Arlo Technologies, Inc. - Quarter Report: 2023 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 2, 2023
| ☐ | 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 94,054,943 as of August 4, 2023.
Arlo Technologies, Inc.
Form 10-Q
For the Quarterly Period Ended July 2, 2023
TABLE OF CONTENTS
| Page | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
2
PART I: FINANCIAL INFORMATION
Item 1.Financial Statements
ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| As of | |||||||||||
| July 2, 2023 | December 31, 2022 | ||||||||||
(In thousands, except share and per share data) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 61,951 | $ | 84,024 | |||||||
| Short-term investments | 61,724 | 29,700 | |||||||||
| Accounts receivable, net | 57,327 | 65,960 | |||||||||
| Inventories | 39,429 | 46,554 | |||||||||
| Prepaid expenses and other current assets | 12,318 | 6,544 | |||||||||
| Total current assets | 232,749 | 232,782 | |||||||||
| Property and equipment, net | 6,421 | 7,336 | |||||||||
| Operating lease right-of-use assets, net | 11,089 | 12,809 | |||||||||
| Goodwill | 11,038 | 11,038 | |||||||||
| Restricted cash | 4,035 | 4,155 | |||||||||
| Other non-current assets | 3,689 | 4,081 | |||||||||
| Total assets | $ | 269,021 | $ | 272,201 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 61,221 | $ | 52,132 | |||||||
| Deferred revenue | 17,639 | 11,291 | |||||||||
| Accrued liabilities | 88,217 | 98,855 | |||||||||
| Total current liabilities | 167,077 | 162,278 | |||||||||
| Non-current operating lease liabilities | 17,141 | 19,279 | |||||||||
| Other non-current liabilities | 3,047 | 2,949 | |||||||||
| Total liabilities | 187,265 | 184,506 | |||||||||
| Commitments and contingencies (Note 8) | |||||||||||
| 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: 93,653,934 at July 2, 2023 and 88,887,139 at December 31, 2022 | 94 | 89 | |||||||||
| Additional paid-in capital | 448,543 | 433,138 | |||||||||
| Accumulated other comprehensive income (loss) | 152 | (107) | |||||||||
| Accumulated deficit | (367,033) | (345,425) | |||||||||
| Total stockholders’ equity | 81,756 | 87,695 | |||||||||
| Total liabilities and stockholders’ equity | $ | 269,021 | $ | 272,201 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | ||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Products | $ | 64,749 | $ | 86,191 | $ | 131,809 | $ | 181,016 | |||||||||||||||
| Services | 50,327 | 32,788 | 94,271 | 62,714 | |||||||||||||||||||
| Total revenue | 115,076 | 118,979 | 226,080 | 243,730 | |||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||
| Products | 60,446 | 73,829 | 124,487 | 154,606 | |||||||||||||||||||
| Services | 12,772 | 11,410 | 24,518 | 21,809 | |||||||||||||||||||
| Total cost of revenue | 73,218 | 85,239 | 149,005 | 176,415 | |||||||||||||||||||
| Gross profit | 41,858 | 33,740 | 77,075 | 67,315 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 17,618 | 17,402 | 35,368 | 33,781 | |||||||||||||||||||
| Sales and marketing | 16,921 | 14,506 | 32,274 | 27,674 | |||||||||||||||||||
| General and administrative | 15,007 | 13,149 | 30,629 | 25,770 | |||||||||||||||||||
| Others | 341 | 25 | 973 | 104 | |||||||||||||||||||
| Total operating expenses | 49,887 | 45,082 | 99,244 | 87,329 | |||||||||||||||||||
| Loss from operations | (8,029) | (11,342) | (22,169) | (20,014) | |||||||||||||||||||
| Interest income, net | 835 | 129 | 1,561 | 124 | |||||||||||||||||||
| Other income (expense), net | 52 | (116) | 13 | 295 | |||||||||||||||||||
| Loss before income taxes | (7,142) | (11,329) | (20,595) | (19,595) | |||||||||||||||||||
| Provision for income taxes | 221 | 228 | 1,013 | 441 | |||||||||||||||||||
| Net loss | $ | (7,363) | $ | (11,557) | $ | (21,608) | $ | (20,036) | |||||||||||||||
| Net loss per share: | |||||||||||||||||||||||
| Basic and diluted | $ | (0.08) | $ | (0.13) | $ | (0.24) | $ | (0.23) | |||||||||||||||
| Weighted average shares used to compute net loss per share: | |||||||||||||||||||||||
| Basic and diluted | 92,337 | 86,868 | 90,984 | 85,966 | |||||||||||||||||||
| Comprehensive loss: | |||||||||||||||||||||||
| Net loss | $ | (7,363) | $ | (11,557) | $ | (21,608) | $ | (20,036) | |||||||||||||||
| Other comprehensive income (loss), net of tax | 131 | (122) | 259 | (168) | |||||||||||||||||||
| Total comprehensive loss | $ | (7,232) | $ | (11,679) | $ | (21,349) | $ | (20,204) | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
Total stockholders’ equity, beginning balances | $ | 86,251 | $ | 112,004 | $ | 87,695 | $ | 112,652 | |||||||||||||||
| Common stock: | |||||||||||||||||||||||
| Beginning balances | $ | 91 | $ | 86 | $ | 89 | $ | 84 | |||||||||||||||
| Issuance of common stock under stock-based compensation plans | 4 | 2 | 7 | 5 | |||||||||||||||||||
| Issuance of common stock under Employee Stock Purchase Plan | — | 1 | — | 1 | |||||||||||||||||||
| Restricted stock unit withholdings | (1) | (1) | (2) | (2) | |||||||||||||||||||
| Ending balances | $ | 94 | $ | 88 | $ | 94 | $ | 88 | |||||||||||||||
| Additional paid-in capital: | |||||||||||||||||||||||
| Beginning balances | $ | 445,809 | $ | 409,242 | $ | 433,138 | $ | 401,367 | |||||||||||||||
| Stock-based compensation expense | 9,997 | 7,093 | 20,622 | 15,276 | |||||||||||||||||||
| Settlement of liability classified restricted stock units | — | 95 | 6,739 | 5,061 | |||||||||||||||||||
| Issuance of common stock under stock-based compensation plans | 2,986 | 34 | 2,986 | 1,419 | |||||||||||||||||||
| Issuance of common stock under Employee Stock Purchase Plan | 1,617 | 1,746 | 1,617 | 1,746 | |||||||||||||||||||
| Restricted stock unit withholdings | (11,866) | (6,894) | (16,559) | (13,553) | |||||||||||||||||||
| Ending balances | $ | 448,543 | $ | 411,316 | $ | 448,543 | $ | 411,316 | |||||||||||||||
| Accumulated deficit: | |||||||||||||||||||||||
| Beginning balances | $ | (359,670) | $ | (297,278) | $ | (345,425) | $ | (288,799) | |||||||||||||||
| Net loss | (7,363) | (11,557) | (21,608) | (20,036) | |||||||||||||||||||
| Ending balances | $ | (367,033) | $ | (308,835) | $ | (367,033) | $ | (308,835) | |||||||||||||||
| Accumulated other comprehensive income (loss): | |||||||||||||||||||||||
| Beginning balances | $ | 21 | $ | (46) | $ | (107) | $ | — | |||||||||||||||
| Other comprehensive income (loss), net of tax | 131 | (122) | 259 | (168) | |||||||||||||||||||
| Ending balances | $ | 152 | $ | (168) | $ | 152 | $ | (168) | |||||||||||||||
Total stockholders’ equity, ending balances | $ | 81,756 | $ | 102,401 | $ | 81,756 | $ | 102,401 | |||||||||||||||
| Common stock shares: | |||||||||||||||||||||||
| Beginning balances | 90,785 | 85,835 | 88,887 | 84,453 | |||||||||||||||||||
| Issuance of common stock under stock-based compensation plans | 3,976 | 2,294 | 7,141 | 4,421 | |||||||||||||||||||
| Issuance of common stock under Employee Stock Purchase Plan | 460 | 304 | 460 | 304 | |||||||||||||||||||
| Restricted stock unit withholdings | (1,567) | (903) | (2,834) | (1,648) | |||||||||||||||||||
| Ending balances | 93,654 | 87,530 | 93,654 | 87,530 | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six Months Ended | |||||||||||
| July 2, 2023 | July 3, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (21,608) | $ | (20,036) | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
| Stock-based compensation expense | 27,564 | 21,834 | |||||||||
| Depreciation and amortization | 2,353 | 2,523 | |||||||||
| Allowance for credit losses and inventory reserves | 613 | (120) | |||||||||
| Deferred income taxes | 243 | 133 | |||||||||
| Others | (567) | 89 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | 8,734 | 5,498 | |||||||||
| Inventories | 6,411 | (628) | |||||||||
| Prepaid expenses and other assets | (5,624) | 767 | |||||||||
| Accounts payable | 9,836 | (6,565) | |||||||||
| Deferred revenue | 6,198 | (16,763) | |||||||||
