UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 20202023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from tofrom________to________
Commission file number: 001-38618
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ARLO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | 38-4061754 |
(State or other Jurisdictionjurisdiction of Incorporationincorporation or Organization)organization) | (I.R.S. Employer Identification Number) |
3030 Orchard Parkway2200 Faraday Ave., | Suite #150 | |
San Jose,Carlsbad, | California | 9513492008 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number including area code
(408) 890-3900
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| Securities registered pursuant to Section 12(b) of the Act: |
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Title of Each Classeach class | | Trading Symbol(s) | | Name of Each Exchangeeach exchange on Which Registeredwhich registered |
| Common Stock, par value $0.001 per share | | ARLO | | New York Stock Exchange |
Securities registered pursuant to 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 ☑ 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 ☑ 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
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| 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) Yes ☐ No ☑
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of June 28, 2020July 2, 2023 was $161.7$981.4 million. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the New York Stock Exchange on June 26, 202030, 2023 (the last business day of the Registrant's most recently completed fiscal second quarter). Shares of the registrant's common stock held by each executive officer and director and certain entities that own 15% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 80,503,73096,171,157 shares as of February 19, 2021.23, 2024.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 20212024 annual meeting of stockholders, which will be filed within 120 days of the registrant’s fiscal year end, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Arlo Technologies, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2023
TABLE OF CONTENTS
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| PART I | | Page
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 1C. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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| PART II |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| Item 9C. | | |
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| PART III |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| PART IV |
| Item 15. | | |
| Item 16. | | |
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PART I
Note About Forward-Looking Statements
This Annual Report on Form 10-K (“Form 10-K”), including the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 below, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Form 10-K, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” in Part I, Item 1A below, and elsewhere in this Annual Report on Form 10-K, including, among other things: health epidemics including the recent COVID-19 pandemic, and other outbreaks could significantly disrupt our operations; future demand for our products may be lower than anticipated; consumers may choose not to adopt our new product offerings or adopt competing products; the actual price, performance and ease of use of our products may not meet the price, performance and ease of use requirements of consumers; our dependence on certain significant customers; our reliance on a limited number of third-party suppliers and manufacturers; new cyber threats may challenge the effectiveness or threaten the security of our products; the collaboration with Verisure may not continue to be successful; the financial capacity available under the revolving credit line;we may overestimate our ability to maintain, protect, and the impactenhance our intellectual property; our efforts to retain key personnel and timing of the restructuring planto attract, retain and motivate qualified personnel with technical, operational and leadership expertise may not be successful; and our business strategies and development plans may not be successful. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. All forward-looking statements in this Annual Report on Form 10-K 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 consolidated financial statements and the accompanying notes contained in this Annual Report on Form 10-K.
Summary of Risk Factors
Below is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we face. Additional discussion of theThe risks summarized in this risk factor summary,are discussed more fully below and otherincluded, but are not limited to, risks that we face, can be found below under the heading “Item 1A — Risk Factors” in Part I of
this Form 10-K and should be carefully considered, together with other information in this Form 10-K and our other filings with the SEC, before making an investment decision regarding our common stock.related to:
•The effectsWe obtain several key components from limited or sole sources, and if these sources fail to satisfy our supply requirements or we are unable to properly manage our supply requirements with our third-party manufacturers, we may lose sales and experience increased component costs.
•We depend on a limited number of health epidemics, includingthird-party manufacturers for substantially all of our manufacturing needs. If these third-party manufacturers experience any delay, disruption, or quality control problems in their operations, we could lose or fail to grow our market share and our brand may suffer.
•If disruptions in our transportation network occur or our shipping costs substantially increase, we may be unable to sell or timely deliver our products, and our operating expenses could increase.
•If we lose the recent COVID-19 pandemic, could have an adverse impact onservices of key personnel, we may not be able to execute our business operations and the markets and communities in which we, our partners and customers operate.strategy effectively.
•We expect our results of operations to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate or decline.
•If we fail to continue to introduce or acquire new products or services that achieve broad market acceptance on a timely basis, or if our products or services are not adopted as expected, we will not be able to compete effectively and we will be unable to increase or maintain revenue and gross margin.
•We obtain several key components from limited or sole sources, and if these sources fail to satisfy our supply requirements or we are unable to properly manage our supply requirements with our third-party manufacturers, we may lose sales and experience increased component costs.
•We may need additional financing to meet our future long-term capital requirements and may be unable to raise sufficient capital on favorable terms or at all.
•Some of our competitors have substantially greater resources than we do, and to be competitive we may be required to lower our prices or increase our sales and marketing expenses, which could result in reduced margins and loss of market share.
•If we lose the services of key personnel, we may not be able to execute our business strategy effectively.
•We entered into an asset purchase agreement (the “Asset Purchase Agreement”) and supply agreement (the “Supply Agreement”) with Verisure Sàrl (“Verisure”) that will givegives Verisure exclusive marketing and distribution rights for our products in Europe as well as the ability to sell our products through their direct channel globally. We cannot provide assurance that the arrangement with Verisure will continue to be a successful collaboration.
•We are subject to financial and operating covenants in our business financing agreement with Western Alliance Bank (the “Credit Agreement”) and any failure to comply with such covenants, or obtain waivers in the event of non-compliance, could limit our borrowing availability under the Credit Agreement, resulting in our being unable to borrow under the Credit Agreement and materially adversely impact our liquidity. In addition, our operations may not provide sufficient cash to meet the repayment obligations of debt incurred under the Credit Agreement.
•We are dependent on information technology systems, infrastructure and data. System security risks, data protection breaches and cyber-attacks could disruptIf our products, services, internal operations, or information technology systems or data, or those of third parties upon which we rely, are or were compromised, we could experience adverse consequences resulting from such compromise, including but not limited to regulatory investigations or actions; litigation; fines and could lead to theftpenalties; disruptions of our intellectual property, and any such disruption could reduce our expectedbusiness operations; reputational harm; loss of customers or sales; reduced revenue increase our expenses, damage our reputation, and causeor profits; increased expenses; significant decline in our stock price to decline significantly.price; and other adverse consequences.
•Our future success depends on our ability to increase sales of our paid subscription services.
•We depend on a limited number of third-party manufacturers for substantially all of our manufacturing needs. If these third-party manufacturers experience any delay, disruption, or quality control problems in their operations, including due to the COVID-19 pandemic, we could lose market share and our brand may suffer.
•If disruptions in our transportation network occur or our shipping costs substantially increase, we may be unable to sell or timely deliver our products, and our operating expenses could increase.
•Interruptions with the cloud-based systems that we use in our operations provided by an affiliate of Amazon.com, Inc. ("Amazon"(“Amazon”), which is also one of our primary competitors, may materially and adversely affect our business, results of operations, and financial condition.
•Our current and future products may experience quality problems, including defects or errors, from time to time that can result in adverse publicity, product recalls, litigation, regulatory proceedings, and warranty claims resulting inand could lead to significant direct or indirect costs, decreased revenue, and operating margin, and harm to our brand.
•We rely on a limited number of traditional and online retailers and wholesale distributors for a substantial portion of our sales, and our revenue could decline if they refuse to pay our requested prices or reduce their level of purchases or if there is significant consolidation in our sales channels, which results in fewer sales channels for our products.
PART I
Item 1. Business
Overview
Arlo Technologies, Inc. (“we”, or “Arlo” or the “Company”) combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that is transforming the wayways in which people experience the connected lifestyle.can protect everything that matters to them with advanced home, business, and personal security services that combine a globally scaled cloud platform, advanced monitoring and analytics capabilities, and award-winning app-controlled devices to create a personalized security ecosystem. Arlo’s deep expertise in product design,cloud services, cutting-edge AI and computer vision analytics, wireless connectivity cloud infrastructure and cutting-edge AI capabilities focuses on delivering aintuitive user experience design delivers seamless, smart home experiencesecurity for Arlo users that is easy to setup and interactengage with every day. Our highly secure, 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. connection – all rooted in a commitment to safeguard privacy for our users and their personal data.
To date, we have launched subscription services such as Arlo Secure, Arlo Total Security, and Arlo Safe, and several categories of award-winning smart connectedsecurity devices, including wired and wire-free smart Wi-Fi and LTE-enabled cameras, audio and video doorbells, floodlight cameras and floodlight cameras.home security systems. In addition, Arlo’s broad compatibility allows the platform to seamlessly integrate with third-party internet-of-things (“IoT”) products and protocols, such as Amazon Alexa, Apple HomeKit, Apple TV, Google Assistant, IFTTT, Stringify and Samsung SmartThings. Since the launch of our first product in December 2014, we have shipped over 19.2 million smart connected devices, and, as of December 31, 2020, our smart platform had approximately 5.0 million cumulative registered accounts across more than 100 countries around the world. We plan to continue to introduce new smart connectedsecurity devices to the Arlo platform both in cameras and newother categories, increase the number of registered accounts on our platform, keep them highly engaged through our mobile app and generate incremental recurring revenue by offering them paid subscription services.
On February 6, 2018, NETGEAR, Inc. (“NETGEAR”) announced that its board of directors had unanimously approved the pursuit of a separation of its Arlo business from NETGEAR (the “Separation”) to be effected through an initial public offering (the “IPO”) of newly issued shares of the common stock of Arlo, then a wholly owned subsidiary of NETGEAR. On July 6, 2018, the Company filed a registration statement (as amended, the "IPO Registration Statement") relating to the IPO of common stock of Arlo with the U.S. Securities and Exchange Commission (the "SEC"). Following a series of restructuring steps prior to the completion of the IPO of Arlo common stock, the Arlo business was transferred from NETGEAR to Arlo (collectively, the " Contribution").
On August 2, 2018, NETGEAR and Arlo announced the pricing of the IPO of 10,215,000 shares of Arlo’s common stock at a price to the public of $16.00 per share. On August 3, 2018, Arlo’s shares began trading on the New York Stock Exchange under the ticker symbol “ARLO.” On August 7, 2018, the Company completed its IPO of 11,747,250 shares of common stock (including 1,532,250 shares of common stock pursuant to the underwriters’ option to purchase additional shares, which was exercised in full on August 3, 2018), at $16.00 per share, before underwriting discounts and commissions and estimated offering costs. Cash proceeds from the IPO were $173.4 million, net of the portion of the offering cost paid by Arlo, which portion was $1.4 million. The total offering cost was $4.6 million, of which $3.2 million was paid by NETGEAR.
Prior to the completion of the IPO, the Company was a wholly owned subsidiary of NETGEAR and upon the closing of the IPO (including the issuance of additional shares of common stock pursuant to the underwriters' option to purchase additional shares, which was exercised in full) on August 7, 2018, NETGEAR owned approximately 84.2% of the shares of Arlo’s outstanding common stock.
On November 29, 2018, NETGEAR announced that its board of directors had approved a special stock dividend (the “Distribution”) to NETGEAR stockholders of the 62,500,000 shares of Arlo common stock owned by NETGEAR.
The Distribution was made on December 31, 2018 (the "Distribution Date") to all NETGEAR stockholders of record as of the close of business on December 17, 2018 (the "Record Date"). In the Distribution, each NETGEAR stockholder of record on the Record Date received 1.980295 shares of Arlo common stock for every share of NETGEAR common stock held on the Record Date, subject to cash in lieu of fractional shares. The Distribution was intended to qualify as generally tax free to NETGEAR stockholders for U.S. federal income tax purposes. In connection with the Distribution, 62,500,000 shares of Arlo common stock held by NETGEAR were distributed to its stockholders and NETGEAR is no longer considered a related party to the Company.
