently amortized on a straight-line basis. Refer to Note 4, Balance Sheet Components, for further information about the impairment of the right-of-use asset and long-lived assets.

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Letters of Credit

In connection with the lease agreement for the office space located in San Jose, California, the Company executed a letter of credit with the landlord as the beneficiary. As of July 3, 2022, the Company had approximately $3.6 million of unused letters of credit outstanding, of which $3.1 million pertains to the lease arrangement in San Jose, California.

Purchase Obligations

The Company has entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. Orders are non-cancelable within 30 days prior to the expected shipment date. As of July 3, 2022, the Company had approximately $67.3 million in non-cancelable purchase commitments with suppliers. As a result of the COVID-19 pandemic, the Company has experienced an elongation of the time from order placement to production primarily due to component shortages and supply chain disruptions. In order to reduce manufacturing lead-times and to ensure an adequate supply of inventories, the Company has worked with its suppliers to place longer lead-time purchase orders to ensure availability of components and materials from its supply chain. Under this circumstance, the Company may be obligated to purchase long lead-time component inventory procured in accordance with its forecasts. As of July 3, 2022, a further $55.7 million of purchase orders beyond contractual termination periods have been issued to supply chain partners in anticipation of demand requirements. Consequently, the Company may incur expenses for materials and components, such as chipsets purchased by the supplier to fulfill the purchase order if the purchase order is cancelled. Expenses incurred in respect of cancelled purchase orders has historically not been significant relative to the original order value. The Company establishes a loss liability for all products it does not expect to sell for which it has committed purchases from suppliers. As of July 3, 2022, the loss liability from committed purchases was $0.3 million. From time to time the Company’s suppliers procure unique complex components on the Company’s behalf. If these components do not meet specified technical criteria or are defective, the Company should not be obligated to purchase the materials.

Warranty Obligations

Changes in the Company’s warranty liability, which is included in Accrued liabilities in the unaudited condensed consolidated balance sheets, were as follows:


	Three Months Ended				Six Months Ended
	July 3, 2022		June 27, 2021		July 3, 2022		June 27, 2021
	(In thousands)
Balance at the beginning of the period	$	1,330	$	1,937	$	1,330	$	2,451

Provision for (release of) warranty obligation made during the period	34		(17)		113		(386)
Settlements made during the period	(79)		(115)		(158)		(260)
Balance at the end of the period	$	1,285	$	1,805	$	1,285	$	1,805

Litigation and Other Legal Matters

Securities Class Action Lawsuits and Derivative Suit

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The Company is involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below. In all cases, at each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. In such cases, the Company accrues for the amount or, if a range, the Company accrues the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within litigation reserves, net. The Company monitors developments in these legal matters that could affect the estimate the Company had previously accrued. In relation to such matters, the Company currently believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its financial position within the next 12 months, or the outcome of these matters is currently not determinable. There are many uncertainties associated with any litigation, and these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any intellectual property litigation may require the Company to make royalty payments, which could have an adverse effect in future periods. If any of those events were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from the Company's estimates, which could result in the need to adjust the liability and record additional expenses.

Beginning on December 11, 2018, purported stockholders of Arlo Technologies, Inc. filed six putative securities class action complaints in the Superior Court of California, County of Santa Clara, and one complaint in the U.S. District Court for the Northern District of California against the Company and certain of its executives and directors. Some of these actions also name as defendants the underwriters in the Company’s initial public offering ("IPO") and NETGEAR, Inc. ("NETGEAR"). The actions pending in state court are Aversa v. Arlo Technologies, Inc., et al., No. 18CV339231, filed Dec. 11, 2018; Pham v. Arlo Technologies, Inc. et al., No. 19CV340741, filed January 9, 2019; Patel v. Arlo Technologies, Inc., No. 19CV340758, filed January 10, 2019; Perros v. NetGear, Inc., No. 19CV342071, filed February 1, 2019; Vardanian v. Arlo Technologies, Inc., No. 19CV342318, filed February 8, 2019; and Hill v. Arlo Technologies, Inc. et al., No. 19CV343033, filed February 22, 2019. On April 26, 2019, the state court consolidated these actions as In re Arlo Technologies, Inc. Shareholder Litigation, No. 18CV339231 (the “State Action"). The action in federal court is Wong v. Arlo Technologies, Inc. et al., No. 19-CV-00372 (the “Federal Action”).

The plaintiffs in the State Action filed a consolidated complaint on May 1, 2019. The plaintiffs allege that the Company failed to adequately disclose quality control problems and adverse sales trends ahead of its IPO, violating the Securities Act of 1933, as amended (the "Securities Act"). The complaint seeks unspecified monetary damages and other relief on behalf of investors who purchased Company common stock issued pursuant and/or traceable to the IPO. On June 21, 2019, the court stayed the State Action pending resolution of the Federal Action, given the substantial overlap between the claims.

In the Federal Action, the court appointed a shareholder named Matis Nayman as lead plaintiff. On June 7, 2019, plaintiff filed an amended complaint. Lead Plaintiff alleges violations of the Securities Act and the Securities Exchange Act of 1934, as amended, based on alleged materially false and misleading statements about the Company’s sales trends and products. In the amended complaint, lead plaintiff sought to represent a class of persons who purchased or otherwise acquired the Company’s common stock (i) during the period between August 3, 2018 through December 3, 2018 and/or (ii) pursuant to or traceable to the IPO. Lead plaintiff seeks class certification, an award of unspecified damages, an award of costs and expenses, including attorneys’ fees, and other further relief as the court may deem just and proper.

On August 6, 2019, defendants filed a motion to dismiss. The federal court granted that motion, and lead plaintiff filed a second amended complaint. On June 12, 2020, lead plaintiff filed an unopposed motion for preliminary approval of a class action settlement for $1.25 million, which was also the amount that the Company had accrued for loss contingency. On September 24, 2020, the federal court entered an order preliminarily approving the settlement. On February 5, 2021, lead plaintiff filed a motion for final approval of the settlement. In October 2020, the Company made a $1.25 million payment an escrow account administered by the court and plaintiff’s counsel (the “Settlement Fund”). The

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Settlement Fund shall be deemed to be in the custody of the court and shall remain subject to the jurisdiction of the court until such time as the Settlement Fund is distributed pursuant to the settlement agreement and/or further order of the court.

On February 5, 2021, lead plaintiff filed a motion for final approval of the settlement. In advance of the final approval hearing, three of the named plaintiffs in the State Action requested exclusion from the settlement. The court held a final approval hearing on March 11, 2021, and, on March 25, 2021, entered an order and final judgment approving the settlement and, among other things, dismissing with prejudice all claims of lead plaintiff and the Settlement Class (as defined in the settlement agreement). On April 19, 2021, the Court issued an amended order and corrected judgment to include defendant NETGEAR, who had been inadvertently omitted from the prior order and final judgment. The Federal Action is now closed.

In the State Action, on May 5, 2021, the court held a status conference. At that conference, the state court instructed plaintiffs Perros, Patel, and Pham (“Plaintiffs”), who were the only Arlo stockholders to opt out of the federal settlement, to file an amended complaint by June 4, 2021. Plaintiffs filed their second amended complaint on June 4, 2021, asserting their individual Securities Act claims, but also purporting to represent a new class of Arlo stockholders who purchased Arlo shares between December 3, 2018 and February 22, 2019 and fell outside the Settlement Class (as defined in the federal settlement). On June 21, 2021, the Arlo defendants filed a motion to dismiss the State Action (for forum non conveniens) based on the federal forum provision in Arlo’s certificate of incorporation. Plaintiffs opposed on July 28, 2021, and the Arlo defendants replied on August 13, 2021. On July 6, 2021, defendants filed multiple demurrers to the second amended complaint. Plaintiffs filed their oppositions on August 12, 2021, and defendants filed their replies on August 27, 2021. On September 9, 2021, the court issued an order granting the Arlo defendants’ forum non conveniens motion, and on September 17, 2021, the court issued a final judgment dismissing the State Action in its entirety. On November 16, 2021, Plaintiffs filed a Notice of Appeal. The appeal is pending before the California Court of Appeal, Sixth Appellate District. Plaintiffs-Appellants filed their opening brief on May 20, 2022. Defendants-Respondents must file their brief on or before August 18, 2022. The court has not yet set a date for oral argument.

Leonard R. Pinto v. Arlo Technologies, Inc., et al.

In addition to the State Action and the Federal Action, a purported stockholder named Leonard Pinto filed a tagalong derivative action on June 13, 2019 in the U.S. District Court for the Northern District of California, captioned Pinto v. Arlo Technologies, Inc. et al., No. 19-CV-03354 (the “Derivative Action”). The Derivative Action is brought on behalf of the Company against the majority of the Company’s current directors. The complaint is based on the same alleged misconduct as the securities class actions but asserts claims for breach of fiduciary duty, waste of corporate assets, and violation of the Securities Exchange Act of 1934, as amended. On August 20, 2019, the court stayed the Derivative Action in deference to the Federal Action. On April 8, 2021, because it had granted final approval of the settlement in the Federal Action, the court lifted the stay in the Derivative Action and asked the parties to file a joint status report by April 22, 2021. In their status report, the parties stipulated to a schedule for plaintiff to file an amended complaint and for the parties to brief a motion to dismiss. Plaintiff filed his amended complaint on May 24, 2021. Defendants moved to dismiss the amended complaint on July 9, 2021. On August 23, 2021, plaintiff filed a second amended complaint. Defendants moved to dismiss the second amended complaint on December 17, 2021. Plaintiff filed his opposition on January 31, 2022, and defendants filed their reply on March 2, 2022. On July 28, 2022, the Court heard defendants’ motion to dismiss. At the hearing, the Court informed the parties that it was inclined to grant defendants’ motion for lack of jurisdiction, but no order has yet been issued.