| Accrued and other liabilities | (11,245) | (16,113) | |||||||||
| Net cash provided by (used in) operating activities | 22,908 | (29,381) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (1,954) | (451) | |||||||||
| Purchases of short-term investments | (61,152) | (59,490) | |||||||||
| Proceeds from maturities of short-term investments | 29,956 | 9,512 | |||||||||
| Net cash used in investing activities | (33,150) | (50,429) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds related to employee benefit plans | 4,611 | 3,171 | |||||||||
| Restricted stock unit withholdings | (16,562) | (13,555) | |||||||||
| Net cash used in financing activities | (11,951) | (10,384) | |||||||||
Net decrease in cash, cash equivalents, and restricted cash | (22,193) | (90,194) | |||||||||
Cash, cash equivalents, and restricted cash, at beginning of period | 88,179 | 179,856 | |||||||||
Cash, cash equivalents, and restricted cash, at end of period | $ | 65,986 | $ | 89,662 | |||||||
| Reconciliation of cash, cash equivalents, and restricted cash to Unaudited Condensed Consolidated Balance Sheets | |||||||||||
| Cash and cash equivalents | $ | 61,951 | $ | 85,537 | |||||||
| Restricted cash | 4,035 | 4,125 | |||||||||
| Total cash, cash equivalents, and restricted cash | $ | 65,986 | $ | 89,662 | |||||||
| Supplemental cash flow information: | |||||||||||
| Non-cash investing activities: | |||||||||||
| Purchases of property and equipment included in accounts payable and accrued liabilities | $ | 433 | $ | 333 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Basis of Presentation
Description of Business
Arlo Technologies, Inc. (“Arlo”) combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle. Our 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.
We conduct business across three geographic regions—(i) the Americas; (ii) Europe, Middle-East and Africa (“EMEA”); and (iii) Asia Pacific (“APAC”)—and primarily generate 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.
Our corporate headquarters is located in Carlsbad, California, with other satellite offices across North America and various other global locations.
Basis of Presentation
We prepare our unaudited condensed consolidated financial statements 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”). The unaudited condensed consolidated financial statements include the accounts of Arlo and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. 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
Our fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. We report the 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.
Reclassification
Certain prior periods amounts have been reclassified to conform to the current period’s presentation. None of these reclassifications had a material impact to the unaudited condensed consolidated financial statements.
7
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 2, 2023 and are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any future period.
Note 2. Significant Accounting Policies and Recent Accounting Pronouncements
Our significant accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes to such policies during the six months ended July 2, 2023.
Emerging Growth Company Status
As an emerging growth company (“EGC”), we may, under the Jumpstart Our Business Startups Act, delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless we otherwise irrevocably elect not to avail ourselves of this exemption. We did not make such an irrevocable election and have not delayed the adoption of any applicable accounting standards. We will no longer qualify as an EGC on December 31, 2023. Accordingly, our Annual Report on Form 10-K for the year ending December 31, 2023 will include an attestation report of our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.
Accounting Pronouncements Recently Adopted
There were no accounting pronouncements adopted during the six months ended July 2, 2023.
Accounting Pronouncements Not Yet Effective
We have considered all recent accounting pronouncements issued, but not yet effective, and do not expect any to have a material effect on our financial statements and related disclosures.
Note 3. Revenue
Performance Obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied and partially unsatisfied as of July 2, 2023:
| 1 year | 2 years | Greater than 2 years | Total | |||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||
| Performance obligations | $ | 18,320 | $ | 58 | $ | 6 | $ | 18,384 | ||||||||||||||||||
The performance obligation classified as greater than one year pertains to revenue deferral from prepaid services.
8
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six months ended July 2, 2023 and July 3, 2022, $87.6 million and $53.4 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $81.4 million and $70.1 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. Approximately $9.8 million and $11.9 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.
During the five-year period that commenced on January 1, 2020, Verisure Sàrl (“Verisure”) has an aggregate purchase commitment of $500.0 million. As of July 2, 2023, $403.1 million of the purchase commitment has been fulfilled. Based on the Supply Agreement with Verisure, a purchase obligation is not deemed to exist until we receive and accept Verisure’s purchase order. As of July 2, 2023, we had a backlog of $38.7 million which represents performance obligations that will be recognized as revenue once fulfilled, which is expected to occur over the next six months.
Disaggregation of Revenue
We disaggregate our revenue into three geographic regions: the Americas, EMEA, and APAC, where we conduct our business. The following table presents revenue disaggregated by geographic regions.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Americas | $ | 78,136 | $ | 60,345 | $ | 134,768 | $ | 128,811 | |||||||||||||||
| EMEA | 30,958 | 54,483 | 79,430 | 104,458 | |||||||||||||||||||
| APAC | 5,982 | 4,151 | 11,882 | 10,461 | |||||||||||||||||||
| Total | $ | 115,076 | $ | 118,979 | $ | 226,080 | $ | 243,730 | |||||||||||||||
Note 4. Balance Sheet Components
Short-term investments
| As of July 2, 2023 | As of December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasuries | $ | 61,572 | $ | 176 | $ | (24) | $ | 61,724 | $ | 29,849 | $ | — | $ | (149) | $ | 29,700 | |||||||||||||||||||||||||||||||
Accounts receivable, net
| As of | |||||||||||
| July 2, 2023 | December 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Gross accounts receivable | $ | 57,649 | $ | 66,383 | |||||||
| Allowance for credit losses | (322) | (423) | |||||||||
| Total | $ | 57,327 | $ | 65,960 | |||||||
9
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Balance at the beginning of the period | $ | 329 | $ | 339 | $ | 423 | $ | 337 | |||||||||||||||
| Provision for (release of) expected credit losses | (7) | 66 | (101) | 68 | |||||||||||||||||||
| Balance at the end of the period | $ | 322 | $ | 405 | $ | 322 | $ | 405 | |||||||||||||||
Property and equipment, net
The components of property and equipment are as follows:
| As of | |||||||||||
| July 2, 2023 | December 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Machinery and equipment | $ | 13,791 | $ | 12,696 | |||||||
| Software | 15,818 | 15,606 | |||||||||
| Computer equipment | 3,853 | 3,992 | |||||||||
Leasehold improvements | 4,661 | 4,657 | |||||||||
| Furniture and fixtures | 2,546 | 2,554 | |||||||||
| Total property and equipment, gross | 40,669 | 39,505 | |||||||||
| Accumulated depreciation | (34,248) | (32,169) | |||||||||
Total property and equipment, net (1) | $ | 6,421 | $ | 7,336 | |||||||
_________________________
(1) $1.4 million and $1.7 million property and equipment, net, was included in the sublease arrangement for the San Jose office building as of July 2, 2023 and December 31, 2022, respectively.