Market
Our total addressable market consists of individuals and business owners who use connectedsmart security devices to enhanceprotect their lives.loved ones and property. Outside of the home, we have seen adoption of our cellular-enabled products in a variety of use cases, such as neighborhood watch, construction site monitoring, wildlife and outdoor trail surveillance and event monitoring. We believe the small business, government and direct home monitoring channels provide growth areas for us in addition to our retail and e-commerce presence. In early 2020, we launched Arlo SmartCloud aOur Software as a Service (“SaaS”) solution to deliver scalableincludes Arlo Secure, a subscription service with coverage for unlimited cameras and an enhanced Emergency Response solution, Arlo Total Security, a comprehensive subscription service with professional monitoring and security hardware, Arlo Safe, a personal safety service with panic button accessory, as well as Arlo SmartCloud, a solution that delivers highly efficient and secure cloud services for business. With Arlo SmartCloud, we are extending our platform to partners to help innovate and deploy new opportunities beyond our own camera ecosystem.at scale. We believe we are well-positioned to extend our current reach to the broader connected lifestyleIoT market both within and beyond the home as we continue to launch new products and services within our connected lifestylesmart security platform.
Services
Arlo Secure
Arlo Secure is our subscription service that provides advanced AI-based detection, DIY home security as well as professional monitoring, and an enhanced Emergency Response capability. These premium services boast support for unlimited household security devices, along with advanced AI object detection, and smarter, more interactive notifications. Additionally, the new 24/7, one-touch Emergency Response is available with the Secure Plus and Safe and Secure Pro plans, enabling Arlo users to directly dispatch first responders during an emergency for quicker action. A trial period of Arlo Secure is provided with various Arlo cameras, home security, and doorbell products. The features of Arlo Secure subscriptions include:
•Emergency Response (Secure Plus plan) – With one touch in the Arlo Secure App, users can directly dispatch fire, police, or medical responders to the camera’s location. If directed by the user, Arlo’s Emergency Response team can also provide critical location information to responders en route to better prepare them, such as gate codes, medical conditions of family members, and pet details.
•2K (Secure plan) and 4K (Secure Plus plan) Cloud-based Video Recording – View 30 days of recordings securely stored on Arlo’s SmartCloud platform, for ultimate peace of mind and protection even if the device is damaged or stolen in a break-in, storm or other physical incident.
•Unlimited Cameras – Users can enjoy Arlo Secure service for all cameras in their home with one all-encompassing plan and can add newly purchased Arlo cameras for no additional service charge.
•Advanced Object Detection – Arlo processes and filters 200 million events each day through advanced object detection backed by visual artificial intelligence, allowing for better recognition of people, packages, vehicles, and animals to add key context to notifications and reduce unwanted alerts.
•Smart Interactive Notifications – Users can take quicker action by responding to rich notifications or viewing an animated preview of a notification video through the lock screen on their smartphone.
•Smoke and CO Alarm Detection – Users can get notified when the camera hears a smoke or CO alarm triggered.
•Cloud-based Activity Zones – Users can reduce unwanted notifications by highlighting specific areas on their property where they want motion to be detected.
•Call a Friend – Users can instantly call a friend through the Arlo App from their notification screen with one tap.
•24/7 Priority Support – Users get priority technical support through the in-app Help Center with omnichannel access to phone, chat, Community or self-help articles.
•24/7 Professional Monitoring(Secure Pro plan) – Users have access to Live Security Experts who swiftly assist in an emergency, regardless of whether a user is home or away. Through Emergency Response, live agents can access authorized camera video to verify emergencies, potentially reducing false alarms, expediting response from emergency personnel in a crisis.
Arlo Total Security
Arlo Total Security is a comprehensive subscription service that offers 24/7 professional monitoring and security hardware with affordable monthly pricing and no upfront costs. At the heart of this innovative subscription service is Arlo’s Home Security System, which uses a first-of-its-kind, all-in-one multi-sensor capable of eight different sensing functions. With its all-in-one design, the Arlo multi-sensor can be placed anywhere—from walls to windows and doors, to underneath sinks and water heaters—to detect motion, door/window openings and tilt, water leaks, freezing temperatures, lighting changes and T3/T4 smoke/CO alarm audio sirens. Managed through the Arlo Secure App, the award-winning security system pairs with Arlo's advanced video security cameras, such as the Arlo Pro 5s, to enable video verification by 24/7 Professional Monitoring security experts of an emergency situation – a growing requirement across municipalities to reduce false alarms and unnecessary utilization of emergency services.
Arlo Safe
Arlo Safe is a personal safety service with a panic button accessory featuring one-tap, 24/7 Emergency Response, family safety, automatic crash detection and more. Ideal for everyone from city dwellers walking home at night, to college students out with friends, teenagers walking to/from school, daily commuters, or even elderly family members, Arlo Safe is an all-encompassing 24/7 personal safety solution for ultimate peace of mind while on the go. Features including 24/7 live agent emergency support, location sharing, family check-ins, and safety alerts provide on-the-go protection to keep the user safe in a time of need. Working in tandem with the Arlo Safe app, the Arlo Safe button can be used to alert safety experts and rapidly send emergency responders to the user’s location anytime, day or night. The features of Arlo Safe subscriptions include:
•One-Touch Emergency Response – Access live safety experts 24/7 to rapidly send fire, police, or medical responders directly to the user’s exact location.
•Family Safety – Never miss a moment with the ability to know where opt-in family members have been, see their current location, or send help directly to them in an emergency situation.
•Crash Detection and Response – Advanced impact detection can expedite emergency response in the event of a vehicle accident by sharing appropriate location and medical information with first responders.
Other Services
Arlo SmartCloud is a SaaS solution that delivers scalable security cloud services for business. Its comprehensive offering includes computer vision, multi-object detection, audio analysis, security services, scaled storage and numerous ecosystem integrations. Arlo SmartCloud is a fully managed robust global platform built for security, scalability, and reliability that can be deployed as part of advanced subscription services for hardware companies, automotive companies, service providers, insurance companies, home builders, smart communities, smart cities, traditional security companies, and other related verticals.
Our services also include certain development services provided to Verisure under a Non-recurring Engineering arrangement, including development of certain custom products specified by Verisure.
Products
Smart ConnectedSecurity Devices
Arlo QEssential Cameras and Doorbells (2nd Generation),released in the third quarter of 2023, deliver smart home protection for everyone at an incredible value. The new lineup features the Arlo Q PlusEssential XL Outdoor Camera with 4X the battery life of the new standard Essential Outdoor Camera, as well as a new Essential Indoor Camera with an automated privacy shield. A new Video Doorbell with head-to-toe 180-degree field of view is also available. The all-new second generation Essential cameras and doorbells offer several new advancements, with up to 2K video resolution, providing customers with powerful smart home security solutions at affordable price points. Additionally, each device features USB-C connections for easy re-charging, and a new quick set-up process using Bluetooth for a faster, easier onboarding experience.
Arlo Home Security System, released in the fourth quarter of 2015, bring Arlo’s performance2022, is a first-of-its-kind smart security system featuring the Arlo All-in-One Multi-Sensor capable of eight different sensing functions. The system, which is managed through the Arlo Secure App, pairs with Arlo's new 24/7 Professional Monitoring service, granting one-tap access to highly trained Security Experts who monitor and designrespond to emergency situations. Able to be placed anywhere, from walls to windows and doors, to under sinks and water heaters, the simple-to-install wireless multi-sensor can detect motion, door/window openings and tilt, water leaks, freezing temperatures, lighting changes and T3/T4 smoke/CO alarm audio sirens.
Arlo Pro 5S, released in the fourth quarter of 2022, is an indoor wired solution that allows usersall-new Wireless Security Camera with advanced 2K video resolution. The latest addition to easily monitor their surroundings with 1080p HD video quality. With two-way audio communication, users cannot only watch but also interact with their children, pets or other guests in their home or business. Arlo Qthe award-winning Pro series, Pro 5S boasts tri-band connectivity - operating via dual-band Wi-Fi and Arlo Q Plus also feature optional 24/7 recordingSecureLink technology. Pro 5S is backed by the Arlo Secure App which features an all-new, highly intuitive interface that streamlines access to critical tools like Emergency Response. Since Pro 5S operates on a subscription basis. Arlo Q Plus includes the additional functionality of being powered-over-ethernet, which is commonlowest power band when in sleep mode, users will appreciate significant battery life improvements. Additionally, tri-band connectivity provides longer Wi-Fi range, and mitigates RF interference and active jamming attempts while maximizing picture quality. Pro 5S seamlessly pairs with other SecureLink devices for business environments.continuous security and connectivity, even during power and internet outages.
Arlo Go 2, released in the second quarter of 2022, is designed for monitoring remote areas, large properties, construction sites, vacation homes, boat or RV slips and hard-to-access areas. Go 2 works with a 4G LTE cellular data plan to provide continuous connectivity and uninterrupted security. Arlo Go 2 features a 100% wire-free, weather-resistant design, swappable, rechargeable battery and the ability to directly connect to Wi-Fi, when in range. Users can view and record 1080p full HD video day and night, capturing important details with color night vision thanks to an integrated spotlight. Two-way, full-duplex audio ensures clear communication with visitors, while a built-in siren can be triggered remotely or automatically to ward off intruders. Additionally, Arlo Go 2 is equipped with GPS positioning to track the camera’s whereabouts, allowing users to locate devices across an expansive area, or in the event of theft.
Arlo Ultra 2, released in the second quarter of 2020, is designed to deliver an enhanced user experience with improved range, building on advanced features such as 4K video with HDR, an ultra-wide, 180-degree field of view, auto zoom and tracking on moving objects with clarity and detail, color night vision allowing the user to see video in color rather than traditional black and white, built-in siren that is automatically triggered by motion or audio, or manually triggered via the Arlo App and more. Arlo Ultra 2 works with Amazon Alexa, Google Assistant, Apple Homekit, and IFTTT for easy interaction, automation and control.
Arlo Floodlight Camera, released in the first quarter of 2017, is the world’s first commercially available LTE-enabled wire-free camera and provides untethered mobile security with support by major networks in key markets around the world, including AT&T and Verizon in the United States. Its IP65-rated weather-resistant design, 720p HD video quality, two-way audio and battery-powered operation allow small business owners, construction sites, outdoor enthusiasts and anyone in need of a truly mobile solution to virtually be at any location, anytime, and maintain monitoring capabilities.
Arlo Baby, released in the second quarter of 2017, combines performance and convenience with smart features that give added peace of mind for parents and caregivers. With 1080p HD video quality, air quality and temperature sensors, motion and audio detection, and advanced night vision, parents can be alerted to movement and changes in their child’s environment, and they can also remotely engage with their child using Arlo’s two-way audio feature, play music or custom recordings or even turn on Arlo Baby’s multi-colored night light to soothe their child to sleep. Parents can also easily move Arlo Baby, powered by its rechargeable batteries or by an electrical outlet, to different rooms.
Arlo Chime, released in the third quarter of 2018 and designed to plug into any standard wall outlet and pairs with the Arlo Audio Doorbell to play a variety of ringtones or act as a siren, and even contains a silent mode for those times when users don’t want to be bothered. The Arlo Chime runs on two standard AA batteries which can last up to an entire year based on normal usage and features a weather-resistant exterior finish. For added ease and versatility, users also have the option to connect with their existing door chimes without needing to install any additional hardware or wiring.
Arlo Ultra, released in the first quarter of 2019 and designed with advanced 4K high dynamic range ("HDR") video quality with color night vision, wire-free setup, a 180-degree diagonal field-of-view, an integrated spotlight and crystal-clear two-way audio with advanced noise cancellations, Ultra delivers ultimate peace of mind for anyone looking to monitor their home or business. Users will experience enhanced detail and clarity and are able to zoom in on video clips to
uncover details such as license plate and clothing. Ultra delivers one of the widest viewing angles in the wire-free security camera industry. Ultra is paired with a new Arlo SmartHub that functions as the nucleus of the smart home and engineered with Arlo RFTM, a proprietary two-way audio frequency technology. Arlo Ultra also includes one year of free Arlo Smart so the users can experience the benefits we deliver.