Skybell Technologies, Inc. v. Arlo Technologies, Inc.

On December 18, 2020, Skybell Technologies, Inc., SB IP Holdings, LLC, and Eyetalk365, LLC (collectively, “Complainants” or “Skybell”) filed a Section 337 complaint against the Company, Vivint Smart Home, Inc. (“Vivint”), and SimpliSafe, Inc. (“SimpliSafe”) (collectively “Respondents”) at the U.S. International Trade Commission (“ITC”). The action alleges that the Company’s cameras and video doorbell cameras infringe seven patents: 10,097,796 (“the ’796 patent”), 10,200,660 (“the ’660 patent”), 10,523,906 (“the ’906 patent”), 10,097,797 (“the ’797 patent”), 9,485,478 (“the ’478 patent”), 10,674,120 (“the ’120 patent”), and 9,432,638 (“the ’638 patent”) (collectively, “the Asserted Patents”) in

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violation of Section 337 of the Tariff Act of 1930. The Asserted Patents are all from the same family and generally directed to detecting a person at a camera and communicating video and audio from the camera to a cell phone along with various other features. The case was instituted on January 25, 2021 as Investigation No. 337-TA-1242.

On September 15, 2021, the Administrative Law Judge (“ALJ”) hearing the case at the ITC issued an Initial Determination (“ID”) ruling that all the Asserted Patents are invalid. The ALJ agreed with Respondents’ contention that there was an impermissible break in priority chains of the applications of the Asserted Patents during their prosecution – meaning that certain of Skybell’s prior issued patents fully anticipated or invalidated all the Asserted Patents. Therefore, the ALJ ruled that there can be no patent infringement or violation of Section 337 of the Tariff Act of 1930 by the Respondents.

Skybell appealed the ID by submitting its Petition for Review to the ITC on September 27, 2021, and the Respondents submitted their Response to the Petition to Review on October 4, 2021. On November 10, 2021, The ITC affirmed the ALJ’s ruling and did not grant any review of the ID, meaning that there is no trial on the ITC docket since there are no valid patents remaining, and the case is concluded at the ITC level. On January 9, 2022, Skybell filed its Notice of Appeal to the Federal Circuit to appeal the ITC’s rulings invalidating the Asserted Patents.

As of July 3, 2022, the Company is unable to predict the outcome of this matter, and, at this time, cannot reasonably estimate the possible loss or range of loss with respect to the legal proceeding discussed herein.

Indemnification of Directors and Officers

The Company, as permitted under Delaware law and in accordance with its bylaws, has agreed to indemnify its officers and directors for certain events or occurrences, subject to certain conditions, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that will enable it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the fair value of each indemnification agreement will be minimal. The Company had no liabilities recorded for these agreements as of July 3, 2022 and December 31, 2021.

Indemnifications

Prior to the completion of the IPO, the Company historically participated in NETGEAR’s sales agreements. In its sales agreements, NETGEAR typically agrees to indemnify its direct customers, distributors and resellers (the “Indemnified Parties”) for any expenses or liability resulting from claimed infringements by NETGEAR’s products of patents, trademarks or copyrights of third parties that are asserted against the Indemnified Parties, subject to customary carve-outs. The terms of these indemnification agreements are generally perpetual after execution of the agreement. The maximum amount of potential future indemnification is generally unlimited. From time to time, the Company receives requests for indemnity and may choose to assume the defense of such litigation asserted against the Indemnified Parties. The Company had no liabilities recorded for these agreements as of July 3, 2022 and December 31, 2021. In connection with the separation of Arlo from NETGEAR (the "Separation"), and after July 1, 2018, certain sales agreements were transferred to the Company, and the Company has replaced certain shared contracts, which include similar indemnification terms.

In addition, pursuant to the master separation agreement and certain other agreements entered into with NETGEAR in connection with the Separation and the IPO, NETGEAR has agreed to indemnify the Company for certain liabilities. The master separation agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of its business with the Company and financial responsibility for the obligations and liabilities of NETGEAR’s business with NETGEAR. Under the intellectual property rights cross-license agreement entered into between the Company and NETGEAR, each party, in its capacity as a licensee, indemnifies the other party, in its capacity as a licensor, and its directors, officers, agents, successors and subsidiaries against any losses

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suffered by such indemnified party as a result of the indemnifying party’s practice of the intellectual property licensed to such indemnifying party under the intellectual property rights cross-license agreement. Also, under the tax matters agreement entered into between the Company and NETGEAR, each party is liable for, and indemnifies the other party and its subsidiaries from and against any liability for, taxes that are allocated to the indemnifying party under the tax matters agreement. In addition, the Company has agreed in the tax matters agreement that each party will generally be responsible for any taxes and related amounts imposed on it or NETGEAR as a result of the failure of the special stock dividend (the “Distribution”) by NETGEAR to NETGEAR stockholders of the 62,500,000 shares of Arlo common stock owned by NETGEAR that was made on December 31, 2018, together with certain related transactions, to qualify as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) and certain other relevant provisions of the Internal Revenue Code (the "Code"), to the extent that the failure to so qualify is attributable to actions, events or transactions relating to such party’s respective stock, assets or business, or a breach of the relevant representations or covenants made by that party in the tax matters agreement. The transition services agreement generally provides that the applicable service recipient indemnifies the applicable service provider for liabilities that such service provider incurs arising from the provision of services other than liabilities arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement, and that the applicable service provider indemnifies the applicable service recipient for liabilities that such service recipient incurs arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement. Pursuant to the registration rights agreement, the Company has agreed to indemnify NETGEAR and its subsidiaries that hold registrable securities (and their directors, officers, agents and, if applicable, each other person who controls such holder under Section 15 of the Securities Act) registering shares pursuant to the registration rights agreement against certain losses, expenses and liabilities under the Securities Act, common law or otherwise. NETGEAR and its subsidiaries that hold registrable securities similarly indemnify the Company but such indemnification will be limited to an amount equal to the net proceeds received by such holder under the sale of registrable securities giving rise to the indemnification obligation.

Change in Control and Severance Agreements

The Company has entered into change in control and severance agreements with certain of its executive officers (the “Severance Agreements”). Pursuant to the Severance Agreements, upon a termination without cause or resignation with good reason, the individual would be entitled to (1) cash severance equal to (a) the individual’s annual base salary and an additional amount equal to his or her target annual bonus (for the Chief Executive Officer) or (b) the individual’s annual base salary (for other executive officers), (2) 12 months of health benefits continuation, and (3) accelerated vesting of any unvested time-based equity awards that would have vested during the 12 months following the termination date. Upon a termination without cause or resignation with good reason that occurs during the one month prior to or 12 months following a change in control, the individual would be entitled to (1) cash severance equal to a multiple (2 times for the Chief Executive Officer and 1 times for other executive officers) of the sum of the individual’s annual base salary and target annual bonus, (2) a number of months of health benefits continuation (24 months for the Chief Executive Officer and 12 months for other executive officers) and (3) vesting of all outstanding, unvested equity awards (for the Chief Executive Officer) and the vesting of all outstanding, unvested time-based equity awards (for other executive officers). Severance will be conditioned upon the execution and non-revocation of a release of claims. The Company had no liabilities recorded for these agreements as of July 3, 2022.

Environmental Regulation

The Company is required to comply and is currently in compliance with the European Union (“EU”) and other Directives on the Restrictions of the use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”), Waste Electrical and Electronic Equipment (“WEEE”) requirements, Energy Using Product (“EuP”) requirements, the REACH Regulation, Packaging Directive and the Battery Directive.

The Company is subject to various federal, state, local, and foreign environmental laws and regulations, including those governing the use, discharge, and disposal of hazardous substances in the ordinary course of its

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manufacturing process. The Company believes that its current manufacturing and other operations comply in all material respects with applicable environmental laws and regulations; however, it is possible that future environmental legislation may be enacted or current environmental legislation may be interpreted to create an environmental liability with respect to its facilities, operations, or products.

Note 10. Employee Benefit Plans

2018 Equity Incentive Plan

The Company grants options and restricted stock units ("RSUs") under the 2018 Equity Incentive Plan (the “2018 Plan”), under which awards may be granted to all employees. Award vesting periods for this plan are generally three to four years. Options may be granted for periods of up to 10 years or such shorter term as may be provided in the applicable option agreement and at prices no less than 100% of the fair market value of the Company’s common stock on the date of grant. Options granted under the 2018 Plan generally vest over four years, the first tranche at the end of 12 months and the remaining shares underlying the option vesting monthly over the remaining three years.