Depreciation expense pertaining to property and equipment was $1.2 million and $2.4 million for the three and six months ended July 2, 2023, and $1.2 million and $2.5 million for the three and six months ended July 3, 2022.
Goodwill
We have determined that no event occurred or circumstances changed during the three and six months ended July 2, 2023 that would more likely than not reduce the fair value of goodwill below the carrying amount. No goodwill impairment was recognized in the three and six months ended July 2, 2023 and July 3, 2022.
10
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other non-current assets
| As of | |||||||||||
| July 2, 2023 | December 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Deferred income taxes | $ | 1,141 | $ | 1,384 | |||||||
| Sublease initial direct cost and adjustments | 896 | 777 | |||||||||
| Other | 1,652 | 1,920 | |||||||||
| Total | $ | 3,689 | $ | 4,081 | |||||||
Accrued liabilities
| As of | |||||||||||
| July 2, 2023 | December 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Sales incentives | $ | 31,281 | $ | 36,271 | |||||||
Sales returns | 14,757 | 18,656 | |||||||||
| Compensation | 16,155 | 15,556 | |||||||||
| Cloud and other costs | 7,657 | 11,154 | |||||||||
| 3,818 | 4,190 | ||||||||||
| Professional services | 2,496 | 3,703 | |||||||||
| Warranty obligations | 1,093 | 1,174 | |||||||||
| Freight cost | 1,921 | 1,050 | |||||||||
| Service cost | 1,084 | 806 | |||||||||
| Restructuring charges | 628 | 1,265 | |||||||||
| Other | 7,327 | 5,030 | |||||||||
| Total | $ | 88,217 | $ | 98,855 | |||||||
Other non-current liabilities
| As of | |||||||||||
| July 2, 2023 | December 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Non-current service cost | $ | 1,202 | $ | 1,259 | |||||||
| Non-current compensation | 872 | 616 | |||||||||
| Non-current deferred revenue | 63 | 212 | |||||||||
| Non-current income taxes payable | 77 | 77 | |||||||||
| Other | 833 | 785 | |||||||||
| Total | $ | 3,047 | $ | 2,949 | |||||||
11
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5. Fair Value Measurements
The following table summarizes assets measured at fair value on a recurring basis:
| As of | |||||||||||
| July 2, 2023 | December 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
Cash equivalents: money-market funds (<90 days) | $ | 1,888 | $ | 12,614 | |||||||
Cash equivalents: U.S. Treasuries (<90 days) | 471 | 20,274 | |||||||||
Available-for-sale securities: U.S. Treasuries (1) | 61,724 | 29,700 | |||||||||
| Total | $ | 64,083 | $ | 62,588 | |||||||
_________________________
(1)Included in short-term investments on our unaudited condensed consolidated balance sheets.
Our 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.
As of July 2, 2023 and December 31, 2022, assets and liabilities measured as Level 2 fair value were not material and there were no Level 3 fair value assets or liabilities measured on a recurring basis.
Note 6. Restructuring
In November 2022, we initiated a restructuring plan to reduce our cost structure to better align the operational needs of the business to current economic conditions while continuing to support our long-term strategy. This restructuring includes the reduction of headcount as well as the abandonment of certain lease contracts and the cancellation of contractual services arrangements with certain suppliers. As of July 2, 2023, we have substantially incurred all costs pertaining to restructuring activities, with related cash outflows extending until the fourth quarter of 2024.
The restructuring liabilities are included in accrued liabilities in our unaudited condensed consolidated balance sheets. Restructuring activities for the six months ended July 2, 2023 are as follows:
| Total | Severance Expense | Office Exit Expense | Other Exit Expense | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | 1,265 | $ | 219 | $ | 991 | $ | 55 | |||||||||||||||
| Restructuring charges | 400 | 278 | 117 | 5 | |||||||||||||||||||
| Cash payments | (1,011) | (464) | (521) | (26) | |||||||||||||||||||
| Non-cash and other adjustments | (26) | — | (21) | (5) | |||||||||||||||||||
| Balance as of July 2, 2023 | $ | 628 | $ | 33 | $ | 566 | $ | 29 | |||||||||||||||
| Total costs incurred inception to date | $ | 2,454 | $ | 1,323 | $ | 1,052 | $ | 79 | |||||||||||||||
12
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 7. Revolving Credit Facility
On October 27, 2021, we 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 us 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. Based on certain terms and conditions including eligible accounts receivable as of July 2, 2023, we had unused borrowing capacity of $13.8 million.
Our obligations under the Credit Agreement are secured by substantially all of our domestic working capital assets, including accounts receivable, cash and cash equivalents, inventory, and other assets to the extent related to such working capital assets.
At our 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 our 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 our average daily availability for the prior fiscal quarter. Among other fees, we are 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 us to (a) until we achieve 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, if the Financial Covenant Trigger Period (as defined in the Credit Agreement) is in effect, 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. As of July 2, 2023, we were 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 we file a bankruptcy petition, a bankruptcy petition is filed against us and is not dismissed or stayed within thirty days or we make 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 2, 2023.
13
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8. Commitments and Contingencies
Operating Leases
Our operating lease obligations mostly include offices, equipment, data centers and distribution centers, with various expiration dates through June 2029. Certain lease agreements include options to renew or terminate the lease, which are not reasonably certain to be exercised and therefore are not factored into our determination of lease payments. The terms of certain leases provide for rental payments on a graduated scale. Gross lease expense was $1.5 million and $3.0 million for the three and six months ended July 2, 2023, respectively, and $1.8 million and $3.6 million for the three and six months ended July 3, 2022, respectively. We 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 2, 2023 and July 3, 2022.