Arlo Pro 3, released in the third quarter of 2019 and designed to provide home and small business owners with a high-performance, simple, wire-free security solution, Pro 3 features 2K resolution with HDR, an integrated spotlight with color night vision and a super-wide 160-degree field of view. Engineered to work indoors or outdoors, Pro 3 offers advanced image quality for DIY security that anyone can easily install in minutes and monitor from anywhere using the Arlo app. Pro 3 also includes a new Arlo SmartHub that securely manages network traffic to the camera in addition to enhancing power and WiFi performance for better range and battery life. Arlo Pro 3 includes a three-month trial period of Arlo Smart.
Arlo Video Doorbell, released in the fourth quarter of 2019 and designed to capture what traditional video doorbells can’t, the new smart entry solution boasts an industry-leading vertical field-of-view, allowing users to get a bigger, more precise picture of their front porch. The Video Doorbell captures footage in a square aspect ratio to allow users to fully view packages on the ground, or visitors from head to toe. It also offers features such as HD resolution image quality along with clear, two-way audio for users to simultaneously see and speak to visitors. Unlike conventional doorbell cameras, the Arlo Video Doorbell delivers direct-to-mobile video calls and personalized alerts when packages, people, vehicles, or animals are detected, allowing for users to quickly reply or take action provided they are an Arlo Smart subscriber or in a trial period. The Arlo Video Doorbell connects to an existing mechanical or digital chime for simple installation and continuous power. Arlo Video Doorbell includes a three-month trial period of Arlo Smart.
Arlo Floodlight Camera, released in the first quarter of 2020, and is the first wire-free variantfloodlight camera on the market. The floodlight camera brings powerful LEDs, an integrated 2K HDR camera, 160-degree field of view, two-way audio, custom lighting configurations and a built-in siren to any home or small business. The floodlight camera can automatically measure the amount of surrounding light to allow for true customization for when the floodlight automatically turns on. The floodlight camera also offers three different light patterns – constant, flashing, and pulsating – which users can control manually on-demand or via automation rules. Arlo Floodlight Camera includes a three-month trial period of Arlo Smart.
Arlo Essential Spotlight, released in the second quarter of 2020 and designed with an industry-leading, 180-degree viewing angle with a square, 1:1 aspect ratio that ensures users can see packages on the ground or visitors from head-to-toe on their mobile devices. Arlo Essential Spotlight features HD video resolution combined with direct-to-mobile video calls, clear, two-way audio, an integrated spotlight with color night vision, built in siren and personalized alerts that allow users to quickly reply to guests or take action. Able to connect directly to WiFi, the latest solution can be powered by its rechargeable battery or be hardwired for continuous charging. Arlo Essential Spotlight includes a three-month trial period of Arlo Smart.
Arlo Ultra 2, released in the second quarter of 2020 and designed to deliver an enhanced user experience with improved range, building on advanced features such as 4K video with HDR, an ultra-wide, 180-degree field of view, auto zoom and tracking on moving object with clarity and detail, color night vision allowing you to see video in color rather than traditional black and white, built-in siren that automatically triggered by motion or audio, or manually triggered via the Arlo App and more. Arlo Ultra 2 works with Amazon Alexa, Google Assistant, Apple Homekit, and IFTTT for easy interaction, automation and control. Arlo Ultra 2 includes a three-month trial period of Arlo Smart.
Arlo Essential XL Spotlight, released in the third quarter of 2020 and which features an integrated, wire-free, extended-life battery that works for up to one year on one charge, an integrated spotlight with color night vision, HD video, two-way audio, motion detection alerts and a built-in siren. A direct to a WiFi connection enables the Arlo Essential XL Spotlight camera to function as a stand-alone home security solution without the need for a separate Arlo SmartHub or Base Station. Arlo Essential XL Spotlight includes a three-month trial period of Arlo Smart.
Arlo Essential Wire-Free Video Doorbell, released in the third quarter of 2020, features an easy-to-install, wire-free, battery-powered design. Arlo’s latest front-entry solution – which joins a robust ecosystem of home security products and services – captures what conventional video doorbells can’t. An industry-leading, 180-degree viewing angle with a square, 1:1 aspect ratio ensures users can see packages on the ground or visitors from head-to-toe on their mobile devices. HD video resolution combined with direct-to-mobile video calls, clear, two-way audio and personalized alerts, allow users to quickly reply to guests or take action. Able to connect directly to WiFi, the latest solution can be powered by its rechargeable batteryor be hardwired for continuous charging. Arlo Essential Wire-Free Video Doorbell includes a three-month trial period of Arlo Smart.
Arlo Pro 4 Wire-Free Spotlight, released in the fourth quarter of 2020 and designed with weather resistance, wide 160-degree field of view, 2K video resolution with HDR, and six-month battery life. Pro 4 also includes two-way audio, built-in siren, and integrated spotlight. The updated Pro 4 has the ability to connect directly to home Wi-Fi networks without the need for a dedicated Arlo SmartHub or Base Station, which allows the camera to work as a standalone system for easier installation and setup. Arlo Pro 4 Wire-Free Spotlight camera includes a three-month trial period of Arlo Smart.
Arlo Accessories
Security System Accessories provide added functionality to the Arlo Security System for added peace of mind. The Wire-Free Outdoor Siren extends protection outside of the home with a loud wire-free siren featuring a weather-resistant design, built-in strobe and adjustable volume settings. The Arlo Cellular and Battery Backup module gives the Arlo Security System up to 12 hours of power during outages and stacks discretely beneath the Security System hub for a sleek all-in-on design.
Charging Accessories are designed to offer additional convenient ways to keep Arlo wire-free cameras up and running even longer. With the Arlo Charging Station, users can charge up to two Arlo Pro, Arlo Pro 2 or Arlo Go batteries with fast-charging technology so there is always a battery ready to go. For those looking to eliminate battery swaps entirely, the mountable and weather-resistant Arlo Solar Panel connects to various Arlo Pro or Arlo Go cameras to keep batteries charged with just a few hours of direct sunlight.
Arlo Mounts feature innovative designs that allow users to mount their cameras outdoors or indoors, on ceilings or countertops. The Arlo Quadpod is a flexible mount featuring four legs crafted from flexible stainless steel and silicone that allowsAnti-Theft Mount enables users to mountlock their Arlo camera even in challenging spots such as tree branches or metal poles.
Arlo Skins allow Arlo ownersplace to prevent tampering and theft. Additional outdoor, tabletop, and other adjustable mounts give users added flexibility to customize their Arlo camerascamera position to blend into their environments or add a pop of personality. Popular with outdoor enthusiasts, Arlo Camouflage and Ghillie skins are ultraviolet and water-resistant and made of durable silicone material for easy slip-on, slip-off convenience. Arlo Baby accessory characters add some playfulnesssuit any unique location they need to the nursery with fun disguises that turn Arlo Baby cameras into puppies, kittens or bunnies.
The Arlo App
The Arlo app, available for iOS and Android devices, is designed to provide our users with an easy-to-use, flexible, mobile-first experience that connects our users to the people and things that matter most to them. Our proprietary AI-based capabilities generate relevant and actionable real-time notifications, which enable users to live stream video or contact emergency services through the app notifications when Arlo devices detect motion or sound. The Arlo app also
enables users to view their library of video clips and share them via text, email or social networks, and varies depending on the types of service plans that the user has. The app has four main screens: devices, library, mode, and setting:
•The Devices screen provides a quick at-a-glance dashboard of the user’s devices linked to their account, with valuable status icons like device battery life, and actionable buttons to live stream from their Arlo camera, call e911, activate a siren, or access the device’s settings.
•The Library screen delivers a timeline view of recorded video clips in the user’s Arlo Smart account, with additional tagging of clips that contain subject matter identified by Arlo Smart’s AI- and CV-based object detection, such as person, package, vehicle or even animal.
•The Mode screen enables users to quickly Arm or Disarm their Arlo system.
•The Settings screen provides access to additional device or account level information and features, including customization of Arlo Smart notifications and detection capabilities.
Services
Launched in 2018, Arlo Smart is a paid subscription service that adds powerful AI capabilities to our cameras that enhance the user experience. Arlo Smart incorporates and replaces our legacy paid subscription services. Through real-time computer vision algorithms, Arlo Smart provides users a more personalized experience, deeper insights into detected activity and streamlined access to take responsive actions in urgent situations, such as contacting local emergency services. A three-month free trial period of Arlo Smart is provided with various Arlo camera and doorbell products. Our paid services subscriber base has grown from over 144,000 paid accounts as of December 31, 2018 to about 435,000 as of December 31, 2020. In addition, some of our older camera products come with a prepaid service that provides users with rolling seven-day cloud video storage, the ability to connect up to five cameras and 90 days of customer support.
In January 2020, we launched Arlo SmartCloud, a SaaS solution to deliver scalable security cloud services for business. Its comprehensive offering includes computer vision, multi-object detection, audio analysis, security services, scaled storage and numerous ecosystem integrations. Arlo SmartCloud is a fully managed robust global platform of capabilities built for security, scalability, and reliability that can be deployed as part of advanced subscription services for hardware companies, automotive companies, service providers, insurance companies, home builders, smart communities, smart cities, traditional security companies, and other related verticals.
Our services also include certain development services provided to Verisure S.à.r.l. under a Non-recurring Engineering arrangement as part of the disposal of our commercial operations in Europe in the fourth quarter of 2019. Refer to the "Agreements with Verisure" section below for details.
Sales Channels
We sell our products through multiple sales channels worldwide, including traditional and online retailers, wholesale distributors, broadcast channels, wireless carriers, and security solution providers.providers as well as directly to consumers through our own online store.
Retailers. We sell to traditional and online retailers, either directly or through wholesale distributors. We work directly with our retail channels on market development activities, such as co-advertising, including digital and traditional media, online promotions and video demonstrations, instant rebate programs, event sponsorship and sales associate training. Our largestWe sell a substantial portion of our products through traditional and online retailers, include Costco,including Amazon, Best Buy Co., Inc., Walmart, Inc., and AmazonCostco Wholesale Corporation and their affiliates. For the year ended December 31, 2020, we derived 20.6%, 14.6% and 12.2% of our revenue from Costco, Best Buy and Amazon and their respective affiliates, respectively. In the third quarter of 2019, we launched our online direct to consumer store to sell our products directly to our customers.
Wholesale Distributors. Our distribution channel supplies our products to retailers, e-commerce resellers, wireless carriers and broadcast channels. We sell directly to our distributors, including Ingram Micro, Inc., D&H Distributing Company and Synnex Corporation.
Broadcast Channels. We also sell our products through TV shopping networks such as HSN.HSN and QVC.
Wireless Carriers. We supply our products to major wireless carriers around the world, including AT&T, T-Mobile, Verizon, Telstra and Vodafone. This sales channel is and will continue to be the key route-to-market for our current portable LTE-enabled camera and any future cellular-enabled connected lifestyle devices.security solutions.
Security Solution Providers.Providers. We sell our products and services to security solution providers, including Verisure, S.à.r.l, from which we derived 17.3%33.5% of our revenue and Securitas Security Services USA, Inc.in 2023.
Agreements with Verisure S.à.r.l.Arlo.com. In the third quarter of 2019, we launched our online direct to consumer store to sell our products directly to our customers. We also sell our subscription services, such as Arlo Secure, Arlo Total Security, and Arlo Safe, directly to consumers.