On July 28, 2021, the Compensation Committee of the Board of Directors (the “Committee”) of the unanimously approved an amendment to the 2018 Plan to, among other things, reserve an additional 1,500,000 shares of the Company’s common stock to be used exclusively for grants of awards to individuals who were not previously employees or non-employee directors of the Company (or following a bona fide period of non-employment with the Company), as an inducement material to the individual’s entry into employment with the Company within the meaning of Rule 303A.08 of the New York Stock Exchange (the “NYSE”) Listed Company Manual (“Rule 303A.08”). The 2018 Plan was amended by the Committee without stockholder approval pursuant to Rule 303A.08.

On January 21, 2022, the Company registered an aggregate of up to 4,222,270 shares of the Company’s common stock on Registration Statement on Form S-8, including 3,377,816 shares issuable pursuant to the Company's 2018 Plan that were automatically added to the shares authorized for issuance under the 2018 Plan on January 1, 2022 pursuant to an “evergreen” provision contained in the 2018 Plan and 844,454 shares issuable pursuant to the ESPP that were automatically added to the shares authorized for issuance under the ESPP on January 1, 2022 pursuant to an “evergreen” provision contained in the ESPP.

The Company’s employees have historically participated in NETGEAR’s various stock-based plans, which are described below and represent the portion of NETGEAR’s stock-based plans in which Arlo employees participated as of July 3, 2022. The Company’s unaudited condensed consolidated statements of operations reflect compensation expense for these stock-based plans associated with the portion of NETGEAR’s plans in which Arlo employees participated.

The following table sets forth the available shares for grant under the 2018 Plan as of July 3, 2022:


			Number of Shares
			(In thousands)
Shares available for grant as of December 31, 2021			2,509
Additional authorized shares			3,378
Granted			(4,474)
Forfeited / cancelled			1,352

Shares traded for taxes			1,648
Shares available for grant as of July 3, 2022			4,413

Employee Stock Purchase Plan

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The Company sponsors an Employee Stock Purchase Plan (“ESPP”), pursuant to which eligible employees may contribute up to 15% of compensation, subject to certain income limits, to purchase shares of the Company’s common stock. The terms of the plan include a look-back feature that enables employees to purchase stock semi-annually at a price equal to 85% of the lesser of the fair market value at the beginning of the offering period or the purchase date. The duration of each offering period is generally six months. As of July 3, 2022, 1,855,548 shares were available for issuance under the ESPP.

Option Activity

Arlo’s stock option activity during the six months ended July 3, 2022 was as follows:


	Number of shares	Weighted Average Exercise Price Per Share
	(In thousands)	(In dollars)
Outstanding as of December 31, 2021	2,574	$	10.55
Granted	—	$	—
Exercised	(209)	$	6.81
Forfeited / cancelled	(3)	$	16.00
Expired	(177)	$	15.84

Outstanding as of July 3, 2022	2,185	$	10.47
Vested and expected to vest as of July 3, 2022	2,185	$	10.47
Exercisable Options as of July 3, 2022	2,180	$	10.46

NETGEAR’s stock option activity for Arlo employees during the six months ended July 3, 2022 was as follows:


	Number of shares	Weighted Average Exercise Price Per Share
	(In thousands)	(In dollars)
Outstanding as of December 31, 2021	11	$	20.11

Exercised	(4)	$	19.53
Forfeited / cancelled	—	$	—
Expired	—	$	—

Outstanding as of July 3, 2022	7	$	20.47
Vested and expected to vest as of July 3, 2022	7	$	20.47
Exercisable Options as of July 3, 2022	7	$	20.47

RSU Activity

Arlo’s RSU activity, excluding PSU activity and MPSU activity, during the six months ended July 3, 2022 was as follows:


	Number of shares	Weighted Average Grant Date Fair Value Per Share
	(In thousands)	(In dollars)
Outstanding as of December 31, 2021	10,080	$	5.73
Granted	3,521	$	7.92
Vested	(3,917)	$	6.26
Forfeited	(1,172)	$	5.89

Outstanding as of July 3, 2022	8,512	$	6.37

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PSU Activity

The Company grants restricted stock units to its NEOs periodically that vested based on the Company's attainment of cash balance goals as of December 31, 2020, 2021 and 2022 and the NEO's continued employment through the vesting dates ("PSUs"). The vesting periods for the PSUs are three or four years. The maximum number of shares that NEOs can earn is 120% of the target number of the PSUs. The minimum number of shares that NEOs can earn is 75% of the target number of the PSUs. The Company determined the fair value of the PSUs using the closing price of the Company's common stock as of the grant date. For PSUs, stock-based compensation expense of performance milestone is recognized over the expected performance achievement period when the achievement becomes probable.

The Company's PSU activity during the year ended of July 3, 2022 was as follows:


	Number of Shares	Weighted Average Grant Date Fair Value Per Share
	(In thousands)	(In dollars)





Outstanding as of December 31, 2021	527	$	4.80
Granted	233	$	7.49
Vested	(257)	$	4.01
Forfeited	—	$	—
Outstanding as of July 3, 2022 (1)	503	$	6.45

_________________________

(1) Includes 164,589 shares of PSUs for the 2020 performance period, achieved at 120% of target, or 197,507 shares and vest over three years, and 148,368 shares of PSUs for the 2021 performance period, achieved at 120% of target, or 178,042 shares and vest over four years.

MPSU Activity

The Company grants restricted stock units to its NEOs that vest based on the Company's stock price performance relative to a broad-market index over a performance period of three to four years and the NEO's continued employment through the vesting date ("TSR MPSUs"). The TSR MPSUs will vest at the end of the three to four-year periods that begin on the TSR MPSUs' grant date based on performance of the Company's common stock relative to the Benchmark during the three to four-year periods from the grant dates. A positive 3.3x or negative 2.5x multiplier will be applied to the total shareholder returns (“TSR”), such that the number of shares vested will increase by 3.3% or decrease by 2.5% of the target numbers, for each 1% of positive or negative TSR relative to the Benchmark. In the event the Company's common stock performance is below negative 30% relative to the Benchmark, no shares will be vested. In no event will the number of shares vested exceed 200% of the target for that tranche.

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The Company's TSR MPSU activity during the year ended of July 3, 2022 was as follows:


	Number of Shares	Weighted Average Grant Date Fair Value Per Share
	(In thousands)	(In dollars)





Outstanding as of December 31, 2021	841	$	5.92
Granted	189	$	12.25
Vested	—	$	—
Forfeited	—	$	—
Outstanding as of July 3, 2022	1,030	$	7.08

The Company also grants restricted stock units to its CEO that vest based on the Company's achievement of its stock price performance targets and the CEO's continued employment through the vesting dates ("CEO MPSUs"). The CEO MPSUs will vest over four years in substantially equal quarterly installments that begin on the CEO MPSUs' grant date in five equal tranches based on the Company's achievement of certain average daily closing prices per share of the Company's common stock, as reported on the NYSE, for any 30 consecutive trading days on or prior to performance period end date. To the extent that the stock price of the tranche does not achieve its corresponding price target prior to the performance period end date, the CEO MPSUs expire or cancel.

The Company's CEO MPSU activity during the year ended of July 3, 2022 was as follows:


	Number of Shares	Weighted Average Grant Date Fair Value Per Share
	(In thousands)	(In dollars)





Outstanding as of December 31, 2021	739	$	5.20
Granted	531	$	7.18
Vested	(38)	$	5.64
Forfeited	—	$	—
Outstanding as of July 3, 2022	1,232	$	6.04

The Company determined the fair value of the shares offered under the ESPP using the Black-Scholes option pricing model as of the grant date. The following table sets forth the weighted average assumptions used to estimate the fair value of purchase rights granted under Arlo’s ESPP for the three and six months ended July 3, 2022 and June 27, 2021.


	Three Months Ended			Six Months Ended
	July 3, 2022		June 27, 2021	July 3, 2022		June 27, 2021
Expected life (in years)	0.5		NA	0.5		0.5
Risk-free interest rate	1.53	%	NA	1.53	%	0.06	%
Expected volatility	63.0	%	NA	63.0	%	87.0	%
Dividend yield	—		NA	—		—

The Company determined the fair value of the RSUs and PSUs using the closing price of the Company's common stock as of the grant date. For PSUs, stock-based compensation expense of performance milestone is recognized over the expected performance achievement period when the achievement becomes probable.