Supplemental cash flow information related to operating leases was as follows:
| Six Months Ended | |||||||||||
| July 2, 2023 | July 3, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | |||||||||||
| Operating cash flows from operating leases | $ | 3,799 | $ | 3,618 | |||||||
| 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 2, 2023 | December 31, 2022 | ||||||||||
| Weighted average remaining lease term | 5.5 years | 5.1 years | |||||||||
| Weighted average discount rate | 5.69 | % | 5.69 | % | |||||||
14
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The future minimum undiscounted lease payments under operating leases and future non-cancelable rent payments from our subtenants for each of the next five years and thereafter as of July 2, 2023 were as follows:
| Operating Lease Payments | Sublease Payments | Net | |||||||||||||||
| (In thousands) | |||||||||||||||||
| 2023 (Remaining six months) | $ | 1,988 | $ | (1,034) | $ | 954 | |||||||||||
| 2024 | 5,398 | (1,947) | 3,451 | ||||||||||||||
| 2025 | 3,904 | (2,006) | 1,898 | ||||||||||||||
| 2026 | 4,011 | (2,066) | 1,945 | ||||||||||||||
| 2027 | 3,986 | (2,322) | 1,664 | ||||||||||||||
| Thereafter | 5,130 | (3,620) | 1,510 | ||||||||||||||
| Total future lease payments | 24,417 | $ | (12,995) | $ | 11,422 | ||||||||||||
| Less: interest | (3,458) | ||||||||||||||||
| Present value of future minimum lease payments | $ | 20,959 | |||||||||||||||
| Accrued liabilities | $ | 3,818 | |||||||||||||||
| Non-current operating lease liabilities | 17,141 | ||||||||||||||||
| Total lease liabilities | $ | 20,959 | |||||||||||||||
Letters of Credit
In connection with the lease agreement for our office space located in San Jose, California, we executed a letter of credit with the landlord as the beneficiary. As of July 2, 2023, we 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
We have 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 2, 2023, we had approximately $50.1 million in non-cancelable purchase commitments with suppliers.
As of July 2, 2023, an additional $24.9 million of purchase orders beyond contractual termination periods have been issued to supply chain partners in anticipation of demand requirements. Consequently, we may incur expenses for the materials and components, such as chipsets already purchased by the supplier to fulfill our orders if the purchase order is cancelled. Expenses incurred have historically not been significant relative to the original order value. As of July 2, 2023, the loss liability from committed purchases was not material.
15
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Warranty Obligations
Changes in warranty obligations, which are included in accrued liabilities in the unaudited condensed consolidated balance sheets, were as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Balance at the beginning of the period | $ | 1,119 | $ | 1,330 | $ | 1,174 | $ | 1,330 | |||||||||||||||
| Provision for warranty obligations | 40 | 34 | 55 | 113 | |||||||||||||||||||
| Settlements | (66) | (79) | (136) | (158) | |||||||||||||||||||
| Balance at the end of the period | $ | 1,093 | $ | 1,285 | $ | 1,093 | $ | 1,285 | |||||||||||||||
Litigation and Other Legal Matters
We are involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below. In all cases, at each reporting period, we evaluate 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, we accrue for the amount or, if a range, we accrue 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 general and administrative expenses. We monitor developments in these legal matters that could affect the estimate we had previously accrued. In relation to such matters, we currently believe that there are no existing claims or proceedings that are likely to have a material adverse effect on our 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 us may cause us to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any intellectual property litigation may require us to make royalty payments, which could have an adverse effect in future periods. If any of those events were to occur, our 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 our estimates, which could result in the need to adjust the liability and record additional expenses.
Securities Class Action Lawsuits and Derivative Suit
On December 11, 2018, purported stockholders of Arlo filed six putative securities class action complaints in the Superior Court of California, County of Santa Clara (the “State Action”), and one complaint in the U.S. District Court for the Northern District of California (the “Federal Action”) against us and certain of our executives and directors. The plaintiffs in the State Action allege that we failed to adequately disclose quality control problems and adverse sales trends ahead of our initial public offering (the “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. In the Federal Action, the court appointed a shareholder named Matis Nayman as lead plaintiff. Lead plaintiff alleged violations of the Securities Act and the Securities Exchange Act of 1934, as amended, based on alleged materially false and misleading statements about our sales trends and products. In the amended complaint, lead plaintiff sought to represent a class of persons who purchased or otherwise acquired our 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 sought 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 an 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 we had accrued for loss
16
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contingency. In October 2020, we made a $1.25 million payment to an escrow account administered by the court and plaintiff’s counsel (the “Settlement Fund”). The Settlement Fund was deemed to be in the custody of the court and remained subject to the jurisdiction of the court until such time as the Settlement Fund was 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, dismissed with prejudice all claims of lead plaintiff and the Settlement Class (as defined in the settlement agreement). The Federal Action is now closed.
In the State Action, on May 5, 2021, the court held a status conference and 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 amended complaint, 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. 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 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 occurred before the California Court of Appeal, Sixth Appellate District. Plaintiffs-Appellants filed their opening brief on May 20, 2022. Defendants-Respondents filed their responding brief on August 18, 2022, and Plaintiffs-Appellants filed their reply brief on September 7, 2022. On April 13, 2023, the court heard oral argument on the appeal and the case was submitted. On May 5, 2023, the Court of Appeal affirmed by written order the trial court’s dismissal of the State Action based on the federal forum provision in Arlo’s certificate of incorporation and awarded costs to Arlo. On June 14, 2023, Plaintiffs filed a petition for review in the Supreme Court of California. Defendants-Respondents filed their answer to the petition for review on July 5, 2023, and Plaintiffs filed their reply in support of the petition for review on July 17, 2023. On July 19, 2023, the Supreme Court of California denied Plaintiffs’ petition for review and closed the case.
Indemnifications
In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, distributors, resellers, vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising from breach of such agreements or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with members of our board of directors and certain of our executive officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments we could be required to make under these indemnification agreements is, in many cases, unlimited. As of July 2, 2023 and December 31, 2022, we have not incurred any material costs as a result of such indemnifications and we are not currently aware of any indemnification claims.
Note 9. Employee Benefit Plans
We grant options and restricted stock units (“RSUs”) under the 2018 Equity Incentive Plan (the “2018 Plan”), under which awards may be granted to all employees. We also grant performance-based and market-based restricted stock units (“PSUs”) to our executive officers periodically. Award vesting periods for the 2018 Plan are generally to four years. As of July 2, 2023, approximately 4.0 million shares were available for future grants. Options may be granted for periods of up to 10 years or such shorter term as may be provided in the agreement and at prices no less than 100% of the fair market value of Arlo’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.
17
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On January 20, 2023, we registered an aggregate of up to 4,444,072 shares of common stock on a Registration Statement on Form S-8, including 3,555,258 shares issuable pursuant to the 2018 Plan that were automatically added to the shares authorized for issuance under the 2018 Plan and 888,814 shares issuable pursuant to the Employee Stock Purchase Plan (“ESPP”) that were automatically added to the shares authorized for issuance on January 1, 2023, both pursuant to an “evergreen” provision contained in the respective plans.
The following table sets forth the available shares for grants as of July 2, 2023:
| Number of Shares | |||||
| (In thousands) | |||||
Shares available for grants as of December 31, 2022 | 4,213 | ||||
| Additional authorized shares | 3,555 | ||||
| Granted | (7,023) | ||||
| Forfeited / cancelled | 377 | ||||
| Shares traded for taxes | 2,834 | ||||
Shares available for grants as of July 2, 2023 | 3,956 | ||||
Employee Stock Purchase Plan
We sponsor the ESPP to eligible employees. As of July 2, 2023, 2.0 million shares were available for issuance under the ESPP.