On November 4, 2019, we concurrently entered into an Asset Purchase Agreement (the “Purchase Agreement”) and Supply Agreement (the “Supply Agreement” and together with the Purchase Agreement, the “Verisure Agreements”) with Verisure S.à.r.l. ("Verisure"). Verisure is a leading European provider of professionally monitored security systems with 24/7 response services to both residential and small business customers. The Verisure Agreements created a strategic partnership that leverages both the Company and Verisure’s capabilities to create incremental scale to address the ever-growing demand for residential and commercial security. The strategic partnership will combine our innovative connected cameras and cloud services platform with Verisure’s professionally monitored security solutions to provide a new level of smart security for European customers. The transactions contemplated by the Verisure Agreements closed on December 30, 2019.
The Purchase Agreement provided that, upon the terms and subject to the conditions set forth in the Purchase Agreement, we transferred, sold and assigned to Verisure certain assets (the "Assets") related to our commercial operations in Europe (the "Business") to Verisure for $50.0 million in cash plus additional cash for certain inventory. The Purchase Agreement contains customary representations and warranties regarding Verisure, the Business and the Assets, indemnification provisions, termination rights and other customary provisions. Further, we agreed not to engage in any business that competes with the Business for a period of three years.
The Supply Agreement provides that, upon the terms and subject to the conditions set forth in the Supply Agreement, Verisure will becomeis the exclusive distributor of our products in Europe for all retail channels and will non-exclusively distribute our products through its direct channels globally in connection with Verisure’s security business. During the five-year period commencingthat commenced on January 1, 2020, Verisure has an aggregate purchase commitment of $500.0 million. As of December 31, 2020, $47.32023, $469.8 million of the purchase commitment has been fulfilled. On December 30, 2019, Verisure prepaid $20.0 million for product purchases in fiscal 2020 andBased on December 21, 2020, Verisure prepaid $40.0 million for product purchases in fiscal 2021 and fiscal 2022.
Thethe Supply Agreement also provides for certain development services to Verisure under the Non-recurring Engineering ("NRE") arrangement, including development of certain custom products specified by Verisure, in exchange for an aggregate of $10.0 million, payable in installments upon meeting certain development milestones. In the second fiscal quarter of 2020, an additional $3.5 million was added to the contract price as a result of a modification to Verisure's specification for the Outdoor Custom Camera.
As part of the Purchase Agreement, we also entered into a Transition Services Agreement with Verisure, ("Verisure TSA")a purchase obligation is not deemed to assist Verisure with the transitionexist until we receive and accept Verisure’s purchase order. As of the Company’s European commercial operations. These transition services primarily include IT support and other services, including sales and marketing, operations and supply chain, finance, legal, and human resources. As compensation for these transition services,December 31, 2023, we had a backlog of $52.3 million which represents performance obligations that will be reimbursed by Verisure based on actual direct costs plus allocation of overhead.recognized as revenue once fulfilled, which is expected to occur over the next twelve months.
Competition
We believe we are well-positioned to compete within the broader connected lifestylesmart security market, both within and beyond the home as we continue to launch new product lines and services withinon our smarthighly secure, globally-scaled platform. However, our market is highly competitive and evolving, and we expect competition to increase in the future. We believe the principal competitive factors impacting the market for our products and services include price, service offerings, functionality, brand, technology, design, distribution channels and customer service.
We believe that we compete favorably in these areas based on the basis of our market leadership position in the U.S. consumer network connected camera systems market, best-in-class technology, direct relationship with users and user engagement, trusted Arlo platform, strong Arlo brand and channel partners and deep strategic partnerships with key suppliers, such as Cypress Semiconductor Co.,Infineon Technologies AG, OmniVision Technologies Inc., Realtek and Qualcomm Incorporated. Moreover, our focus on building a connected lifestylesmart security platform, combined with our leadership in innovation in the consumer network connected camera systems
market, has led to the strength of our Arlo brand worldwide. We believe this focus allows us to compete favorably with companies that have introduced or have announced plans to introduce smart security devices with connected lifestyle functionalities.or services. Nevertheless, the connected lifestylesmart security market remains highly competitive, and has a multitude of participants, including: large global technology companies, such as Amazon (Ring and Blink) and Google (Nest); security service vendors, such as ADT; telecom service providers, such as AT&T and Comcast; and smaller point product companies.other companies, such as TP Link, Eufy and Wyze.
Many of our existing and potential competitors have longer operating histories, greater name recognition and substantially greater financial, technical, sales, marketing and other resources than we do. We anticipate that current and potential competitors will also intensify their efforts to penetrate our target markets. For additional information, see “Risk Factors-Risks Related to Our Business-Some of our competitors have substantially greater resources than we do, and to be competitive we may be required to lower our prices or increase our sales and marketing expenses, which could result in reduced margins and loss of market share.”
Research and Development
We are passionate about developing new and innovative products and services that enableenhance the connected lifestyle.smart security experience. Our research and development team collaborates with our product team to design and build differentiated new products and improve upon our existing products and services. Our goal is to create unique user experiences within the connected lifestyle.smart security market. For example, our original Arlo camera was the world’s first commercially available 100% battery-operated Wi-Fi security camera with 720p HD video, IP65-rated weather resistance and night vision. The groundbreaking nature of the product, first launched in December 2014, gathered critical acclaim and market success. Our research and development team has taken this same approach to all of our subsequent product releases, constantly innovating to stay ahead of the competition.competitive.
As of December 31, 2020,2023, our research and development staff consisted of 137148 employees, located in our offices worldwide, and was comprised of front-end and back-end software engineers, RFradio frequency engineers, electrical engineers, mechanical engineers, system test engineers, computer vision scientists and data analysis engineers, UX and industrial design engineers and mobile app developers. We also engage and contract with certain third parties, such as ITS Partner LLC, e-Infochips Ltd., and Elinext Software Ltd. on research and development. We intend to continue to invest in research and development to expand our platform and capabilities in the future.
Manufacturing
While all of our products are primarily designed in North America, we currently outsource manufacturing to Foxconn Cloud Network Technology Singapore Pte. Ltd., Alpha Networks Inc., Pegatron Corporation, and Sky Light IndustrialChicony Electronics Co., Ltd., which are all headquartered in Asia. Although we do not have any long-term purchase contracts, we have executed master product supply agreements with these manufacturers, which typically provide indemnification for intellectual property infringement, epidemic failure clauses, agreed-upon price concessions, division of each party’s intellectual property and product quality requirements. As we expand our product portfolio, we continue to explore new potential manufacturing partners that may provide us with competitive advantages on technology and cost. Since we outsource our manufacturing, we have the flexibility and ability to adapt to market
changes, product supply and component pricing while keeping our costs low. In addition to their responsibility for the manufacturing of our products, our manufacturers typically purchase all necessary parts and materials to produce finished goods. To maintain quality standards for our suppliers, we have established our own product quality organization based in Vietnam Hong Kong,and Taiwan, Indonesia, and mainland China, which is responsible for auditing and inspecting process and product quality on the premises of our manufacturers. Our strategic relationships with our manufacturers are an important component of our ability to introduce new products and grow our business.
We focus on driving alignment of our product roadmaps with our manufacturers and determining what we can do collectively to reduce costs across the supply chain. Our operations teams based in the United States, Hong Kong,Ireland, Taiwan, Vietnam, Indonesia and mainland ChinaVietnam coordinate with our manufacturers’ engineering, manufacturing and quality control personnel to develop the requisite manufacturing processes, quality checks and testing and general oversight of the manufacturing activities. We
believe this model has enabled us to quickly and efficiently deliver high-quality and innovative products, while enabling us to minimize costs and manage inventory.
Our products are manufactured and packaged for retail sale by our manufacturers mostly in Vietnam, Thailand, and Indonesia, with minimal manufacturers in China, and shipped to our logistics hubs located in the United States, Hong Kong, and Australia. Our operations team coordinates with our manufacturers to ensure that the shipment of our products from the manufacturers to these logistics hubs meets customer demand.
Marketing
Our marketing programs are focused on building global brand awareness, increasing product adoption and driving sales. Our marketing efforts target individuals interested in a connected lifestyle and we believe our marketing programs allow us to attract and engage with customers efficiently and at scale.smart security solution. We also increase brand awareness by augmenting word-of-mouth recommendations from Arlo customers and key influencers, interact digitally with current and prospective customers and maintain and develop our strong channel partnerships and strong shelf presence. We collaborate with our retail partners on market development activities to drive in-store and online engagement with the brand and drive purchases.
Customer Care
We provide customer care to Arlo users globally through a variety of communication channels, including phone, chat, email, social media and our Arlo Community, as well as self-guided resources such as knowledge-base articles, how-to videos and technical documentation on our website. We believe that providing timely, responsive customer support and educational content to our users helps foster an ongoing engagement that builds loyalty to our brand and also enables Arlous to understand user needs as they evolve. The online Arlo Community in particular serves as an efficient and engaging platform through which we can deliver customer care and receive feedback from users. We gather and analyze user feedback from all platforms to help inform our design and engineering teams about future enhancements to our products and services.
In order to best serve our users globally, we manage and continually adjust our resources worldwide through a mixture of permanent employees and subcontracted, outsourced resources. As our installed base continues to grow in new geographies, new categories and technologies, we will continue to focus on building a scalable support infrastructure that enables our users to engage with us through the channel that is most convenient and efficient for their needs.
Arlo Cloud Engineering Operations
We currently serve our users from third-party data center hosting facilities. Our cloud platform runs in data centers in the United States and a data center in Ireland to serve our European Union users. We also utilize data centers in Singapore Australia and China.Australia. We have designed our cloud environments to be highly resilient with built-in redundancy and provide failover to other data centers in our network.
Fiscal periodsPeriods
Our fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. We report our 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.
Seasonality
Historically, we have generated higher product revenue in the third and fourth quarters of each year compared to the first and second quarters due to seasonal demand from consumer markets, primarily relating to the beginning of the school year and the holiday season. For example, for the years ended December 31, 2020, 20192023, 2022 and 2018,2021, our third and
fourth quarters collectively represented 63.0%54.0%, 61.8%50.3% and 54.5%58.4%, respectively, of our revenue for such years. Therefore, timely and effective product and service introductions are critical to our results of operations.
Backlog
Our backlog consists of products for which customer purchase orders have been received and that are scheduled or in the process of being scheduled for shipment. As of December 31, 2020, we had a backlog of $5.7 million, compared to $5.4 million as of December 31, 2019 and $18.9 million as of December 31, 2018. As we typically fulfill orders received within a relatively short period after receipt, our revenue in any fiscal year depends primarily upon orders booked and the availability of supply of our products in that year. In addition, most of our backlog is subject to rescheduling or cancellation with minimal penalties. As a result, our backlog as of any particular date may not be an indicator of revenue for any succeeding period. Similarly, there is a lack of meaningful correlation between year-over-year changes in backlog as compared with year-over-year changes in revenue. Accordingly, we do not believe that backlog information is material to an understanding of our overall business, and backlog as of any particular date should not be considered a reliable indicator of our ability to achieve any particular level of revenue or financial performance.
Intellectual Property
Our ability to protect our intellectual property will be an important factor in the success and continued growth of our business. We rely upon a combination of patent, copyright, trade secret, and trademark laws and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Some of our technology relies upon third-party licensed intellectual property.
We currently hold 72 U.S.113 issued United States patents, 3259 pending U.S.United States patent applications, seven51 international patents, including patents issued by China and and the EU, 1334 pending patent applications outside of the United States. All the patents and patent applications generally relate to certain aspects of our hardware devices, accessories, software and services. We continually review our development efforts to assess the existence and patentability of new intellectual property.