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The Company utilized a Monte Carlo pricing model customized to the specific provisions of the 2018 Plan to value the MPSUs awards on the grant date. The weighted average assumptions used in this model to estimate fair value at the grant date are as follows:

TSR MPSU

CEO MPSU

Three Months Ended

Six Months Ended

Three Months Ended

Six Months Ended

July 3,
2022

June 27,
2021

July 3,
2022

June 27,
2021

July 3,
2022

June 27,
2021

July 3,
2022

June 27,
2021

Expected life

4.0

Risk-free interest rate

1.49

0.33

1.54

Expected volatility

76.4

69.9

76.3

Dividend yield

—

Stock Beta

0.42

0.45

NETGEAR’s RSU activity for Arlo employees during the six months ended July 3, 2022 was as follows:


	Number of shares	Weighted Average Grant Date Fair Value Per Share
	(In thousands)	(In dollars)
Outstanding as of December 31, 2021	47	$	39.67

Vested	(43)	$	39.36
Forfeited	(1)	$	39.69

Outstanding as of July 3, 2022	3	$	44.87

Stock-Based Compensation Expense

The Company's employees have historically participated in NETGEAR's various stock-based plans, which are described below and represent the portion of NETGEAR's stock-based plans in which Company employees participated. The Company's unaudited condensed consolidated statements of operations reflect compensation expense for these stock-based plans associated with the portion of NETGEAR's plans in which Company employees participated. The stock-based compensation expense for Company employees consist of Company RSUs, PSUs, MPSUs and stock options and NETGEAR RSUs and stock options granted to Company employees, employees' annual bonus in RSU form and the purchase rights under Company ESPP. The following table sets forth the stock-based compensation expense included in the Company’s unaudited condensed consolidated statements of operations during the periods indicated:


	Three Months Ended				Six Months Ended
	July 3, 2022		June 27, 2021		July 3, 2022		June 27, 2021
	(In thousands)
Cost of revenue	$	1,335	$	1,289	$	2,245	$	2,163
Research and development	3,621		3,832		5,923		6,388
Sales and marketing	1,790		1,639		3,170		2,829
General and administrative	5,499		4,849		10,496		8,569
Total stock-based compensation	$	12,245	$	11,609	$	21,834	$	19,949

The Company recognizes this compensation expense generally on a straight-line basis over the requisite service period of the award.

As of July 3, 2022, $34 thousand of unrecognized compensation cost related to Arlo’s stock options was expected to be recognized over a weighted-average period of 0.1 years. $57.5 million of unrecognized compensation cost

Table of Contents

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

related to unvested Arlo’s RSUs, PSUs and MPSUs was expected to be recognized over a weighted-average period of 2.4 years.

As of July 3, 2022, there was no unrecognized compensation cost related to NETGEAR’s stock options for Arlo employees. $9 thousand of unrecognized compensation cost related to unvested NETGEAR RSUs for Arlo employees was expected to be recognized over a weighted-average period of 0.1 years.

Note 11. Income Taxes

The provision for income taxes for the three and six months ended July 3, 2022 was $0.2 million and $0.4 million, or an effective tax rate of (2.0)% and (2.3)%, respectively. The provision for income taxes for the three and six months ended June 27, 2021 was $0.2 million and $0.3 million, or an effective tax rate of (0.7)% and (1.0)%. During the three and six months ended July 3, 2022, the Company sustained U.S. book losses . Consistent with the prior year, the Company maintained a valuation allowance against its U.S. federal and state deferred tax assets and did not record a tax benefit on these deferred tax assets since it is more likely than not that these deferred tax assets will not be realized. The Company's provision for income taxes was primarily attributable to income taxes on foreign earnings. The provision for income taxes for the three months ended July 3, 2022 was slightly higher than the same period in the prior year primarily due to an increase in foreign earnings in the second quarter of 2022. The provision for income taxes for the six months ended July 3, 2022 was higher than the same period in the prior year primarily due to an increase in foreign earnings in the first half of 2022.

Note 12. Net Loss Per Share

Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Potentially dilutive common shares, such as common shares issuable upon exercise of stock options and vesting of restricted stock awards are typically reflected in the computation of diluted net loss per share by application of the treasury stock method. For certain periods presented, due to the net losses reported, these potentially dilutive securities were excluded from the computation of diluted net loss per share, since their effect would be anti-dilutive.

Net loss per share for the three and six months ended July 3, 2022 and June 27, 2021 were as follows:


	Three Months Ended				Six Months Ended
	July 3, 2022		June 27, 2021		July 3, 2022		June 27, 2021
	(In thousands, except per share data)
Numerator:
Net loss	$	(11,557)	$	(23,320)	$	(20,036)	$	(34,039)
Denominator:
Weighted average common shares - basic	86,868		82,134		85,966		81,275
Potentially dilutive common share equivalent	—		—		—		—
Weighted average common shares - dilutive	86,868		82,134		85,966		81,275

Basic net loss per share	$	(0.13)	$	(0.28)	$	(0.23)	$	(0.42)
Diluted net loss per share	$	(0.13)	$	(0.28)	$	(0.23)	$	(0.42)

Anti-dilutive employee stock-based awards, excluded	4,812		5,989		1,476		4,650

Table of Contents

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 13. Segment and Geographic Information

Segment Information

The Company operates as one operating and reportable segment. The Company has identified its Chief Executive Officer ("CEO") as the Chief Operating Decision Maker (“CODM”). The CODM reviews financial information presented on a combined basis for purposes of allocating resources and evaluating financial performance.

Geographic Information

The Company conducts business across three geographic regions: Americas, EMEA and APAC. Revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, net changes in deferred revenue, and gains or losses from hedging. For reporting purposes, revenue by geography is generally based upon the ship-to location of the customer for device sales and device location for service sales.

The following table shows revenue by geography for the periods indicated:


	Three Months Ended				Six Months Ended
	July 3, 2022		June 27, 2021		July 3, 2022		June 27, 2021
	(In thousands)
United States (“U.S.”)	$	59,997	$	66,496	$	125,234	$	116,037
Americas (excluding U.S.)	348		185		3,577		280
EMEA	54,483		25,101		104,458		49,692
APAC	4,151		6,789		10,461		15,118
Total revenue	$	118,979	$	98,571	$	243,730	$	181,127

The Company’s Property and equipment, net is located in the following geographic locations:


	As of
	July 3, 2022		December 31, 2021
	(In thousands)
Americas
United States (“U.S.”)	$	5,742	$	7,302
Americas (excluding U.S.)	452		520
EMEA	313		402
APAC
China	809		1,143
APAC (excluding China)	162		228
Total property and equipment, net	$	7,478	$	9,595

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “could,” “may,” “will,” and similar expressions are intended to identify forward-looking statements, including statements concerning our business and the expected performance characteristics, specifications, reliability, market acceptance, market growth, specific uses, user feedback, market position of our products and technology and the potential adverse impact of the COVID-19 pandemic on our business and operations. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Part II—Item 1A—Risk Factors” and “Liquidity and Capital Resources” below. All forward-looking statements in this document are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this quarterly report. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us,” the "Company,” and “Arlo” refer to Arlo Technologies, Inc. and our subsidiaries.

Business and Executive Overview

Arlo combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that are transforming the way people experience the connected lifestyle. Arlo’s deep expertise in product design, wireless connectivity, cloud infrastructure and cutting-edge AI capabilities focuses on delivering a seamless, smart home experience for Arlo users that is easy to setup and interact with every day. Our cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection. Since the launch of our first product in December 2014, we have shipped over 25.1 million smart connected devices, and as of July 3, 2022, the Arlo platform had approximately 6.6 million cumulative registered accounts across more than 100 countries around the world.

We conduct business across three geographic regions—(i) the Americas; (ii) Europe, Middle-East and Africa (“EMEA”); and (iii) Asia Pacific (“APAC”) and we primarily generate revenue by selling devices through retail, wholesale distribution, wireless carrier channels, security solution providers, Arlo’s direct to consumer store and paid subscription services. International revenue was 49.6% and 32.5% of our revenue for the three months ended July 3, 2022 and June 27, 2021, respectively, and 48.6% and 35.9% of our revenue for the six months ended July 3, 2022 and June 27, 2021, respectively.

For the three months ended July 3, 2022 and June 27, 2021, we generated revenue of $119.0 million and $98.6 million, respectively, representing a year-over-year increase of 20.7%. For the six months ended July 3, 2022 and June 27, 2021, we generated revenue of $243.7 million and $181.1 million, respectively, representing a year-over-year increase of 34.6%. Loss from operations were $11.3 million and $25.8 million for the three months ended July 3, 2022 and June 27, 2021, respectively. Loss from operations were $20.0 million and $37.3 million for the six months ended July 3, 2022 and June 27, 2021, respectively.

On November 4, 2019, we concurrently entered into an Asset Purchase Agreement (the “Purchase Agreement”) and Supply Agreement (the “Supply Agreement” and together with the Purchase Agreement, the “Verisure Agreements”) with Verisure. Under the Supply Agreement, Verisure became the exclusive distributor of our products in Europe for all channels, and non-exclusively distribute our products through its direct channels globally for an initial term of five years.

Our goal is to continue to develop innovative, world-class connected lifestyle solutions to expand and further monetize our current and future user and paid account bases. We believe that the growth of our business is dependent on

many factors, including our ability to innovate and launch successful new products on a timely basis and grow our installed base, to increase subscription-based recurring revenue, to invest in brand awareness and channel partnerships and to continue our global expansion. We expect to increase our investment in research and development going forward as we continue to introduce new and innovative products and services to enhance the Arlo platform and compete for engineering talent. We also expect to significantly increase our Sales and Marketing expense as we invest in new campaigns to increase awareness of and preference for the Arlo brand.