Option Activity
Stock option activity during the six months ended July 2, 2023 was as follows:
| Number of Shares | Weighted Average Exercise Price Per Share | ||||||||||
| (In thousands) | (In dollars) | ||||||||||
Outstanding as of December 31, 2022 | 2,082 | $ | 10.24 | ||||||||
| Granted | — | $ | — | ||||||||
| Exercised | (433) | $ | 6.90 | ||||||||
| Forfeited / cancelled | — | $ | — | ||||||||
| Expired | (12) | $ | 7.55 | ||||||||
Outstanding as of July 2, 2023 | 1,637 | $ | 11.15 | ||||||||
| Vested and expected to vest as of July 2, 2023 | 1,637 | $ | 11.15 | ||||||||
| Exercisable Options as of July 2, 2023 | 1,637 | $ | 11.15 | ||||||||
RSU Activity
RSU activity, excluding PSU activity, during the six months ended July 2, 2023 was as follows:
18
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| Number of Shares | Weighted Average Grant Date Fair Value Per Share | ||||||||||
| (In thousands) | (In dollars) | ||||||||||
Outstanding as of December 31, 2022 | 9,487 | $ | 6.36 | ||||||||
| Granted | 4,975 | $ | 3.95 | ||||||||
| Vested | (4,641) | $ | 4.79 | ||||||||
| Forfeited | (363) | $ | 6.42 | ||||||||
Outstanding as of July 2, 2023 | 9,458 | $ | 5.86 | ||||||||
PSU Activity
Our executive officers and other senior employees have been granted performance-based awards with vesting occurring at the end of a or five-year period if performance conditions or market conditions are met. The number of units earned and eligible to vest are determined based on the achievement of various performance conditions or market conditions, including the cumulative paid accounts targets, stock price, cash balances at reporting period, and the recipients’ continued services. At the end of each reporting period, we evaluate the probability of achieving the performance or market conditions and record the related stock-based compensation expense based on the achievement over the service period.
PSU activity during the six months ended July 2, 2023 was as follows:
| Number of Shares | Weighted Average Grant Date Fair Value Per Share | ||||||||||
| (In thousands) | (In dollars) | ||||||||||
Outstanding as of December 31, 2022 | 4,041 | $ | 6.22 | ||||||||
| Granted | 2,050 | $ | 4.56 | ||||||||
| Vested | (2,067) | $ | 5.51 | ||||||||
| Forfeited | (3) | $ | 8.28 | ||||||||
Outstanding as of July 2, 2023 | 4,021 | $ | 5.74 | ||||||||
Stock-Based Compensation Expense
The following table sets forth the stock-based compensation expense included in our unaudited condensed consolidated statements of comprehensive loss:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Cost of revenue | $ | 967 | $ | 1,335 | $ | 1,828 | $ | 2,245 | |||||||||||||||
| Research and development | 3,311 | 3,621 | 7,222 | 5,923 | |||||||||||||||||||
| Sales and marketing | 1,670 | 1,790 | 3,392 | 3,170 | |||||||||||||||||||
| General and administrative | 7,025 | 5,499 | 15,122 | 10,496 | |||||||||||||||||||
| Total | $ | 12,973 | $ | 12,245 | $ | 27,564 | $ | 21,834 | |||||||||||||||
As of July 2, 2023, there was no unrecognized compensation cost related to stock options. Approximately $71.2 million of unrecognized compensation cost related to unvested RSUs and PSUs is expected to be recognized over a weighted-average period of 2.2 years as of July 2, 2023.
19
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10. Income Taxes
The provision for income taxes for the three and six months ended July 2, 2023 was $0.2 million and $1.0 million, or an effective tax rate of (3.1)% and (4.9)%. 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)%. During the three and six months ended July 2, 2023 and July 3, 2022, we sustained U.S. book losses. Consistent with the prior year periods, we maintained a valuation allowance against our 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. Provision for income taxes decreased slightly for the three months ended July 2, 2023, compared to the prior year period and increased for the six months ended July 2, 2023, compared to the prior year period, primarily due to the higher U.S. earnings and also the application of Section 174 of the Internal Revenue Code requiring capitalization of research and experimental expenses, which increase was recognized mostly in the first quarter of 2023.
Note 11. Net Loss Per Share
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | ||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss | $ | (7,363) | $ | (11,557) | $ | (21,608) | $ | (20,036) | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average common shares - basic and dilutive | 92,337 | 86,868 | 90,984 | 85,966 | |||||||||||||||||||
| Basic and diluted net loss per share | $ | (0.08) | $ | (0.13) | $ | (0.24) | $ | (0.23) | |||||||||||||||
| Anti-dilutive employee stock-based awards, excluded | 1,370 | 4,812 | 3,238 | 1,476 | |||||||||||||||||||
20
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 12. Segment and Geographic Information
Segment Information
We operate as one operating and reportable segment. Our Chief Executive Officer (“CEO”) is identified as the Chief Operating Decision Maker (“CODM”), who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Geographic Information for Revenue
Revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates, net changes in deferred revenue, and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance. Sales and usage-based taxes are excluded from revenue. 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 presents revenue by geographic area. For comparative purposes, amounts in prior periods have been recast.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| United States | $ | 78,186 | $ | 59,997 | $ | 134,029 | $ | 125,234 | |||||||||||||||
| Spain | 19,549 | 40,141 | 58,120 | 64,709 | |||||||||||||||||||
| Ireland | 4,106 | 10,664 | 8,986 | 32,751 | |||||||||||||||||||
| Other countries | 13,235 | 8,177 | 24,945 | 21,036 | |||||||||||||||||||
| Total | $ | 115,076 | $ | 118,979 | $ | 226,080 | $ | 243,730 | |||||||||||||||
Geographic Information for Long-Lived Assets
Long-lived assets include property and equipment, net and operating lease right-of-use assets, net. Our long-lived assets are based on the physical location of the assets. The following table presents long-lived assets by geographic area.
| As of | |||||||||||
| July 2, 2023 | December 31, 2022 | ||||||||||
| (In thousands) | |||||||||||
| United States | $ | 14,961 | $ | 17,762 | |||||||
| Other countries | 2,549 | 2,383 | |||||||||
| Total | $ | 17,510 | $ | 20,145 | |||||||
21
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
This Quarterly Report on Form 10-Q (the “Quarterly 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, and market position of our products and technology. 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, such information may be limited or incomplete, and we assume no obligation to update any such forward-looking statements. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these 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 29.4 million smart connected devices. As of July 2, 2023, the Arlo platform had approximately 7.9 million cumulative registered accounts across more than 100 countries around the world coupled with 2.3 million cumulative paid subscribers and annual recurring revenue of $193.6 million.
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. For the three months ended July 2, 2023 and July 3, 2022, we generated total revenue of $115.1 million and $119.0 million, respectively. Loss from operations was $8.0 million and $11.3 million for the three months ended July 2, 2023 and July 3, 2022, respectively. For the six months ended July 2, 2023 and July 3, 2022, we generated total revenue of $226.1 million and $243.7 million, respectively. Loss from operations was $22.2 million and $20.0 million for the six months ended July 2, 2023 and July 3, 2022, respectively.
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 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 our sales and marketing expense to increase in the future as we invest in marketing to drive demand for our products and services.