We also pursue the registration of our domain names and trademarks and service marks in the United States and in certain locations outside the United States. We currently have sixseven registered trademarks and three pending trademark applications in the United States, as well as 3880 registered trademarks and 1025 pending trademark applications outside of the United States. We currently hold trademark registrations for “ARLO” in nine countries, including13 countries: the United States, Argentina, Australia, Brazil, Canada, Chile, China, Japan, Mexico, New Zealand, Peru, Singapore, and Japan,Trinidad and Tobago, as well as the World Intellectual Property Organization. Organization. For more information, see “Risk Factors-Risks Related to Our Business-If we are unable to secure and protect our intellectual property rights, our ability to compete could be harmed.”
Environmental Laws
Our products and manufacturing processes are subject to numerous governmental regulations, which cover both the use of various materials and environmental concerns. Environmental issues such as pollution and climate change have had significant legislative and regulatory efforts on a global basis, and there are expected to be additional changes to the regulations in these areas. These changes could directly increase the cost of energy, which may have an impact on the way we manufacture products. In addition, any new regulations or laws in the environmental area might increase the cost of the raw materials we use in our products and the cost of compliance. Other regulations in the environmental area may require us to continue to monitor and ensure proper disposal or recycling of our products. To the best of our knowledge, we maintain compliance with all current government regulations concerning our production processes for all locations in which we operate. Since we operate on a global basis, this is also a complex process that requires continual monitoring of regulations and an ongoing compliance process to ensure that we and our suppliers are in compliance with all existing regulations.
Our CultureEnvironmental, Social, and Our EmployeesGovernance
We believe responsible and sustainable business practices support our long-term success. As a company, we are deeply committed to protecting and supporting our people, our environment, and our communities. That commitment is reflected through various corporate initiatives as well as day-to-day activities, including our adoption of sustainability-focused policies and procedures, our publicly recognized focus on fostering an inclusive workplace, our constant drive toward more efficient use of materials and energy, our careful and active management of our supply chain, our services and products which help reduce carbon footprints and enhance road safety, and our impactful and globally integrated ethics and compliance program.
Our adoption of environmental, social and governance (“ESG”) practices is based on several principles that help position our business for long-term, sustainable success. We believe a holistic ESG approach creates competitive advantages over business rivals as our partners, suppliers, and customers increasingly look to build relationships with companies that boast sustainable and adaptable business operations.
Environmental
We are committed to providing customers with high quality products, conducting operations in a socially responsible, ethical, and sustainable manner to protect the environment and promoting compliance with all relevant regulations, customer specifications, and environmental legislation. This commitment continues to be a driving force at our company, and a principle that is deeply ingrained in our values.
As we continue to further implement our ESG and Sustainability program, we have experienced an improvement in our management of our environmental practices. Our environmental programs have received low-risk ratings from prominent ESG ratings agencies, demonstrating our continued efforts to integrate ESG into our business. We strive for continuous improvement by establishing internal targets and timelines to improve our carbon footprint which we expect will help improve our risk ratings even further. Additionally, our engagement with the various stakeholders including ESG rating agencies, have enabled us to expand the scope of analysis in our annual ESG reporting to our external stakeholders.
Social
We believe in fostering a culture missionof fairness and coreinclusion both within our company and throughout our supplier network. We prioritize open communication and collaboration with our employees and partners to address any concerns related to recruitment, working hours, compensation, discrimination, and the freedom to associate. By working closely together, we strive to create a welcoming and respectful work environment, both within our organization and beyond, promoting equal and humane treatment both within our company as well as at our suppliers. We work with our employees and partners closely to resolve any issues with respect to recruitment, working hours, compensation, discrimination, and freedom of association, hence ensuring a respectable working environment internally and externally.
We believe we can play a crucial role in driving positive social change and, in our commitment to the humane treatment of employees globally, we have continued to administer our Conflict Mineral Program. All of our employees and our ODMs are expected to follow the requirements of the Conflict Minerals Program, improve employee practices, and maintain tight control over supply chain relationships to ensure compliance in accordance with the Organization for Economic Co-operation and Development (“OECD”).
In addition, we have a zero tolerance policy for both forced labor and human trafficking. In an effort to support the California Transparency in Supply Chains Act of 2010 (“SB657”) and to confront slavery, we have committed to assess risks related to our supply chain and our direct commercial suppliers and to evaluate suppliers’ compliance with the Arlo Technologies Supplier Code of Conduct via periodic audits.
We are committed to fostering a diverse and inclusive workplace by implementing policies and programs that promote diversity in hiring, provide equal opportunities for career advancement, and create a supportive environment for underrepresented groups. Our commitment to inclusion and diversity has resulted in a significant increase in the total number of women in our workforce, a sizable uptick in the number of Women in Tech, and a meaningful rise in the number of women in leadership roles. We continue to seek opportunities to ensure we are bringing in diverse viewpoints to the conversation, because we believe those efforts support a long-term and sustainable track record of operational success. We prioritize the well-being of employees by offering comprehensive benefits, promoting work-life balance, providing mental health support, and fostering a culture that values areemployee health and professional development.
We believe another measure of success is having a criticalpositive impact on community stakeholders. Our leadership team and employees have made the commitment to work closely with local charities in their communities to support philanthropic initiatives, such as fundraising for humanitarian crises and working with young people with autism and other learning difficulties. Charitable giving is a core part of our success.community outreach and we expect to continue those efforts. Another action we have undertaken in community empowerment is supporting minority businesses and local suppliers. We are committed to supporting marginalized communities, including racial and ethnic minorities, LGBTQ+ individuals, refugees and immigrants, by advocating for their rights and providing resources and support.
Governance
We are committed to providing customers with high quality products that comply with regulatory laws, directives, standards and industry regulations. Our culture is built onproducts, including Verisure's Arlo branded products, go through rigorous testing and certification processes to achieve regulatory compliance.
Ethics are a key element in our Corporate Social Responsibility Program. Our Code of Ethics serves as a foundation of our corporate governance policy and provides guidance on standard business conduct for all of our employees and partners. We demonstrate transparency and accountability, which are core components of our business, in our corporate governance, decision-making processes, and reporting practices, including regular disclosure of social and environmental impact metrics and engagement with stakeholders.
All of our employees are required to take and pass yearly training courses on Anti-Bribery and Anti-Corruption to ensure they understand the importance of following local laws and regulations with respect to those topics.
In addition, we and our manufacturing partners are committed to meeting ISO standards and maintaining ISO 9001 and/or ISO 14001 certifications.
We are committed to ethical practices in the development and deployment of technology, including responsible data handling, protection of user privacy, and avoidance of harmful applications such as surveillance or discrimination algorithms.
Without an effective and efficient management system, we would not be able to optimize the value of the Corporate Social Responsibility Program and fulfill our responsibility as a loyal global citizen. Our program includes review of management system in the areas of Ethics, Labor and Environment, and Health and Safety to help establish an organized framework for identifying, evaluating and remediating issues as they arise.
Our Nominating and Corporate Governance Committee has oversight over reviewing our practices and initiatives with respect to ESG matters that encourages creativityare expected to have a significant impact on us.
Human Capital Resources
Our human capital measures and objectives, which are used to drive our business results focus on our talent and culture as we look to develop the Arlo workforce for the future. We nurture our talent through entrepreneurship, diversity, empowerment, ethicscarefully crafted processes that build effective compensation arrangements and open dialoguedrive culture and purpose at Arlo. This then translates into our performance management and reward systems. We aim to continually innovatehave the right people in the right roles at the right time to drive our business outcomes, ensuring top diverse talent for our critical roles. We embed Diversity, Equity and improveInclusion into our technology, solutions, brandculture strategy. It is a key pillar in our employee value proposition in line with our talent philosophy. Other key pillars in our value proposition include providing an inclusive and partnerships.flexible workplace and providing the right development opportunities. We continuealso believe in leadership excellence as we connect our group success with individual performance. We strive to recruitattract and hireretain exceptionally talented, diverse, and ethical employees, and we are proud of Arlothe culture we have been ablebuilt. We continue to build.shape our desired experience, in line with the promised employee value proposition and desired culture to drive engagement and high performance. We believe that great teams make great products and as such, our talented employees, located throughout the United States, Canada, Australia, Taiwan, India, and Ireland, communicate, connect and work together to deliver a world-class end-to-end smart security solution. We believe that we maintain a goodgreat working relationship with our employees, as evidenced by our regular employee engagement surveys, and we have not experienced any labor disputes. As of December 31, 2020,2023, we had 359a total of 363 full-time employees, of which approximately 64% were based in the United States, and approximately 36% were based in other global regions.
Diversity, Equity and Inclusion
Diversity, Equity and Inclusion initiatives are integrated into every aspect of our people strategy as we plan to increase our organization’s diversity. Arlo is proud to be an equal opportunity workplace. We always strive to treat all employees and job applicants based on merit, qualifications, personality, and talent, and to draw from a diverse candidate pool as we recruit new talent across all levels. We aim to connect people from all backgrounds and beliefs and strive for a truly inclusive and collaborative working environment.
We have taken action alongside a group of more than 1,200 businesses in a collective commitment to make progress towards advancing diversity and inclusion in our workplace, communities, and country. We value diversity and integrate it into our business by striving to ensure that our company is representative of the customers we serve and that inclusion is at the core of our workplace culture. Our Chief Executive Officer signed the CEO Action for Diversity & Inclusion pledge, the largest CEO-driven business commitment to advance diversity and inclusion within the workplace to underscore our commitment. By making this pledge, we go beyond accepting diversity and are committed to the following actions:
•Continue to cultivate our workplace to support open dialogue on complex, and sometimes difficult conversations about diversity and inclusion.
•Make unconscious bias education available to everyone.
•Share best known—and unsuccessful—actions.
•Create and share strategic inclusion and diversity plans with our board of directors in an effort to prioritize diversity and inclusion and to drive accountability in our organization.
For the third year running, we are partnering with the GEM Consortium (“GEM”). GEM connects highly qualified students from underrepresented groups to STEM graduate programs with much-needed financial support that is often the deciding factor in pursuing graduate education. We have welcomed a number of GEM interns at Arlo.
We host a number of events and days of observance with guest and internal speakers at Arlo. Each Spring, for example, we hold a “Week of Understanding” with speakers on key diversity and inclusion topics. These events provide a platform for dialogue and an opportunity for every employee to learn, discuss, and appreciate differences between colleagues as we grow to drive greater inclusion at Arlo and truly reflect the customers we serve.
We continually strive to be a deeply inclusive employer with diversity reflected in our teams. We encourage employees to truly be themselves and thrive in an environment where their voices matter, differences are understood and valued, and where they are supported to express their unique ideas openly. We aim to foster a highly engaged and energized workplace, where everyone is treated with dignity and respect and is excited to achieve more.
In addition to incorporating inclusion into our performance review process, we are also diversifying interview teams by adding a greater number of employees into the decision-making process. Training on bridging diversity gaps has also been provided to employees to further drive an inclusive culture and build upon employee engagement.
Compensation and Benefits
We strive to provide our employees with compensation that is market-competitive and internally equitable. We recognize our people are most likely to thrive when they have the resources to meet their needs and the time and support to succeed in their professional and personal lives. In support of this, we offer a wide variety of benefits for employees around the world and invest in tools and resources that are designed to support our employees’ individual growth and development.
Health and Safety
We strive to protect the health and safety of our employees. We identify potential workplace risks in order to develop measures to mitigate possible hazards. We support employees with general safety, security and crisis management training, and by putting specific programs in place for those working in potentially high-hazard environments.
Employee Engagement
We believe that open and honest communication among team members, managers and leaders helps create an open, collaborative work environment where everyone can contribute, grow and succeed. Team members are encouraged to come to their managers with questions, feedback or concerns, and we conduct surveys that gauge employee sentiment in areas like career development, manager performance and inclusivity.