Key Business Metrics

In addition to the measures presented in our unaudited condensed consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions. We believe these key business metrics provide useful information by offering the ability to make more meaningful period-to-period comparisons of our on-going operating results and a better understanding of how management plans and measures our underlying business. Our key business metrics may be calculated in a manner different from the same key business metrics used by other companies. We regularly review our processes for calculating these metrics, and from time to time we may discover inaccuracies in our metrics or make adjustments to better reflect our business or to improve their accuracy, including adjustments that may result in the recalculation of our historical metrics. We believe that any such inaccuracies or adjustments are immaterial unless otherwise stated.


	As of
	July 3, 2022		% Change		June 27, 2021
	(In thousands, except percentage data)
Cumulative registered accounts	6,640		20.1	%	5,527
Cumulative paid accounts	1,478		112.7	%	695
Annual recurring revenue	$	116,601	67.2	%	$	69,753

Cumulative Registered Accounts. We believe that our ability to increase our user base is an indicator of our market penetration and growth of our business as we continue to expand and innovate our Arlo platform. We define our registered accounts at the end of a particular period as the number of unique registered accounts on the Arlo platform as of the end of such particular period. The number of registered accounts does not necessarily reflect the number of end-users on the Arlo platform, as one registered account may be used by multiple people. We changed our definition from registered users to registered accounts starting in the fourth quarter of 2019 due to the Verisure transaction. Verisure will own the registered accounts but we will continue to provide services to these European customers under the Verisure Agreements.

Cumulative Paid Accounts. Paid accounts worldwide measured as any account where a subscription to a paid service is being collected (either by the Company or by the Company’s customers or channel partners), plus paid service plans of a duration of more than 3 months bundled with products (such bundles being counted as a paid account after 90 days have elapsed from the date of registration). In the fourth quarter of 2019, we redefined paid subscribers as paid accounts to include customers that were transferred to Verisure as part of the disposal of our commercial operations in Europe because we will continue to provide services to these European customers and receive payments associated with them, under the Verisure Agreements.

Annual Recurring Revenue ("ARR"). Effective as of the quarter ended October 3, 2021, we have adopted ARR as one of the key indicators of our business performance. We believe ARR enables measurement of our business initiatives, and serves as an indicator of our future growth. ARR represents the amount of paid service revenue that we expect to recur annually and is calculated by taking our recurring paid service revenue for the last calendar month in the fiscal quarter, multiplied by 12 months. Recurring paid service revenue represents the revenue we recognize from our paid accounts and excludes prepaid service revenue and Non-Recurring Engineering ("NRE") service revenue from strategic partners. The ARR for the comparative period presented was derived following the same methodology. ARR is a performance metric and should be viewed independently of revenue and deferred revenue, and is not intended to be a substitute for, or combined with, any of these items.

Impact of COVID-19, Global Geopolitical, Economic and Business Conditions

We continue to closely monitor developments and are taking steps to mitigate the potential risks related to the COVID-19 pandemic to us, our employees and our customers. The extent of the impact of the COVID-19 pandemic on our business operations will depend on future developments, including the duration of the pandemic, the broader implications of the macro-economic recovery and the impact on overall customer demand, all of which are uncertain and cannot be predicted. Our priorities and actions during the COVID-19 pandemic continue to be focused on protecting the health and safety of all those we serve, our employees, our customers, our suppliers and our communities, including implementing continuous updates to our health and safety policies and processes and progress made through vaccinations. We continue to instruct all but a limited number of our global workforce to work remotely as a precautionary measure intended to minimize the risk of the virus to them and the communities in which we operate, while we continue to focus on providing our team with the resources that they need to meet the needs of our customers and deliver new innovations to the markets we serve, despite challenges presented by the COVID-19 pandemic. We also continue to work with our suppliers to address any supply chain disruptions, which might include larger component backlogs, component cost increases, travel restrictions and logistics changes that can impact our operations. For example, increased demand for electronics as a result of the COVID-19 pandemic increased demand for chips in the automotive industry and certain other factors have led to a global shortage of semiconductors. As a result, we have experienced component shortages, including longer lead times for components and supply constraints that have affected both our ability to meet scheduled product deliveries and worldwide demand for our products. Also, as a result of the COVID-19 pandemic, our supply chain partners are limited by production capacity, constrained by material availability, labor shortages, factory uptime and freight capacity, each of which constrains our ability to capitalize fully on end-market demand. As of July 3, 2022, international freight capacity remains depressed compared to pre-pandemic levels, and this has caused, and continues to cause, air and ocean freight rates to materially increase compared to pre-pandemic levels. Furthermore, transit times have also increased, causing us to rely more on air freight in order to meet our customers' demands. For the three and six months ended July 3, 2022, we saw a 27% and 176% increase in freight-in expense compared to the prior year periods, respectively, as a result of the higher sea and air freight rates and component shortages which necessitated use of air freight to meet customer requested delivery dates. We expect supply chain constraints to persist through 2022. While we believe we have been broadly successful in navigating COVID-19 related challenges to date, any further disruptions to our supply chain and operations could have a significant negative impact on our net revenue, gross and operating margin performance. In addition, as a result of the COVID-19 pandemic, ongoing conflict in Ukraine, supply chain disruptions, inflation, lower consumer confidence and rising interest rates, we could experience material charges from potential adjustments of the carrying value of our inventories and trade receivables, impairment charges on our long-lived assets, intangible assets and goodwill, and changes in the effectiveness of our hedging instruments, among others.

During the first half of 2022, we remained focused on navigating these on-going challenges through preserving our liquidity and managing our cash flow through taking preemptive action to enhance our ability to meet our short-term liquidity needs. These actions include, but are not limited to, proactively managing working capital by closely monitoring customers' credit and collections, renegotiating payment terms with third-party manufacturers and key suppliers, closely monitoring inventory levels and purchases against forecasted demand, reducing or eliminating non-essential spending, subleasing excess office space, and deferment of hiring. We continue to monitor this rapidly developing situation and may, as necessary, reduce expenditures further, borrow under our revolving credit facility, or pursue other sources of capital that may include other forms of external financing in order to maintain our cash position and preserve financial flexibility in response to the uncertainty in the United States and global markets resulting from the COVID-19 pandemic, the ongoing conflict in Ukraine, supply chain disruptions, inflation, lower consumer confidence and rising interest rates.

Results of Operations

We operate as one operating and reportable segment. The following table sets forth, for the periods presented, the unaudited condensed consolidated statements of operations data, which we derived from the accompanying unaudited condensed consolidated financial statements:


	Three Months Ended								Six Months Ended
	July 3, 2022				June 27, 2021				July 3, 2022				June 27, 2021
	(In thousands, except percentage data)
Revenue:
Products	$	86,191	72.4	%	$	73,311	74.4	%	$	181,016	74.3	%	$	133,072	73.5	%


Services	32,788		27.6	%	25,260		25.6	%	62,714		25.7	%	48,055		26.5	%

Total revenue	118,979		100.0	%	98,571		100.0	%	243,730		100.0	%	181,127		100.0	%
Cost of revenue:
Products	73,829		62.1	%	62,019		62.9	%	154,606		63.4	%	109,176		60.3	%


Services	11,410		9.6	%	10,383		10.5	%	21,809		8.9	%	19,975		11.0	%

Total cost of revenue	85,239		71.6	%	72,402		73.5	%	176,415		72.4	%	129,151		71.3	%
Gross profit	33,740		28.4	%	26,169		26.6	%	67,315		27.6	%	51,976		28.7	%
Operating expenses:
Research and development	17,402		14.6	%	16,251		16.5	%	33,781		13.9	%	31,042		17.1	%
Sales and marketing	14,506		12.2	%	12,459		12.6	%	27,674		11.4	%	23,666		13.1	%
General and administrative	13,149		11.1	%	13,559		13.8	%	25,770		10.6	%	24,786		13.7	%
Impairment charges	—		—	%	9,116		9.2	%	—		—	%	9,116		5.0	%
Separation expense	25		0.0	%	605		0.6	%	104		0.0	%	659		0.4	%

Total operating expenses	45,082		37.9	%	51,990		52.7	%	87,329		35.8	%	89,269		49.3	%
Loss from operations	(11,342)		(9.5)	%	(25,821)		(26.2)	%	(20,014)		(8.2)	%	(37,293)		(20.6)	%
Interest income (expense), net	129		0.1	%	3		—	%	124		0.1	%	27		—	%
Other income (expense), net	(116)		(0.1)	%	2,662		2.7	%	295		0.1	%	3,571		2.1	%
Loss before income taxes	(11,329)		(9.5)	%	(23,156)		(23.5)	%	(19,595)		(8.0)	%	(33,695)		(18.6)	%
Provision for income taxes	228		0.2	%	164		0.2	%	441		0.2	%	344		0.2	%
Net loss	$	(11,557)	(9.7)	%	$	(23,320)	(23.7)	%	$	(20,036)	(8.2)	%	$	(34,039)	(18.8)	%

Revenue

Our gross revenue consists primarily of sales of devices, prepaid and paid subscription service revenue and NRE service revenue from Verisure and our customers. We generally recognize revenue from product sales at the time the product is shipped and transfer of control from us to the customer occurs. Our first generation camera products come with a prepaid service that provides users with rolling seven-day cloud video storage, the ability to connect up to five cameras and 90 days of customer support. Our second generation camera, doorbell and floodlight products come with a prepaid service that includes a one-year free trial period of Arlo Secure bundled with our Arlo Ultra products launched in early 2019, and a three-month free trial period of Arlo Secure bundled with our products launched after September 2019. Upon device shipment, we attribute a portion of the sales price to the prepaid service, deferring this revenue at the outset and subsequently recognizing it ratably over the estimated useful economic life of the device or free trial period, as applicable. Our paid subscription services relate to sales of subscription plans to our registered accounts. Our services also include certain development services provided to Verisure and other customers under NRE arrangements. In the third quarter of 2021, we introduced Arlo Secure, our new service plan with coverage for unlimited cameras and an enhanced Emergency Response solution. Arlo Secure replaced Arlo Smart, our previous service plan. Existing Arlo Smart customers are entitled to either retain their existing plans or upgrade to the new Arlo Secure plan of their choosing.