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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 and for the Three Months Ended | |||||||||||||||||
| July 2, 2023 | % Change | July 3, 2022 | |||||||||||||||
| (In thousands, except percentage data) | |||||||||||||||||
| Cumulative registered accounts | 7,860 | 18.4 | % | 6,640 | |||||||||||||
Cumulative paid accounts (1) | 2,289 | 54.9 | % | 1,478 | |||||||||||||
| Annual recurring revenue | $ | 193,633 | 66.1 | % | $ | 116,601 | |||||||||||
_________________________
(1)The increase for the three months ended July 2, 2023 compared to the prior year period reflects an increase in the number of paid accounts in our EMEA region which were managed by Verisure and now onboarded with us. This does not have an impact to our financial statements and key business metrics other than our number of Cumulative Paid Accounts.
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 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 end-users to monitor the devices attached to that household.
Cumulative Paid Accounts. Paid accounts are defined as any account worldwide where a subscription to a paid service is being collected (either by us or by our customers or channel partners, including Verisure).
Annual Recurring Revenue (“ARR”). 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. 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.
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Impact of Global Geopolitical, Economic and Business Conditions
During the six months ended July 2, 2023, we remained focused on the ongoing conflict in Ukraine, supply chain disruptions, inflation, fluctuating consumer confidence and rising interest rates by preserving our liquidity and managing our cash flow by 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, and subleasing or reducing excess office space. We continue to monitor the 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 ongoing conflict in Ukraine, supply chain disruptions, the inflationary macro environment, fluctuating consumer confidence and rising interest rates and current financial conditions within the banking industry, including the effects of recent failures of other financial institutions, and liquidity levels.
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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 comprehensive loss data, which we derived from the accompanying unaudited condensed consolidated financial statements:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except percentage data) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Products | $ | 64,749 | 56.3 | % | $ | 86,191 | 72.4 | % | $ | 131,809 | 58.3 | % | $ | 181,016 | 74.3 | % | |||||||||||||||||||||||||||||||
| Services | 50,327 | 43.7 | % | 32,788 | 27.6 | % | 94,271 | 41.7 | % | 62,714 | 25.7 | % | |||||||||||||||||||||||||||||||||||
| Total revenue | 115,076 | 100.0 | % | 118,979 | 100.0 | % | 226,080 | 100.0 | % | 243,730 | 100.0 | % | |||||||||||||||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Products | 60,446 | 52.5 | % | 73,829 | 62.0 | % | 124,487 | 55.1 | % | 154,606 | 63.4 | % | |||||||||||||||||||||||||||||||||||
| Services | 12,772 | 11.1 | % | 11,410 | 9.6 | % | 24,518 | 10.8 | % | 21,809 | 8.9 | % | |||||||||||||||||||||||||||||||||||
| Total cost of revenue | 73,218 | 63.6 | % | 85,239 | 71.6 | % | 149,005 | 65.9 | % | 176,415 | 72.4 | % | |||||||||||||||||||||||||||||||||||
| Gross profit | 41,858 | 36.4 | % | 33,740 | 28.4 | % | 77,075 | 34.1 | % | 67,315 | 27.6 | % | |||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | 17,618 | 15.3 | % | 17,402 | 14.6 | % | 35,368 | 15.6 | % | 33,781 | 13.9 | % | |||||||||||||||||||||||||||||||||||
| Sales and marketing | 16,921 | 14.7 | % | 14,506 | 12.2 | % | 32,274 | 14.3 | % | 27,674 | 11.4 | % | |||||||||||||||||||||||||||||||||||
| General and administrative | 15,007 | 13.0 | % | 13,149 | 11.1 | % | 30,629 | 13.5 | % | 25,770 | 10.6 | % | |||||||||||||||||||||||||||||||||||
| Others | 341 | 0.4 | % | 25 | — | % | 973 | 0.5 | % | 104 | — | % | |||||||||||||||||||||||||||||||||||
| Total operating expenses | 49,887 | 43.4 | % | 45,082 | 37.9 | % | 99,244 | 43.9 | % | 87,329 | 35.8 | % | |||||||||||||||||||||||||||||||||||
| Loss from operations | (8,029) | (7.0) | % | (11,342) | (9.5) | % | (22,169) | (9.8) | % | (20,014) | (8.2) | % | |||||||||||||||||||||||||||||||||||
| Interest income, net | 835 | 0.8 | % | 129 | 0.1 | % | 1,561 | 0.7 | % | 124 | 0.1 | % | |||||||||||||||||||||||||||||||||||
| Other income (expense), net | 52 | — | % | (116) | (0.1) | % | 13 | — | % | 295 | 0.1 | % | |||||||||||||||||||||||||||||||||||
| Loss before income taxes | (7,142) | (6.2) | % | (11,329) | (9.5) | % | (20,595) | (9.1) | % | (19,595) | (8.0) | % | |||||||||||||||||||||||||||||||||||
| Provision for income taxes | 221 | 0.2 | % | 228 | 0.2 | % | 1,013 | 0.5 | % | 441 | 0.2 | % | |||||||||||||||||||||||||||||||||||
| Net loss | $ | (7,363) | (6.4) | % | $ | (11,557) | (9.7) | % | $ | (21,608) | (9.6) | % | $ | (20,036) | (8.2) | % | |||||||||||||||||||||||||||||||
Revenue
Our gross revenue consists primarily of sales of devices, prepaid and paid subscription service revenue. We generally recognize revenue from product sales at the time the product is shipped and transfer of control from us to the customer occurs. Upon device shipment, we attribute a portion of the sales price as 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 revenue consists of gross revenue, less customer rebates and other channel sales incentives, 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.
We conduct business across three geographic regions—(i) the Americas; (ii) EMEA; and (iii) APAC—and generally base revenue by geography on the ship-to location of the customer for device sales and device location for service sales.
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| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| July 2, 2023 | % Change | July 3, 2022 | July 2, 2023 | % Change | July 3, 2022 | ||||||||||||||||||||||||||||||
| (In thousands, except percentage data) | |||||||||||||||||||||||||||||||||||
| Americas | $ | 78,136 | 29.5 | % | $ | 60,345 | $ | 134,768 | 4.6 | % | $ | 128,811 | |||||||||||||||||||||||
| Percentage of revenue | 67.9 | % | 50.7 | % | 59.6 | % | 52.8 | % | |||||||||||||||||||||||||||
| EMEA | 30,958 | (43.2) | % | 54,483 | 79,430 | (24.0) | % | 104,458 | |||||||||||||||||||||||||||
| Percentage of revenue | 26.9 | % | 45.8 | % | 35.1 | % | 42.9 | % | |||||||||||||||||||||||||||
| APAC | 5,982 | 44.1 | % | 4,151 | 11,882 | 13.6 | % | 10,461 | |||||||||||||||||||||||||||
| Percentage of revenue | 5.2 | % | 3.5 | % | 5.3 | % | 4.3 | % | |||||||||||||||||||||||||||
| Total revenue | $ | 115,076 | (3.3) | % | $ | 118,979 | $ | 226,080 | (7.2) | % | $ | 243,730 | |||||||||||||||||||||||
Product revenue decreased by $21.4 million, or 24.9% and $49.2 million, or 27.2% for the three and six months ended July 2, 2023 compared to the prior year periods. The declines were experienced mainly in EMEA and Americas primarily driven by a reduction in the average selling prices (“ASPs”) of our products as we increased promotional activities to stimulate household acquisition and increased subscriber growth coupled with a shift in product mix driven by the softening consumer demand as a result of current macro-economic factors and seasonality.