Company Information
We were incorporated in Delaware in January 2018 in connection with the Separation. We have dual corporate headquarters and our2018. Our principal executive offices are located at 3030 Orchard Parkway, San Jose, California 95134, and our telephone number is (408) 890-3900. Our secondary executive offices are located at 2200 Faraday Ave., Suite #150, Carlsbad, CA 92008.California 92008, and our telephone number is (408) 890-3900. Our website is http://www.arlo.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are available free of charge on our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities Exchange Commission (the “SEC”). The contents of our websiteswebsite are not incorporated into this Annual Report. Further, our references to the URLs for these websites are intended to be inactive textual reference only.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are filed with the SEC. We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements, and other information with the SEC. You may read and copy our reports, proxy statements and other information filed by us at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room. Our filings are also available to the public over the Internet at the SEC’s website at http://www.sec.gov.
Our website provides a link to our SEC filings, which are available free of charge on the same day such filings are made. The specific location on the website where these reports can be found is http://investor.arlo.com. Our website also provides a link to Section 16 filings which are available free of charge on the same day as such filings are made. Information contained on these websites is not a part of this Annual Report on Form 10-K.
Information about our Executive Officers
The following table sets forth the names, ages and positions of our executive officers as of February 19, 2021.
| | | | | | | | |
Name | Age | Position(s) |
Matthew McRae | 47 | Chief Executive Officer and Director |
Gordon Mattingly | 50 | Chief Financial Officer |
| | |
Brian Busse | 52 | General Counsel and Corporate Secretary |
Matthew McRae. Matthew McRae has served as our Chief Executive Officer since February 2018 and as a member of our Board since August 2018. Mr. McRae served as NETGEAR’s Senior Vice President of Strategy from October 2017 until August 2018. Mr. McRae previously served as the Chief Technology Officer of Vizio Inc. from 2010 to March 2017, and prior to that served as its Vice President and General Manager, Advanced Products Group, from 2008 to 2010. From 2007 to 2008, Mr. McRae was Vice President of Marketing and Business Development of Fabrik (now part of HGST, Inc.), a provider of data storage and next generation web services, and prior to that, from 2001 to 2007, was the Senior Director, Worldwide Business Development at Cisco Systems Inc., a leader in networking services. Mr. McRae has served on the board of directors of Dedicated Hosting Services, Inc. (d/b/a Streaming Media Hosting), a private content delivery network company, since 2014, and he has been on the board of directors of the UC Irvine Institute for Innovation since 2015. He previously served on the board of directors of the Leatherby Center for Entrepreneurship and Business Ethics at the Business School of Chapman University from 2012 to 2015.
Gordon Mattingly. Gordon Mattingly has served as our Chief Financial Officer since June 15, 2020. Mr. Mattingly served as our Senior Vice President, Finance from July 2018 to June 2020. From 2003 through June 2018, Mr. Mattingly held various financial roles with NETGEAR and its affiliates, most recently serving as Vice President, Financial Planning & Analysis from August 2011 through June 2018. Before joining NETGEAR, Inc., Mr. Mattingly held various European finance positions within U.S. technology companies such as RealNetworks, Inc., International Business Machines Corporation and Tivoli Systems Inc. Mr. Mattingly began his career in finance with the London audit firm of Mazars Group, where he specialized in audits at Lloyd’s of London and qualified as a member of the Institute of Chartered Accountants in England and Wales. Mr. Mattingly also qualified in 2013 as a member of the Chartered Institute of Taxation. Mr. Mattingly received a BSc in Economics and Accountancy from the University of Southampton.
Brian Busse. Brian Busse has served as our General Counsel since July 2018. Previously, Mr. Busse was NETGEAR’s Vice President Intellectual Property & Litigation where he was responsible for overseeing NETGEAR’s worldwide litigation, intellectual property, privacy and licensing matters. Before joining NETGEAR in September 2009, Mr. Busse served as Counsel in the Intellectual Property Litigation Department of O’Melveny & Myers LLP in Menlo Park, California beginning in December 2008 where he represented public and private technology companies in a wide range of intellectual property litigation matters, including all aspects of patent litigation, including trial, discovery, law and motion, and claim construction. Mr. Busse began practicing law with the New York firm of Skadden, Arps, Slate, Meagher & Flom LLP, advising clients on various areas of litigation. Mr. Busse holds a J.D. from The University of Texas at Austin School of Law, an M.S. and Ph.D. in Physics from Oregon State University, and a B.S. in Physics from Virginia Tech. Mr. Busse is admitted to practice law in California and New York.
Item 1A. Risk Factors
Investing in our common stock involves substantial risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” when evaluating our business and before deciding whether to invest in shares of our common stock. We describe below what we believe are currently the material risks and uncertainties we face, but they are not the only risks and uncertainties we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occur, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the market price of our common stock could decline and you could lose part or all of your investment.
Risks Related to Our Business
The effectsWe obtain several key components from limited or sole sources, and if these sources fail to satisfy our supply requirements or we are unable to properly manage our supply requirements with our third-party manufacturers, we may lose sales and experience increased component costs.
Any shortage or delay in the supply of health epidemics, includingkey product components would harm our ability to meet scheduled product deliveries. Many of the recent COVID-19 pandemic,components used in our products are specifically designed for use in our products, some of which are obtained from sole source suppliers. These components include lens, lens-sensors, and passive infrared sensors that have been customized for the Arlo application, as well as custom-made batteries that provide power conservation and safety features. In addition, the components used in our end products have been optimized to extend battery life. Our third-party manufacturers generally purchase these components on our behalf, and we do not have any contractual commitments or guaranteed supply arrangements with our suppliers. If demand for a specific component increases, we may not be able to obtain an adequate number of that component in a timely manner or at all. In addition, if worldwide demand for the components increases significantly, the availability of these components could be limited. Further, our suppliers may experience financial or other difficulties as a result of uncertain and weak worldwide economic conditions. Other factors that may affect our suppliers’ ability or willingness to supply components to us include internal management or reorganizational issues, such as roll-out of new equipment which may delay or disrupt supply of previously forecasted components, or industry consolidation and divestitures, which may result in changed business and product priorities among certain suppliers. It could be difficult, costly, and time consuming to obtain alternative sources for these components, or to change product designs to make use of alternative components. In addition, difficulties in transitioning from an existing supplier to a new supplier could create delays in component availability that would have an adversea significant impact on our business, operationsability to fulfill orders for our products.
We generally provide our third-party manufacturers with a rolling forecast of demand, which they use to determine our material and component requirements. Lead times for ordering materials and components vary significantly and depend on various factors, such as the specific supplier, contract terms, and demand and supply for a component at a given time. Some of our components have long lead times, such as wireless local area network chipsets, physical layer transceivers, connector jacks, and metal and plastic enclosures. If our forecasts are not timely provided or are lower than our actual requirements, our third-party manufacturers may be unable to manufacture products in a timely manner or at all. If our forecasts are too high, our third-party manufacturers will be unable to use the components they have purchased on our behalf. The cost of the components used in our products tends to drop rapidly as volumes increase and the markets and communities in whichtechnologies mature. Therefore, if our third-party manufacturers are unable to promptly use components purchased on our behalf, our cost of producing products may be higher than our competitors due to an oversupply of higher-priced components. Moreover, if they are unable to use components ordered at our direction, we our partners and customers operate.will need to reimburse them for any losses they incur.
Our business and operations could be adversely affected by health epidemics, including the recent COVID-19 pandemic, impacting the markets and communities in whichIf we our partners and our customers operate. On March 11, 2020, the World Health Organization announced that COVID-19,are unable to obtain a respiratory illness, caused by a novel coronavirus is a pandemic. The Presidentsufficient supply of the United States has declared the COVID-19 pandemic a national emergency. In response to the COVID-19 pandemic, many state, local and foreign governments have put in place, and otherscomponents, or if we experience any interruption in the future may put in place, quarantines, executive orders, shelter-in-place orders and similar government orders and restrictions in order to control the spreadsupply of the disease. Such orders or restrictions, or the perception that such orders or restrictions could occur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellation of events, among other effects that could negatively impact productivity and disrupt our operations and those of our partners and our customers. For example, we have implemented a work-from-home policy for the vast majority of employees, and we may take further actions that alter our operations as may be required by federal, state or local authorities, or which we determine are in the best interests of our employees, customers, partners and stockholders. The effects of pandemic adversely affectedcomponents, our product shipments and financial results for the year ended December 31, 2020.could be reduced or delayed or our cost of obtaining these components may increase.
In addition, whilesole suppliers of highly specialized components may provide, or have provided components that were either defective or did not meet the potential impact and duration of the COVID-19 pandemic on the global economy andcriteria required by us or our business in particular may be difficult to assessmanufacturers, retailers, distributors, or predict, the pandemic has resulted in, and may continue to result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. The COVID-19 pandemic also could reduce demand for our products and services as our largestother channel partners, focus on selling essential goods, temporarily close stores or experience decreasesresulting in foot traffic. In addition, a recession or market correction resulting from the spread of COVID-19 could further decrease technology spending, adversely affecting demand for our productsdelays, lost revenue opportunities, and services, our business and the value of our common stock. As of December 31, 2020, our retail channel inventory in Americas declined compared to December 31, 2019 due to disruption to our sales channel, contributing to a decline in net revenue in Americas by 6.8%, compared to the year ended December 31, 2019.potentially substantial write-offs.
The COVID-19 pandemic may adversely affect the abilityWe depend on a limited number of third-party manufacturers for substantially all of our manufacturing needs. If these third-party manufacturers experience any delay, disruption, or quality control problems in their operations, we could lose or fail to grow our market share and other suppliers to fulfill their obligations to us. Weour brand may suffer.
All of our products are manufactured, assembled, tested and generally packaged by a limited number of third-party original design manufacturers (“ODMs”). In most cases, we rely on these manufacturers to procure components and, in some cases, subcontract engineering work. We cannot guarantee that ourcurrently outsource manufacturing to Foxconn Cloud Network Technology Singapore Pte. Ltd., Pegatron Corporation, Alpha Networks, Inc., and Chicony Electronics Co., Ltd.. We do not have any long-term contracts with any of these third-party manufacturers, although we have executed product supply agreements with these manufacturers, which typically provide indemnification for intellectual property infringement, epidemic failure clauses, agreed-upon price concessions, and certain product quality requirements. Some of these third-party manufacturers produce products for our competitors. Due to changing economic conditions, the viability of some of these third-party manufacturers may be at risk. The loss of the services of any of our primary third-party manufacturers could cause a significant disruption in operations and delays in product shipments. Qualifying a new manufacturer and commencing volume production is expensive and time consuming. Ensuring that a contract manufacturer is qualified to manufacture our products to our standards is time consuming. In addition, there is no assurance that a contract manufacturer can scale its production of our products at the volumes and in the quality that we require. If a contract manufacturer is unable to do these things, we may have to move production for the products to a new or existing third-party manufacturer, which would take significant effort and our business, results of operations, and financial condition could be materially and adversely affected. In addition, as we contemplate moving manufacturing into different jurisdictions, we may be subject to additional significant challenges in ensuring that quality, processes, and costs, among other suppliersissues, are consistent with our expectations. For example, while we expect our manufacturers to be responsible for penalties assessed on us because of excessive failures of the products, there is no assurance that we will be able to meetcollect such reimbursements from these manufacturers, which causes us to take on additional risk for potential failures of our near-termproducts.
Our reliance on third-party manufacturers also exposes us to the following risks over which we have limited control:
•unexpected increases in manufacturing and repair costs;
•inability to control the quality and reliability of finished products;
•inability to control delivery schedules;
•potential liability for expenses incurred by third-party manufacturers in reliance on our forecasts that later prove to be inaccurate;
•potential lack of adequate capacity to manufacture all or long-term manufacturing requirements.a part of the products we require; and
•potential labor unrest affecting the ability of the third-party manufacturers to produce our products.