Our revenue consists of gross revenue, less end-user customer rebates and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, allowances for estimated sales returns, price protection, and net changes in deferred revenue. A significant portion of our marketing expenditure is with customers and is deemed to be a reduction of revenue under authoritative guidance for revenue recognition.

Under the Supply Agreement, Verisure became the exclusive distributor of our products in Europe for all channels, and will non-exclusively distribute our products through its direct channels globally for an initial term of five years. During the five-year period commencing January 1, 2020, Verisure has an aggregate product purchase commitment of $500.0 million. As of July 3, 2022, $255.6 million of the purchase commitment has been fulfilled. The Supply Agreement also provides for certain NRE services to Verisure, including developing certain custom products specified by Verisure in exchange for an aggregate of $13.5 million, payable in installments upon meeting certain development milestones. As of July 3, 2022, Verisure has paid the full cash consideration of $13.5 million for these NRE services. For the three months ended July 3, 2022 and June 27, 2021, we recognized service revenue of $0.2 million and $2.0 million, respectively, for these NRE services.

We conduct business across three geographic regions: Americas, EMEA, and APAC. We generally base revenue by geography on the ship-to location of the customer for device sales and device location for service sales.


	Three Months Ended								Six Months Ended
	July 3, 2022			% Change		June 27, 2021			July 3, 2022			% Change		June 27, 2021
	(In thousands, except percentage data)





Americas	$	60,345		(9.5)	%	$	66,681		$	128,811		10.7	%	$	116,317
Percentage of revenue	50.7		%			67.6		%	52.8		%			64.2		%





EMEA	54,483			117.1	%	25,101			104,458			110.2	%	49,692
Percentage of revenue	45.8		%			25.5		%	42.9		%			27.4		%





APAC	4,151			(38.9)	%	6,789			10,461			(30.8)	%	15,118
Percentage of revenue	3.5		%			6.9		%	4.3		%			8.4		%





Total revenue	$	118,979		20.7	%	$	98,571		$	243,730		34.6	%	$	181,127

Revenue for the three and six months ended July 3, 2022 increased 20.7% and 34.6%, compared to the prior year periods, respectively, primarily due to higher product sales and service revenue. Product revenue increased by $12.9 million, or 17.6% and $47.9 million, or 36.0% for the three and six months ended July 3, 2022 compared to the prior year periods, respectively, primarily driven by an increase in product shipments in EMEA due to stronger customer demand and the launch of a customized camera in the Verisure Security channel, partially offset by decrease in product sales in Americas and APAC, and higher provisions for sales returns in Americas due to higher return rates in the current period that are deemed to be a reduction of revenue. Service revenue increased by $7.5 million, or 29.8% and $14.7 million, or 30.5% for the three and six months ended July 3, 2022 compared to the prior year periods, respectively, primarily due to an increase in paid accounts, partially offset by a decrease in Verisure NRE revenue recognition.

Cost of Revenue

Cost of revenue consists of both product costs and costs of service. Product costs primarily consist of: the cost of finished products from our third-party manufacturers and overhead costs, including personnel expense for operation staff, purchasing, product planning, inventory control, warehousing and distribution logistics, third-party software licensing fees, inbound freight, IT and facilities overhead, warranty costs associated with returned goods, write-downs for excess and obsolete inventory and excess components, and royalties to third parties. Cost of service consists of costs attributable to the provision and maintenance of our cloud-based platform, including personnel, storage, security and computing, IT and facilities overhead as well as NRE service costs incurred under the Verisure NRE arrangements.

Our cost of revenue as a percentage of revenue can vary based upon a number of factors, including those that may affect our revenue set forth above and factors that may affect our cost of revenue, including, without limitation: product mix, sales channel mix, registered accounts' acceptance of paid subscription service offerings, fluctuation in foreign exchange rates and changes in our cost of goods sold due to fluctuations in prices paid for components, net of vendor rebates, cloud platform costs, warranty and overhead costs, inbound freight and duty product conversion costs, charges for excess or obsolete inventory, and amortization of acquired intangibles. We outsource our manufacturing, warehousing, and distribution logistics. We also outsource certain components of the required infrastructure to support our cloud-based back-end IT infrastructure. We believe this outsourcing strategy allows us to better manage our product and service costs and gross margin.

The following table presents cost of revenue and gross margin for the periods indicated:


	Three Months Ended						Six Months Ended
	July 3, 2022		% Change		June 27, 2021		July 3, 2022		% Change		June 27, 2021
	(In thousands, except percentage data)
Cost of revenue:
Products	$	73,829	19.0	%	$	62,019	$	154,606	41.6	%	$	109,176

Services	11,410		9.9	%	10,383		21,809		9.2	%	19,975
Total cost of revenue	$	85,239	17.7	%	$	72,402	$	176,415	36.6	%	$	129,151

Cost of product revenue increased 19.0% and 41.6% for the three and six months ended July 3, 2022 compared to the prior year periods, respectively, primarily due to increases in gross shipments plus the increases in costs of materials and components of our products and freight cost. Cost of service revenue increased 9.9% and 9.2% for the three and six months ended July 3, 2022 compared to the prior year periods, respectively, as a result of service revenue growth, offset by cost optimizations.

Gross Profit

The following table presents gross profit for the periods indicated:


	Three Months Ended								Six Months Ended
	July 3, 2022			% Change		June 27, 2021			July 3, 2022			% Change		June 27, 2021
	(In thousands, except percentage data)
Gross profit:
Products	$	12,362		9.5	%	$	11,292		$	26,410		10.5	%	$	23,896

Services	21,378			43.7	%	14,877			40,905			45.7	%	28,080
Total gross profit	$	33,740		28.9	%	$	26,169		$	67,315		29.5	%	$	51,976
Gross margin percentage:
Products	14.3		%			15.4		%	14.6		%			18.0		%

Services	65.2		%			58.9		%	65.2		%			58.4		%
Total gross margin percentage	28.4		%			26.6		%	27.6		%			28.7		%

Gross profit increased 28.9% and 29.5% for the three and six months ended July 3, 2022, compared to the prior year periods, respectively, due to a combination of both product and service revenue increases. The product gross profit increase is primarily due to an increase in product revenue and lower provisions for marketing expenditures that are deemed to be reductions of revenue, partially offset by higher product costs and provision for sale returns. The service gross profit increase is primarily due to growth in paid service revenue due to an increase in paid accounts and cost optimizations implemented.

Operating Expenses

Research and Development

Research and development expense consists primarily of personnel-related expense, safety, security, regulatory services and testing, other research and development consulting fees, and corporate IT and facilities overhead. We recognize research and development expenses as they are incurred. We have invested in and expanded our research and development organization to enhance our ability to introduce innovative products and services. We expect research and development expense to increase in absolute dollars as we develop new product and service offerings and compete for engineering talent. We believe that innovation and technological leadership are critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies, products, and services, including our hardware devices, cloud-based software, AI-based algorithms, and machine learning capabilities. Research and development expense directly attributable to delivering the Verisure NRE is recognized in cost of service.

The following table presents research and development expense for the periods indicated:


	Three Months Ended						Six Months Ended
	July 3, 2022		% Change		June 27, 2021		July 3, 2022		% Change		June 27, 2021
	(In thousands, except percentage data)
Research and development expense	$	17,402	7.1	%	$	16,251	$	33,781	8.8	%	$	31,042

Research and development expense increased $1.2 million for the three months ended July 3, 2022, compared to the prior year period, primarily due to an increase of $0.8 million in outside professional services and an increase in certain research and development expenses amounting to $0.8 million, as result of a reduction in the amount of work performed on Verisure NRE projects classified as a cost of service revenue, partially offset by a decrease of $0.4 million in IT and facility overhead and other expenses. Research and development expense increased $2.7 million for the six months ended July 3, 2022, compared to the prior year period, primarily due to an increase of $1.7 million in outside professional services and an increase in certain research and development expenses amounting to $1.4 million, as a result of a reduction in the amount of work performed on Verisure NRE projects which are classified as cost of service revenue, partially offset by a decrease of $0.4 million in other expenses.

Sales and Marketing

Sales and marketing expense consists primarily of personnel expense for sales and marketing staff; technical support expense; advertising; trade shows; corporate communications and other marketing expense; product marketing expense; IT and facilities overhead; outbound freight costs; and credit card processing fees. We expect our sales and marketing expense to significantly increase in the future as we invest in marketing to drive awareness of our brand and drive demand for our products and services.