Service revenue increased in all regions by $17.5 million, or 53.5% and $31.6 million, or 50.3% for the three and six months ended July 2, 2023 compared to the prior year periods, primarily due to a 54.9% increase in cumulative paid accounts and rates for our subscription plans.
Cost of Revenue
Cost of revenue consists of both product costs and service costs. 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. Service costs consist of costs attributable to the provision and maintenance of our cloud-based platform, including personnel, storage, security and computing, IT and facilities overhead.
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, 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 costs, and charges for excess or obsolete inventory. 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 and allows us to adapt to changing market dynamics and supply chain constraints.
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The following table presents cost of revenue and gross margin for the periods indicated:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| July 2, 2023 | % Change | July 3, 2022 | July 2, 2023 | % Change | July 3, 2022 | ||||||||||||||||||||||||||||||
| (In thousands, except percentage data) | |||||||||||||||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||||||||||||||
| Products | $ | 60,446 | (18.1) | % | $ | 73,829 | $ | 124,487 | (19.5) | % | $ | 154,606 | |||||||||||||||||||||||
| Services | 12,772 | 11.9 | % | 11,410 | 24,518 | 12.4 | % | 21,809 | |||||||||||||||||||||||||||
| Total cost of revenue | $ | 73,218 | (14.1) | % | $ | 85,239 | $ | 149,005 | (15.5) | % | $ | 176,415 | |||||||||||||||||||||||
Product cost of revenue decreased 18.1% and 19.5% for the three and six months ended July 2, 2023 compared to the prior year periods, respectively, primarily due to decreases in product shipments coupled with decreases in freight-in costs due to normalization of the supply chain and utilization of ocean freight, partially offset by increases in inventory reserves.
Service cost of revenue increased 11.9% and 12.4% for the three and six months ended July 2, 2023 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 2, 2023 | % Change | July 3, 2022 | July 2, 2023 | % Change | July 3, 2022 | ||||||||||||||||||||||||||||||
| (In thousands, except percentage data) | |||||||||||||||||||||||||||||||||||
| Gross profit: | |||||||||||||||||||||||||||||||||||
| Products | $ | 4,303 | (65.2) | % | $ | 12,362 | $ | 7,322 | (72.3) | % | $ | 26,410 | |||||||||||||||||||||||
| Services | 37,555 | 75.7 | % | 21,378 | 69,753 | 70.5 | % | 40,905 | |||||||||||||||||||||||||||
| Total gross profit | $ | 41,858 | 24.1 | % | $ | 33,740 | $ | 77,075 | 14.5 | % | $ | 67,315 | |||||||||||||||||||||||
| Gross margin percentage: | |||||||||||||||||||||||||||||||||||
| Products | 6.6 | % | 14.3 | % | 5.6 | % | 14.6 | % | |||||||||||||||||||||||||||
| Services | 74.6 | % | 65.2 | % | 74.0 | % | 65.2 | % | |||||||||||||||||||||||||||
| Total gross margin | 36.4 | % | 28.4 | % | 34.1 | % | 27.6 | % | |||||||||||||||||||||||||||
Product gross profit decreased for the three and six months ended July 2, 2023 compared to the prior year periods, primarily driven by a reduction in the ASPs of our products as we increased promotional activities to stimulate household acquisition and increased subscriber growth coupled with a shift in product mix driven by the softening consumer demand as a result of current macro-economic factors. The product gross profit decrease was partially offset by the decrease in freight-in costs due to normalization of the supply chain and utilization of ocean freight.
Service gross profit increased for the three and six months ended July 2, 2023 compared to the prior year periods, primarily due to growth in paid service revenue in all regions as a result of a 54.9% increase in cumulative paid accounts and rates for our subscription plans as well as cost optimizations.
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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. Generally, 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.
The following table presents research and development expense for the periods indicated:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| July 2, 2023 | % Change | July 3, 2022 | July 2, 2023 | % Change | July 3, 2022 | ||||||||||||||||||||||||||||||
| (In thousands, except percentage data) | |||||||||||||||||||||||||||||||||||
| Research and development expense | $ | 17,618 | 1.2 | % | $ | 17,402 | $ | 35,368 | 4.7 | % | $ | 33,781 | |||||||||||||||||||||||
Research and development expense increased by $0.2 million for the three months ended July 2, 2023 compared to the prior year period, primarily due to an increase of $0.5 million in personnel-related expenses mainly from increase in base compensation as a result of headcount increase, partially offset by a decrease of $0.2 million in corporate IT and facilities overhead.
Research and development expense increased by $1.6 million for the six months ended July 2, 2023 compared to the prior year period, primarily due to an increase of $2.5 million in personnel-related expenses mainly from stock-based compensation and merit increases, partially offset by a decrease of $0.9 million in corporate IT and facilities overhead.
Sales and Marketing
Sales and marketing expense consists primarily of personnel expense for sales and marketing staff, technical support expense, advertising, trade shows, media and placement, 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 increase in the future as we invest in marketing to 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 2, 2023 | % Change | July 3, 2022 | July 2, 2023 | % Change | July 3, 2022 | ||||||||||||||||||||||||||||||
| (In thousands, except percentage data) | |||||||||||||||||||||||||||||||||||
| Sales and marketing expense | $ | 16,921 | 16.6 | % | $ | 14,506 | $ | 32,274 | 16.6 | % | $ | 27,674 | |||||||||||||||||||||||
Sales and marketing expense increased $2.4 million for the three months ended July 2, 2023 compared to the prior year period, primarily due to increases of $0.7 million in marketing expenditures, $0.7 million in customer care services, $0.7 million freight-out expenses, and $0.6 million in credit card processing fees as a result of increases in Arlo.com Store sales and paid subscriber accounts.
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Sales and marketing expense increased $4.6 million for the six months ended July 2, 2023 compared to the prior year period, primarily due to increases of $1.7 million in marketing expenditures, $1.2 million in credit card processing fees as a result of increases in Arlo.com Store sales and paid subscriber accounts, $1.1 million freight-out expenses, and $1.0 million in customer care 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 2, 2023 | % Change | July 3, 2022 | July 2, 2023 | % Change | July 3, 2022 | ||||||||||||||||||||||||||||||
| (In thousands, except percentage data) | |||||||||||||||||||||||||||||||||||
| General and administrative expense | $ | 15,007 | 14.1 | % | $ | 13,149 | $ | 30,629 | 18.9 | % | $ | 25,770 | |||||||||||||||||||||||
General and administrative expense increased $1.9 million for the three months ended July 2, 2023 compared to the prior year period, primarily due to an increase of $2.6 million in personnel-related expenses mainly from stock-based compensation, partially offset by decreases of $0.6 million in legal and professional services and corporate IT and facilities overhead.
General and administrative expense increased $4.9 million for the six months ended July 2, 2023 compared to the prior year period, primarily due to an increase of $6.6 million in personnel-related expenses mainly from stock-based compensation and merit increases, partially offset by decreases of $1.6 million in corporate IT and facilities overhead and legal and professional services.