All of our products must satisfy safety and regulatory standards and some of our products must also receive government certifications. Our third-party manufacturers are primarily responsible for conducting the tests that support our applications for most regulatory approvals for our products. If we experience supply constraints from our third-party manufacturers fail to timely and accurately conduct these tests, we maywould be requiredunable to allocateobtain the affectednecessary domestic or foreign regulatory approvals or certificates to sell our products amongstin certain jurisdictions. As a result, we would be unable to sell our customers, whichproducts and our sales and profitability could have a material adverse effect onbe reduced, our relationships with these customersour sales channel could be harmed, and on our financial condition. In addition, if we are unable to meet customer demand due to fluctuating or late supply from our third-party manufacturersreputation and other suppliers, it could result in lost sales and have a material adverse effect on our business. We also rely on other suppliers such as cloud infrastructure servicesbrand would suffer.
providers, distribution centers
Specifically, substantially all of our manufacturing and logisticsassembly occurs in the Asia Pacific region, primarily in Vietnam, and transportation services providers.any disruptions due to natural disasters, health epidemics, and political, social, and economic instability in the region would affect the ability of our third-party manufacturers to manufacture our products. In particular, in the event the labor market in Vietnam becomes saturated, our third-party manufacturers in that region may increase our costs of production. If these costs increase, it may affect our margins and ability to lower prices for our products to stay competitive. Labor unrest may also affect our third-party manufacturers, as workers may strike and cause production delays. If our third-party manufacturers fail to maintain good relations with their employees or contractors, and production and manufacturing of our products are affected, then we may be subject to shortages of products and the quality of products delivered may be affected. Further, if our manufacturers or warehousing facilities are disrupted or destroyed, we could have no other suppliersreadily available alternatives for manufacturing and assembling our products, and our business, results of operations, and financial condition could be materially and adversely affected.
In the future, we may work with more third-party manufacturers on a contract manufacturing basis, which could result in our exposure to additional risks not inherent in a typical ODM arrangement. Such risks may include our inability to properly source and qualify components for the products, lack of software expertise resulting in increased software defects, and lack of resources to properly monitor the manufacturing process. In our typical ODM arrangement, our ODMs are generally responsible for sourcing the components of the products and warranting that the products will work according to a product’s specification, including any software specifications. In a contract manufacturing arrangement, we would take on much more, if not all, of the responsibility around these areas. If we are unable to properly manage these risks, our products may be more susceptible to defects, and our business, results of operations, and financial condition could be materially and adversely affected.
If disruptions in our transportation network occur or our shipping costs substantially increase, we may be unable to sell or timely deliver our products, and our operating expenses could increase.
We are highly dependent upon the transportation systems we use to ship our products, including surface, ocean and air freight. Our attempts to closely match our inventory levels to our product demand intensify the need for our transportation systems to function effectively and without delay. On a quarterly basis, our shipping volume also tends to steadily increase as the quarter progresses, which means that any disruption in our transportation network in the latter half of a quarter will likely have a more material effect on our business than a disruption at the beginning of a quarter.
The transportation network is subject to disruption or congestion from a variety of causes, including labor disputes or port strikes, international conflicts, such as the ongoing escalating conflict between Russia and Ukraine, hostilities in the Middle-East, attacks on shipping vessels in Red Sea, acts of war or terrorism, natural disasters, and congestion resulting from higher shipping volumes. Labor disputes among freight carriers and at ports of entry are common, particularly in Europe, and we expect labor unrest and its effects on shipping our products to be a continuing challenge for us. A port worker strike, work slow-down, or other transportation disruption in Long Beach, California, where we import our products to fulfill their obligationsour American orders, could significantly disrupt our business. Our international freight is regularly subject to us,inspection by governmental entities. If our delivery times increase unexpectedly for these or any other reasons, our ability to deliver products on time would be materially and adversely affected and result in delayed or lost revenue as well as customer imposed penalties. In addition, if increases in fuel prices occur, our transportation costs would likely increase. Moreover, the cost of shipping our products by air freight is greater than by other methods. From time to time in the past, we could facehave shipped products shortages, delayusing extensive air freight to meet unexpected spikes in demand and shifts in demand between product categories, to bring new product introductions services to our customers could be interrupted,market quickly and to timely ship products previously ordered. If we continue to rely more heavily upon air freight to deliver our products, distributionour overall shipping costs will increase. A prolonged transportation disruption or a significant increase in the cost of freight could materially and adversely affect our business, results of operations, and financial condition.
If we lose the services of key personnel, we may not be delayedable to execute our business strategy effectively.
Our future success depends in large part upon the continued services of our key technical, engineering, sales, marketing, finance, and thus adversely affectingsenior management personnel. The competition for qualified personnel with significant experience in the design, development, manufacturing, marketing, and sales in the markets in which we operate is intense, both where our revenue. ForU.S. operations are based, including Silicon Valley, and in global markets in which we operate. Our inability to attract qualified personnel, including hardware and software engineers and sales and marketing personnel, could delay the year ended December 31, 2020,development and introduction of, and harm our freight-in expense increased by 56%, comparedability to the prior year.
The global pandemic of COVID-19 continuessell, our products and services. Decreases in our stock price may negatively affect our efforts to rapidly evolve,attract and weretain qualified personnel. Changes to U.S. immigration policies that restrict our ability to attract and retain technical personnel may negatively affect our research and development efforts. We will continue to monitorreplace key personnel, from within or looking outside, wherever we find the COVID-19 situation closely. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. best candidates.
We do not yet knowmaintain any key person life insurance policies. Our business model requires extremely skilled and experienced senior management who are able to withstand the full extentrigorous requirements and expectations of potential delaysour business. Our success depends on senior management being able to execute at a very high level. The loss of any of our senior management or impacts onother key engineering, research, development, sales, or marketing personnel, particularly if lost to competitors, could harm our ability to implement our business strategy and respond to the rapidly changing needs of our business. If we suffer the loss of services of any key executive or key personnel, our business, results of operations, and financial condition could be materially and adversely affected. In addition, we may not be able to have the proper personnel in place to effectively execute our long-term business strategy if key personnel retire, resign or the global economy as a whole.are otherwise terminated.
We expect our results of operations to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate or decline.
Our results of operations are difficult to predict and may fluctuate substantially from quarter-to-quarter or year-to-year for a variety of reasons, many of which are beyond our control. If our actual results were to fall below our estimates or the expectations of public market analysts or investors, our quarterly and annual results would be negatively impacted and the price of our stock could decline. Other factors that could affect our quarterly and annual operating results include, but are not limited to:
•changes in the pricing policies of, or the introduction of new products by, us or our competitors;
•delays in the introduction of new products by us or market acceptance of these products;
•health epidemics and other outbreaks, including the COVID-19 pandemic, which could significantly disrupt our operations;
•introductions of new technologies and changes in consumer preferences that result in either unanticipated or unexpectedly rapid product category shifts;
•competition with greater resources may cause us to lower prices and in turn could result in reduced margins and loss of market share;
•epidemic or widespread product failure, or unanticipated safety issues, in one or more of our products;
•slow or negative growth in the connected lifestyle,smart security, home electronics, and related technology markets;
•seasonal shifts in end-market demand for our products;
•unanticipated decreases or delays in purchases of our products by our significant retailers, distributors, and other channel partners;
•component supply constraints from our vendors;
•unanticipated increases in costs, including air freight, associated with shipping and delivery of our products;
•the inability to maintain stable operations by our suppliers and other parties with whom we have commercial relationships;
•discovery of security vulnerabilities in our products, services or systems, leading to negative publicity, decreased demand, or potential liability;
•foreign currency exchange rate fluctuations in the jurisdictions where we transact sales and expenditures in local currency;
•excess levels of inventory and low turns;
•changes in or consolidation of our sales channels and wholesale distributor relationships or failure to manage our sales channel inventory and warehousing requirements;
•delay or failure to fulfill orders for our products on a timely basis;
•delay or failure of our retailers, distributors, and other channel partners to purchase at their historic volumes or at the volumes that they or we forecast;
•changes in tax rates or adverse changes in tax laws that expose us to additional income tax liabilities;
•changes in U.S. and international tax policy, including changes that adversely affect customs, tax or duty rates such as tariffs on product imports, as well as income tax legislation and regulations that affect the countries where we conduct business;
•operational disruptions, such as transportation delays or failure of our order processing system, particularly if they occur at the end of a fiscal quarter;
•disruptions or delays related to our financial and enterprise resource planning systems;
•our inability to accurately forecast product demand, resulting in increased inventory exposure;
•allowance for credit losses exposure with our existing retailers, distributors and other channel partners and new retailers, distributors and other channel partners, particularly as we expand into new international markets;
•geopolitical disruption, including sudden changes in immigration policies, leading to disruption in our workforce or delay or even stoppage of our operations in manufacturing, transportation, technical support, and research and development;
•terms of our contracts with channel partners or suppliers that cause us to incur additional expenses or assume additional liabilities;
•an increase in price protection claims, redemptions of marketing rebates, product warranty and stock rotation returns or allowance for credit losses;
•litigation involving alleged patent infringement;
•failure to effectively manage our third-party customer support partners, which may result in customer complaints and/or harm to the Arlo brand;
•our inability to monitor and ensure compliance with our code of ethics, our anti-corruption compliance program, and domestic and international anti-corruption laws and regulations, whether in relation to our employees or with our suppliers or retailers, distributors, or other channel partners;
•labor unrest at facilities managed by our third-party manufacturers;
•workplace or human rights violations in certain countries in which our third-party manufacturers or suppliers operate, which may affect the Arlo brand and negatively affect our products’ acceptance by consumers;
•unanticipated shifts or declines in profit by geographical region that would adversely impact our tax rate;
•failure to implement and maintain the appropriate internal controls over financial reporting, which may result in restatements of our financial statements; and
•any changes in accounting rules.
As a result, period-to-period comparisons of our results of operations may not be meaningful, and you should not rely on them as an indication of our future performance.
If we fail to continue to introduce or acquire new products or services that achieve broad market acceptance on a timely basis, or if our products or services are not adopted as expected, we will not be able to compete effectively and we will be unable to increase or maintain revenue and gross margin.
We operate in a highly competitive, quickly changing environment, and our future success depends on our ability to develop or acquire and introduce new products and services that achieve broad market acceptance. Our future success will depend in large part upon our ability to identify demand trends in the connected lifestylesmart security market and quickly develop or acquire, and design, manufacture and sell, products and services that satisfy these demands in a cost-effective manner.
In order to differentiate our products and services from our competitors’ products, we must continue to increase our focus and capital investment in research and development, including software development. We have committed a substantial amount of resources to the manufacture, development and sale of our Arlo SmartSecure services and our wire-free smart Wi-Fi cameras, advanced baby monitors, and smart lights, and to introducing additional and improved models in these lines. In addition, we plan to continue to introduce new categories of smart connectedsecurity devices to the Arlo platform in the near future. If our existing products and services do not continue, or if our new products or services fail, to achieve widespread market acceptance, if existing customers do not subscribe to our paid subscription services such as Arlo Smart,Secure or Arlo Total Security, if those services do not achieve widespread market acceptance, or if we are unsuccessful in capitalizing on opportunities in the connected lifestylesmart security market, as well as in the related market in the small business segment, our future growth may be slowed and our business, results of operations, and financial condition could be materially and adversely affected. Successfully predicting demand trends is difficult, and it is very difficult to predict the effect that introducing a new product or service will have on existing product or service sales. It is possible that Arlo may not be as successful with its new products and services, and as a result our future growth may be slowed and our business, results of operations and financial condition could be materially and adversely affected. Also, we may not be able to respond effectively to new product or service announcements by our competitors by quickly introducing competitive products and services.