The following table presents sales and marketing expense for the periods indicated:


	Three Months Ended						Six Months Ended
	July 3, 2022		% Change		June 27, 2021		July 3, 2022		% Change		June 27, 2021
	(In thousands, except percentage data)
Sales and marketing expense	$	14,506	16.4	%	$	12,459	$	27,674	16.9	%	$	23,666

Sales and marketing expense increased $2.0 million for the three months ended July 3, 2022, compared to the prior year period, primarily due to increases of $1.4 million in marketing expenditures, primarily for the production of creative content and other preparatory work for our upcoming awareness advertising campaign, $0.6 million in personnel-related expenses and $0.4 million in credit card processing fees, partially offset by a decrease of $0.3 million in outside professional services. Sales and marketing expense increased $4.0 million for the six months ended July 3, 2022, compared

to the prior year period, primarily due to increases of $2.3 million in marketing expenditures, primarily for the production of creative content and other preparatory work for our upcoming awareness advertising campaign, $1.4 million in personnel-related expenses, $0.8 million in credit card processing fees, $0.2 million in IT and facility overhead and $0.2 million in sales freight-out expenses, partially offset by decreases of $0.9 million in outside professional services.

General and Administrative

General and administrative expense consists primarily of personnel-related expense for certain executives, finance and accounting, investor relations, human resources, legal, information technology, professional fees, corporate IT and facilities overhead, strategic initiative expense and other general corporate expense. We expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense.

The following table presents general and administrative expense for the periods indicated:


	Three Months Ended						Six Months Ended
	July 3, 2022		% Change		June 27, 2021		July 3, 2022		% Change		June 27, 2021
	(In thousands, except percentage data)
General and administrative expense	$	13,149	(3.0)	%	$	13,559	$	25,770	4.0	%	$	24,786

General and administrative expense decreased $0.4 million for the three months ended July 3, 2022, compared to the prior year period, primarily due to an increase of $0.7 million in personnel-related expenses, offset by decreases of $0.7 million in legal and professional services, $0.3 million in IT and facility overhead, and $0.1 million in other expenses. General and administrative expense increased $1.0 million for the six months ended July 3, 2022, compared to the prior year period, primarily due to an increase of $2.5 million in personnel-related expenses, partially offset by decreases of $0.7 million in legal and professional services, $0.6 million in IT and facility overhead, and $0.2 million in other expenses.

Impairment Charges

The following table presents impairment charges for the periods indicated:


	Three Months Ended					Six Months Ended
	July 3, 2022		% Change	June 27, 2021		July 3, 2022		% Change	June 27, 2021
	(In thousands, except percentage data)
Impairment charges	$	—	**	$	9,116	$	—	**	$	9,116

During the second quarter of 2021, we reviewed certain of our right-of-use assets and other lease-related assets for impairment in conjunction with our decision to sublease our office space in San Jose, California. As a result, we recorded an impairment charge of $9.1 million, which includes $6.8 million associated with the right-of-use asset and $2.3 million associated with the leasehold improvements and furniture, fixtures and equipment included in the San Jose office asset group. Refer to Note 4, Balance Sheet Components, for further information about the impairment of the right-of-use asset and long-lived assets.

Separation Expense

Separation expense consists primarily of costs of legal and professional services for IPO-related litigation associated with our separation from NETGEAR.

The following table presents separation expense for the periods indicated:


	Three Months Ended						Six Months Ended
	July 3, 2022		% Change		June 27, 2021		July 3, 2022		% Change		June 27, 2021
	(In thousands, except percentage data)
Separation expense	$	25	(95.9)	%	$	605	$	104	(84.2)	%	$	659

Interest Income and Other Income (Expense), Net

The following table presents other income (expense), net for the periods indicated:


	Three Months Ended					Six Months Ended
	July 3, 2022		% Change	June 27, 2021		July 3, 2022	% Change	June 27, 2021
	(In thousands, except percentage data)
Interest income (expense), net	$	129	**	$	3	124	**	27
Other income (expense), net	$	(116)	**	$	2,662	295	**	3,571

**Percentage change not meaningful.

Our interest income was primarily earned from our short-term investments and cash and cash equivalents. We expect our interest income in absolute dollars to marginally increase as interest rates are expected to increase, while we deploy our short-term investments and cash and cash equivalents to fund our operations.

Other income (expense), net primarily represents gains and losses on transactions denominated in foreign currencies, foreign currency contract gain (loss), net, and other miscellaneous income and expense. We have also included reimbursements under the Verisure Transition Service Agreement ("Verisure TSA") and the Employee Retention Credit ("ERC") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") for qualified wages in Other income.

Other income (expense), net decreased $2.8 million for the three months ended July 3, 2022, compared to the prior year period, primarily due to a decrease of $1.8 million in ERC under the CARES Act, which was recognized as Other income in the second quarter of 2021, and a decrease of $0.8 million in Verisure TSA related income. Other income (expense), net decreased $3.3 million for the six months ended July 3, 2022, compared to the prior year period, primarily due to a decrease of $1.8 million in ERC under the CARES Act, which was recognized as Other income in the second quarter of 2021, and a $1.5 million decrease in Verisure TSA related income.

Provision for Income Taxes


	Three Months Ended								Six Months Ended
	July 3, 2022			% Change		June 27, 2021			July 3, 2022			% Change		June 27, 2021
	(In thousands, except percentage data)
Provision for income taxes	$	228		39.0	%	$	164		$	441		28.2	%	$	344
Effective tax rate	(2.0)		%			(0.7)		%	(2.3)		%			(1.0)		%

The Company’s provision for income taxes was primarily attributable to income taxes on foreign earnings. The increase in provision for income taxes for the three and six months ended July 3, 2022, compared to the prior year periods, was primarily due to higher foreign earnings in the second quarter of 2022 and first half of 2022, respectively. Consistent with the prior year, the Company maintained a valuation allowance against its U.S. federal and state deferred tax assets and did not record a tax benefit on these deferred tax assets since it is more likely than not that these deferred tax assets will not be realized.

Liquidity and Capital Resources

We have a history of losses and may continue to incur operating and net losses for the foreseeable future. As of July 3, 2022, our accumulated deficit was $308.8 million.

Our principal sources of liquidity are cash, cash equivalents and short-term investments. Short-term investments are marketable government securities with an original maturity or a remaining maturity at the time of purchase of greater than three months and no more than 12 months. The marketable securities are held in our name with a high quality financial institution, which acts as our custodian and investment manager. As of July 3, 2022, we had cash, cash equivalents and short-term investments totaling $135.3 million. 34.6% of our cash and cash equivalents were held outside of the U.S. Starting in 2018, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) impact on the repatriation of foreign earnings is generally immaterial. The cash and cash equivalents balance outside of the U.S. is subject to fluctuation based on the settlement of intercompany balances. On October 27, 2021, we entered into a Loan and Security Agreement with Bank of America, N.A. for a $40.0 million three-year revolving credit facility. Refer to Note 8. Debt for further information about the terms and structure of the credit facility.

Based on our current plans, the Loan and Security Agreement with Bank of America, N.A, and market conditions, we believe that such sources of liquidity will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months. However, in the future, including sooner than may be anticipated, we may require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity or debt financings or collaborative agreements or from other sources. However, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets, which have also been impacted by ongoing supply chain disruptions, rising interest rates, lower consumer confidence and inflation. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our capacity to support our operating expenses and capital requirements or for other purposes, such as acquisitions.

We have no commitments to obtain such additional financing and cannot assure you that additional financing will be available at all or, if available, that such financing would be obtainable on terms favorable to us and would not be dilutive. Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products, the growth in our service revenue, as well as the ability to increase our gross margin dollars and continue to maintain controls over our operating expenditures.

Cash Flow

The following table presents our cash flows for the periods presented:


	Six Months Ended
	July 3, 2022		June 27, 2021
	(In thousands)
Net cash used in operating activities	$	(29,381)	$	(23,466)
Net cash provided by (used in) investing activities	(50,429)		18,934
Net cash used in financing activities	(10,384)		(2,948)
Net cash decrease	$	(90,194)	$	(7,480)

Operating activities

Net cash used in operating activities increased by $5.9 million for the six months ended July 3, 2022 compared to the prior year period. This increase comprised an increase in working capital used in operations of $13.3 million, offset by a $7.4 million reduction in adjusted net loss reconciled to net cash used in operating activities. The increase in working capital used in operations was mainly driven by lower collections from customers primarily as a result of a change in customer mix and associated payment terms and higher inventory purchases, partially offset by lower payments to suppliers.

Our days' sales outstanding (“DSO”) increased to 57 days as of July 3, 2022 compared to 50 days as of December 31, 2021, primarily as a result of changes in customer mix and associated payment terms. Inventory increased marginally to $39.2 million as of July 3, 2022 from $38.4 million as of December 31, 2021, due to higher inventory purchases in line with product shipments. Our ending inventory turns were 7.5x in the three months ended July 3, 2022 down from 10.5x turns in the three months ended December 31, 2021, primarily as a result of the normal seasonality in our business. Our accounts payable decreased to $77.4 million as of July 3, 2022 from $84.1 million as of December 31, 2021, primarily due to timing of supplier payments.