Others
Others include separation expense, which consists primarily of costs of legal and professional services for IPO-related litigation associated with our separation from NETGEAR, and restructuring charges, which consist of severance costs and office exit expense associated with the abandonment of certain lease contracts.
Interest Income and Other Income (Expense), Net
The following table presents interest income and other income (expense), net for the periods indicated:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| July 2, 2023 | % Change | July 3, 2022 | July 2, 2023 | % Change | July 3, 2022 | ||||||||||||||||||||||||||||||
| (In thousands, except percentage data) | |||||||||||||||||||||||||||||||||||
| Interest income, net | $ | 835 | ** | $ | 129 | 1,561 | ** | 124 | |||||||||||||||||||||||||||
| Other income (expense), net | $ | 52 | ** | $ | (116) | 13 | (95.6) | % | 295 | ||||||||||||||||||||||||||
**Percentage change not meaningful.
Interest income, net increased for the three and six months ended July 2, 2023 compared to the prior year periods, primarily due to the increase in our short-term investments as well as a result of higher interest rates.
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Provision for Income Taxes
The following table presents provision for income taxes for the periods indicated:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| July 2, 2023 | % Change | July 3, 2022 | July 2, 2023 | % Change | July 3, 2022 | ||||||||||||||||||||||||||||||
| (In thousands, except percentage data) | |||||||||||||||||||||||||||||||||||
| Provision for income taxes | $ | 221 | (3.1) | % | $ | 228 | $ | 1,013 | 129.7 | % | $ | 441 | |||||||||||||||||||||||
| Effective tax rate | (3.1) | % | (2.0) | % | (4.9) | % | (2.3) | % | |||||||||||||||||||||||||||
Provision for income taxes decreased slightly for the three months ended July 2, 2023, compared to the prior year period and increased for the six months ended July 2, 2023, compared to the prior year period, primarily due to the higher U.S. earnings and also the application of Section 174 of the Internal Revenue Code requiring capitalization of research and experimental expenses, which increase was recognized mostly in the first quarter of 2023. Consistent with the prior year periods, we maintained a valuation allowance against our 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.
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Liquidity and Capital Resources
As of July 2, 2023, our cash and cash equivalents and short-term investments totaled $123.7 million and we had unused borrowing capacity of $13.8 million based on the terms and conditions of our revolving credit facility. We have a history of losses and may incur operating and net losses in the future. As of July 2, 2023, our accumulated deficit was $367.0 million. Historically, we have funded our principal business activities through cash flows generated from operations and available cash on hand.
Material Cash Requirements
We believe that our existing sources of liquidity will be sufficient to meet our anticipated cash requirements for at least the next 12 months. However, in the future we may require or desire additional funds to support our operating expenses and capital requirements. To the extent that current and anticipated future sources of liquidity are insufficient, we may seek to raise additional funds through public or private equity. We have no commitments to obtain such additional financing and cannot provide assurance 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 may vary from those currently planned and will depend on numerous factors, including the introduction of new products, the growth in our service revenue, the ability to increase our gross margin dollars, as well as cost optimization initiatives and controls over our operating expenditures. As we grow our installed base and related cost structure, there will be a need for additional working capital, hence, we have increased our subscription rates effective February 3, 2023.
Leases and Contractual Commitments
Our operating lease obligations mostly include offices, equipment, data centers, and distribution centers. Our contractual commitments are primarily inventory-related purchase obligations with suppliers.
Contingencies
We are involved in disputes, litigation, and other legal actions. We evaluate 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. Significant judgment is required to determine both the probability and the estimated amount of loss. In such cases, we accrue for the amount or, if a range, we accrue 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.
Refer to Note 8. Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report for further information about our operating leases, purchase obligations, and legal contingencies.
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Cash Flow
The following table presents our cash flows for the periods presented:
| Six Months Ended | |||||||||||
| July 2, 2023 | July 3, 2022 | ||||||||||
| (In thousands) | |||||||||||
| Net cash provided by (used in) operating activities | $ | 22,908 | $ | (29,381) | |||||||
| Net cash used in investing activities | (33,150) | (50,429) | |||||||||
| Net cash used in financing activities | (11,951) | (10,384) | |||||||||
| Net cash decrease | $ | (22,193) | $ | (90,194) | |||||||
Operating activities
Net cash provided by operating activities increased by $52.3 million for the six months ended July 2, 2023 compared to the prior year period, primarily due to improved profitability and changes in working capital as a result of an increase in our service revenue driven by growth in paid accounts and increased subscription rates, lower payments to suppliers primarily as a result of reduced inventory purchases, and higher collection from customers on products sales due to enhanced collection efforts.
Investing activities
Net cash used in investing activities decreased by $17.3 million for the six months ended July 2, 2023 compared to the prior year period, primarily due to a decrease in net purchases, and maturities, of short-term investments.
Financing activities
Net cash used in financing activities increased by $1.6 million for the six months ended July 2, 2023 compared to the prior year period, primarily due to the increase in withholding tax from restricted stock unit releases, partially offset by higher proceeds related to employee benefit plans.
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, 2022. There have been no material changes to our critical accounting policies and estimates during the six months ended July 2, 2023, 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.
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Item 3.Quantitative and Qualitative Disclosures About Market Risk
During the six months ended July 2, 2023, 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, 2022.
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, has evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act 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 have been no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report 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 future 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.
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PART II: OTHER INFORMATION
Item 1.Legal Proceedings
The information set forth under the heading “Litigation and Other Legal Matters” in Note 8, Commitments and Contingencies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report, 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.
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 on Form 10-K for the year ended December 31, 2022 under the heading “Risk Factors.” During the six months ended July 2, 2023, there have been no significant changes to the risk factors under the heading “Risk Factors” described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 5. Other Information
Trading Arrangements
During the quarter ended July 2, 2023, our directors and officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated the contracts, instructions or written plans for the purchase or sale of Arlo's securities set forth in the table below:
| Type of Trading Arrangement | ||||||||||||||||||||||||||||||||||||||
| Name and Position | Action | Date | Rule 10b5-1 (1) | Non-Rule 10b5-1 (2) | Total Shares to be Sold | Expiration Date | ||||||||||||||||||||||||||||||||
Matthew McRae, Chief Executive Officer | Adoption | May 31, 2023 (3) | X | 577,014 | September 15, 2023 | |||||||||||||||||||||||||||||||||
_________________________
(1)Contract, instruction or written plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act.
(2)“Non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of Regulation S-K under the Exchange Act.
(3)Adopted for personal tax planning purposes.
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Item 6.Exhibits
Exhibit Index
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
Exhibit Number | Exhibit Description | Form | Date | Number | Filed Herewith | |||||||||||||||||||||||||||
| 8-K | 8/7/2018 | 3.1 | ||||||||||||||||||||||||||||||
| 8-K | 8/7/2018 | 3.2 | ||||||||||||||||||||||||||||||
| S-1/A | 7/23/2018 | 4.1 | ||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||
32.1# | X | |||||||||||||||||||||||||||||||
32.2# | X | |||||||||||||||||||||||||||||||
| 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. | X | ||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||
| # | 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. | |||||||||||||||||||||||||||||||
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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/ KURTIS BINDER | ||
| Kurtis Binder | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
Date: August 10, 2023
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