Investing activities

Net cash used in investing activities increased by $69.4 million for the six months ended July 3, 2022 compared to the prior year period, primarily due to purchases of short-term investments.

Financing activities

Net cash used in financing activities was $10.4 million for the six months ended July 3, 2022, representing tax withholdings from restricted stock unit releases of $13.6 million, offset by proceeds from ESPP contributions and exercises of stock options of $3.2 million. Net cash used in financing activities was $2.9 million for the six months ended June 27, 2021, representing tax withholdings from restricted stock unit releases of $9.1 million, offset by proceeds from ESPP contributions and exercises of stock options of $6.1 million.

Contractual Obligations

Our principal commitments consist of obligations under operating leases for office space, equipment, data center facilities and distribution center facilities, as well as non-cancellable purchase commitments. Refer to Note 9. Commitments and Contingencies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for a complete discussion of our contractual obligations.

Critical Accounting Policies and Estimates

For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to our critical accounting policies and estimates during the six months ended July 3, 2022, other than as discussed in Note 2. Significant Accounting Policies and Recent Accounting Pronouncements, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

During the six months ended July 3, 2022, there were no material changes to our market risk disclosures as set forth in Part II Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were, in design and operation, effective at the reasonable assurance level. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended July 3, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. It should be noted that any system of controls, however well designed and operated, can provide only reasonable assurance, and not absolute assurance, that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of certain events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals in all future circumstances.

PART II: OTHER INFORMATION

Item 1.Legal Proceedings

The information set forth under the heading “Litigation and Other Legal Matters” in Note 9, Commitments and Contingencies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, is incorporated herein by reference. For additional discussion of certain risks associated with legal proceedings, see the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Item 1A.Risk Factors

Our business, reputation, results of operations and financial condition, as well as the price of our stock, can be affected by a number of factors, whether currently known or unknown, including those described in Part I, Item 1A of our Annual Report Form 10-K for the year ended December 31, 2021 under the heading “Risk Factors.” When any one or more of these risks materialize from time to time, our business, reputation, results of operations and financial condition, as well as the price of our stock, can be materially and adversely affected. Below are changes to our risk factors included in our Annual Report From 10-K for the year ended December 31, 2021.

Global geopolitical, economic and business conditions could materially adversely affect our revenue and results of operations.

Our business has been, and may continue to be, affected by a number of factors that are beyond our control, including but not limited to general geopolitical, economic and business conditions, conditions in the financial markets, and changes in the overall demand for connected lifestyle products. Our products and services may be considered discretionary items for our consumer and small business end-users. A severe and/or prolonged economic downturn, including as a result of the COVID-19 pandemic, the ongoing conflict in Ukraine, inflation, supply chain disruptions, rising interest rates, or lower consumer confidence, among other things, could adversely affect our customers’ financial condition and their levels of business activity. As a result of stimulus programs put in place over the past two years, the U.S. and many countries are currently experiencing an inflationary environment. In addition, the U.S. Federal Reserve has raised, and may again raise, interest rates in response to concerns about inflation, which in turn has negatively impacted equity values. The U.S. capital markets experienced and continue to experience extreme volatility and disruption following the global outbreak of COVID-19, the Russian invasion of Ukraine, and inflationary pressures. Weakness in, and uncertainty about, global economic conditions may also cause businesses to postpone spending in response to tighter credit, rising interest rates, inflation, lower consumer confidence, negative financial news and/or general declines in income or asset values, which could have a material negative effect on the demand for our products and services.

In the recent past, various regions worldwide have experienced slow economic growth. In addition, current economic challenges in China may continue to put negative pressure on global economic conditions. If conditions in the global economy, including in Europe, China, Australia and the United States, or other key vertical or geographic markets deteriorate, such conditions could materially adversely affect our business, results of operations, and financial condition. If we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, which could materially adversely affect our business, results of operations, and financial condition. In addition, the economic problems affecting the financial markets and the uncertainty in global economic conditions resulted in a number of adverse effects, including a low level of liquidity in many financial markets, extreme volatility in credit, equity, currency, and fixed income markets, instability in the stock market, and high unemployment.

In addition, the challenges faced by the European Union to stabilize some of its member state economies, such as Greece, Portugal, Spain, Hungary, and Italy, have had international implications, affecting the stability of global financial markets and hindering economies worldwide. Many member states in the European Union have been addressing the issues with controversial austerity measures. In addition, the potential consequences of the “Brexit” process in the United Kingdom have led to significant uncertainty in the region. Should the European Union monetary policy measures be insufficient to restore confidence and stability to the financial markets, or should the United Kingdom’s “Brexit” decision

lead to additional economic or political instability, the global economy, including the U.S. and European Union economies where we have a significant presence, could be hindered, which could have a material adverse effect on our business, results of operations, and financial condition. There could also be a number of other follow-on effects from these economic developments on our business, including the inability of customers to obtain credit to finance purchases of our products, customer insolvencies, decreased customer confidence to make purchasing decisions, decreased customer demand, and decreased customer ability to pay their trade obligations.

In addition, availability of our products from third-party manufacturers and our ability to distribute our products into non-U.S. jurisdictions may be impacted by factors such as ongoing supply chain disruptions, an increase in duties, tariffs, or other restrictions on trade; raw material shortages, work stoppages, strikes and political unrest; economic crises and international disputes or conflicts; changes in leadership and the political climate in countries from which we import products. Further, the imposition of and changes in the U.S.' and other governments' duties, trade regulations, trade wars, tariffs, other restrictions or other geopolitical events, including the evolving relations between U.S. and China and evolving relations with Russia due to the current hostilities between Russia and Ukraine, create uncertainty regarding our ability to market and distribute our products into non-U.S. jurisdictions and any failure to effectively anticipate or respond to such events could materially adversely affect our business, results of operations, and financial condition.

A portion of our global and U.S. sales are comprised of goods assembled and manufactured in our facilities in Taiwan and the People’s Republic of China, and components for a number of our goods are sourced from suppliers in the People’s Republic of China. When tariffs, duties, or other restrictions are placed on goods imported into the United States from China or any related counter-measures are taken by China, our revenue and results of operations may be materially harmed.

In recent years, the U.S. Government has imposed increases to the ad valorem duties applicable to certain products imported from China, including increases of up to 25% for some items. We are actively addressing the risks related to these additional duties, which have affected, or have the potential to affect, at least some of our imports from China. Although we have already taken some steps to mitigate these risks, including by moving a significant portion of our manufacturing and assembly to Vietnam and other areas in the Asia Pacific region outside of China, if these duties are imposed, the cost of our products may increase. These duties may also make our products more expensive for consumers, which may reduce consumer demand. We may need to offset the financial impact by, among other things, moving even more of our product manufacturing to other locations, modifying other business practices or raising prices. If we are not successful in offsetting the impact of any such duties, our revenue, gross margins, and operating results may be materially adversely affected.

Instability in geographies where we have operations and personnel or where we derive amounts of revenue could have a material adverse effect on our business, customers, operations and financial results.

Economic, civil, military and political uncertainty exists and may increase in regions where we operate and derive our revenue. Various countries in which we operate are experiencing and may continue to experience military action and civil and political unrest. We have operations in the emerging market economies of Eastern Europe, previously including operations in Belarus, utilizing employees and contractors who perform services relating to new product releases. In late February 2022, Russian military forces launched significant military action against Ukraine. Sustained conflict and disruption in the region is likely. The impact to Belarus, Russia and Ukraine, as well as actions taken by other countries, including new and stricter export controls and sanctions by Canada, the United Kingdom, the European Union, the U.S. and other countries and organizations against officials, individuals, regions, and industries in Russia, Belarus and Ukraine, and each country’s potential response to such sanctions, tensions and military actions, could have a material adverse effect on our product development timelines and increase our research and development expenditure. Material adverse effects from the conflict and enhanced sanctions activity has caused us to transition our operations out of Belarus to other countries. We are actively monitoring the security of our remaining employees and contractors in Eastern Europe and the stability of our infrastructure, including communications and internet availability. To date we have not experienced any material interruptions in our operations there, but if we are unable to effectively replicate the capabilities previously

provided by our Belarusian operations in other countries, our ability to timely introduce new products and financial results may be harmed.

Item 6.Exhibits

Exhibit Index

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

Date

Number

Filed Herewith

3.1

Amended and Restated Certificate of Incorporation of Arlo Technologies, Inc.

8-K

8/7/2018

3.1

3.2

Amended and Restated Bylaws of Arlo Technologies, Inc.

8-K

8/7/2018

3.2

4.1

Common Stock Certificate of Arlo Technologies, Inc.

S-1/A

7/23/2018

4.1

31.1

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

31.2

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

32.1#

Section 1350 Certification of Principal Executive Officer

32.2#

Section 1350 Certification of Principal Financial Officer

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

This certification is deemed to accompany this Quarterly Report on Form 10-Q and will not be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that section. This certification will not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


ARLO TECHNOLOGIES, INC.
Registrant



/s/ MATTHEW MCRAE
Matthew McRae
Chief Executive Officer
(Principal Executive Officer)



/s/ GORDON MATTINGLY
Gordon Mattingly
Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: August 10, 2022