In addition, we may acquire companies and technologies in the future and, consistent with our vision for Arlo, introduce new product and service lines in the connected lifestylesmart security market. In these circumstances, we may not be able to successfully manage integration of the new product and service lines with our existing suite of products and services. If we
are unable to effectively and successfully further develop these new product and service lines, we may not be able to increase or maintain our sales, and our gross margin may be adversely affected.
We may experience delays and quality issues in releasing new products and services, which may result in lower quarterly revenue than expected. In addition, we may in the future experience product or service introductions that fall short of our projected rates of market adoption. Currently, reviews of our products and services are a significant factor in the success of our new product and service launches. If we are unable to generate a high number of positive reviews or quickly respond to negative reviews, including end-user reviews posted on various prominent online retailers, our ability to sell our products and services will be harmed. Any future delays in product and service development and introduction, or
product and service introductions that do not meet broad market acceptance, or unsuccessful launches of new product and service lines could result in:
•loss of or delay in revenue and loss of market share;
•negative publicity and damage to our reputation and brand;
•a decline in the average selling price of our products and services;
•adverse reactions in our sales channels, such as reduced shelf space, reduced online product visibility, or loss of sales channels; and
•increased levels of product returns.
Throughout the past few years, Arlo has significantly increased the rate of new product and service introductions, with the introduction of new lines of Arlo cameras, smart lights,camera, home security system, and doorbell products, as well as the introduction of our Arlo Smart services.Secure, Arlo Total Security, and Arlo Safe. If we cannot sustain that pace of product and service introductions, either through rapid innovation or acquisition of new products and services or product and service lines, we may not be able to maintain or increase the market share of our products and services or expand further into the connected lifestylesmart security market in accordance with our current plans. In addition, if we are unable to successfully introduce or acquire new products and services with higher gross margin, our revenue and overall gross margin would likely decline.
We obtain several key components from limited or sole sources, and if these sources fail to satisfy our supply requirements or we are unable to properly manage our supply requirements with our third-party manufacturers, we may lose sales and experience increased component costs.
Any shortage or delay in the supply of key product components would harm our ability to meet scheduled product deliveries. Many of the components used in our products are specifically designed for use in our products, some of which are obtained from sole source suppliers. These components include lens, lens-sensors, and passive infrared (“PIR”) sensors that have been customized for the Arlo application, as well as custom-made batteries that provide power conservation and safety features. In addition, the components used in our end products have been optimized to extend battery life. Our third-party manufacturers generally purchase these components on our behalf, and we do not have any contractual commitments or guaranteed supply arrangements with our suppliers. If demand for a specific component increases, we may not be able to obtain an adequate number of that component in a timely manner. In addition, if worldwide demand for the components increases significantly, the availability of these components could be limited. For example, increased demand for electronics as a result of the COVID-19 pandemic, effects of the U.S. trade war with China, increased demand for chips in the automotive industry and certain other factors have led to a global shortage of semiconductors. Due to such shortage, starting in the fourth quarter of 2020 we started to experience component shortages, including longer lead times for components, and supply constraints, which we expect to continue into 2021. Such shortages and constraints are affecting our ability to meet scheduled product deliveries and worldwide demand for our products in the first quarter of 2021 and potentially beyond. Further, our suppliers may experience financial or other difficulties as a result of uncertain and weak worldwide economic conditions. Other factors that may affect our suppliers’ ability or willingness to supply components to us include internal management or reorganizational issues, such as roll-out of new equipment which may delay or disrupt supply of previously forecasted components, or industry consolidation and divestitures, which may result in changed business and product priorities among certain suppliers. It could be difficult, costly, and time consuming to obtain alternative sources for these components, or to change product designs to make use of alternative components. In addition, difficulties in transitioning from an existing supplier to a new supplier could create delays in component availability that would have a significant impact on our ability to fulfill orders for our products.
We provide our third-party manufacturers with a rolling forecast of demand, which they use to determine our material and component requirements. Lead times for ordering materials and components vary significantly and depend on various factors, such as the specific supplier, contract terms, and demand and supply for a component at a given time.
Some of our components have long lead times, such as wireless local area network chipsets, physical layer transceivers, connector jacks, and metal and plastic enclosures. If our forecasts are not timely provided or are less than our actual requirements, our third-party manufacturers may be unable to manufacture products in a timely manner. If our forecasts are too high, our third-party manufacturers will be unable to use the components they have purchased on our behalf. The cost of the components used in our products tends to drop rapidly as volumes increase and the technologies mature. Therefore, if our third-party manufacturers are unable to promptly use components purchased on our behalf, our cost of producing products may be higher than our competitors due to an oversupply of higher-priced components. Moreover, if they are unable to use components ordered at our direction, we will need to reimburse them for any losses they incur.
If we are unable to obtain a sufficient supply of components, or if we experience any interruption in the supply of components, our product shipments could be reduced or delayed or our cost of obtaining these components may increase. For example, in December 2018 we announced a delay in the expected timing of shipment of our Ultra product due to a battery-related issue from one of our suppliers. Component shortages and delays affect our ability to meet scheduled product deliveries, damage our brand and reputation in the market, and cause us to lose sales and market share. For example, component shortages and disruptions in supply in the past have limited our ability to supply all the worldwide demand for our products, and our revenue was affected. At times, we have elected to use more expensive transportation methods, such as air freight, to make up for manufacturing delays caused by component shortages, which reduces our margins. In addition, at times sole suppliers of highly specialized components have provided components that were either defective or did not meet the criteria required by our retailers, distributors, or other channel partners, resulting in delays, lost revenue opportunities, and potentially substantial write-offs.
We may need additional financing to meet our future long-term capital requirements and may be unable to raise sufficient capital on favorable terms or at all.
We have recorded a net loss of $101.3 million, $86.0 million and $75.5$22.0 million for the yearsyear ended December 31, 2020, 2019 and 2018, respectively,2023, and we have a history of losses and may continue to incur operating and net losses for the foreseeable future. As of December 31, 2020 and 2019,2023, our accumulated deficit was $232.8 million and $131.5 million, respectively.$367.5 million.
As of December 31, 2020,2023, our cash and cash equivalents and short-term investments totaled $206.1 million.$136.5 million and we generated free cash flow of $35.5 million for the year ended December 31, 2023. In November 2019,October 2021, we entered into a business financing agreementLoan and Security Agreement with Western Alliance Bank of America, N.A. (the "Credit Agreement"), providing for a credit facility toof up to $40.0 million and, as of December 31, 2020,2023, we have not borrowed against this credit facility.facility and we had unused borrowing capacity of $13.9 million. Refer to Note 10.7, DebtRevolving Credit Facility in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for further details on such business financing agreement.the Credit Agreement. While, based on our current plans, the business financing agreementCredit Agreement with Western Alliance Bank of America, N.A., and market conditions, we believe that such sources of liquidity will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months, we may require additional funds, either through equity or debt financings or collaborative agreements or from other sources. We have no commitments to obtain such additional financing, and we may not be able to obtain any such additional financing on terms favorable to us, or at all. If adequate financing is not available, we may further delay, postpone or terminate product and service expansion and curtail certain selling, general and administrative operations. The inability to raise additional financing may have a material adverse effect on our future performance. In addition, the COVID-19 pandemic has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we could experience an inability to access additional capital.
Some of our competitors have substantially greater resources than we do, and to be competitive we may be required to lower our prices or increase our sales and marketing expenses, which could result in reduced margins and loss of market share.
We compete in a rapidly evolving and fiercely competitive market, and we expect competition to continue to be intense, including price competition. Our principal competitors include Amazon (Blink and Ring), Canary, D-Link, Eufy, Google (Nest), Swann, Night Owl, Wyze, Foxconn Corporation (Belkin), Night Owl, Samsung, D-Link,SimpliSafe, Swann, and Canary.Wyze. Other competitors include numerous local vendors such as Netatmo, Logitech, Bosch, Instar, and Uniden. In addition, these local vendors may target markets outside of their local regions and may increasingly compete with us in other regions worldwide. Many of our existing and
potential competitors have longer operating histories, greater brand recognition, and substantially greater financial, technical, sales, marketing, and other resources. These competitors may, among other things, undertake more extensive marketing campaigns, adopt more aggressive pricing policies, obtain more favorable pricing from suppliers and manufacturers, and exert more influence on sales channels than we can. In addition, certain competitors may have different business models, such as integrated manufacturing capabilities, that may allow them to achieve cost savings and to compete on the basis of price. Other competitors may have fewer resources, but may be more nimble in developing new or disruptive technology or in entering new markets.
We anticipate that current and potential competitors will also intensify their efforts to penetrate our target markets. For example, price competition is intense in our industry in certain geographical regions and product categories. Many of our competitors price their products significantly below our product costs. Average sales prices have declined in the past and may again decline in the future. These competitors may have more advanced technology, more extensive distribution channels, stronger brand names, greater access to shelf space in retail locations, bigger promotional budgets, and larger retailers, distributors, and other channel partners, and end-user bases than we do.
In addition, many of these competitors leverage a broader product portfolio and offer lower pricing as part of a more comprehensive end-to-end solution. These companies could devote more capital resources to develop, manufacture, and market competing products than we could.
AmazonAmazon.com is both a competitor and a distribution channel for our products as well as a provider of services to support our cloud-based storage. If Amazon decided to end our distribution channel relationship or ceased providing cloud storage services to us, our sales and product performance could be harmed, which could seriously harm our business, financial condition, results of operations, and cash flows.
Our competitors may also acquire other companies in the market and leverage combined resources to gain market share. If any of these companies are successful in competing against us, our sales could decline, our margins could be negatively impacted, and we could lose, or fail to grow, our market share, any of which could seriously harm our business, financial condition, and results of operations.
If we lose the services of key personnel, we may not be able to execute our business strategy effectively.
Our future success depends in large part upon the continued services of our key technical, engineering, sales, marketing, finance, and senior management personnel. The competition for qualified personnel with significant experience in the design, development, manufacturing, marketing, and sales in the markets in which we operate is intense, both where our U.S. operations are based, including Silicon Valley, and in global markets in which we operate. Our inability to attract qualified personnel, including hardware and software engineers and sales and marketing personnel, could delay the development and introduction of, and harm our ability to sell, our products and services. Decreases in our stock price may negatively affect our efforts to attract and retain qualified personnel. Changes to U.S. immigration policies that restrict our ability to attract and retain technical personnel may negatively affect our research and development efforts. We will continue to replace key personnel, from within or looking outside, wherever we find the best candidates.
We do not maintain any key person life insurance policies. Our business model requires extremely skilled and experienced senior management who are able to withstand the rigorous requirements and expectations of our business. Our success depends on senior management being able to execute at a very high level. The loss of any of our senior management or other key engineering, research, development, sales, or marketing personnel, particularly if lost to competitors, could harm our ability to implement our business strategy and respond to the rapidly changing needs of our business. If we suffer the loss of services of any key executive or key personnel, our business, results of operations, and financial condition could be materially adversely affected. In addition, we may not be able to have the proper personnel in place to effectively execute our long-term business strategy if key personnel retire, resign or are otherwise terminated.
We entered into an asset purchase agreement (the “Asset Purchase Agreement”) and supply agreement (the “Supply Agreement”) with Verisure Sàrl (“Verisure”) that will givegives Verisure exclusive marketing and distribution rights
for our products in Europe as well as the ability to sell our products through their direct channel globally. We cannot provide assurance that the arrangement with Verisure will continue to be a successful collaboration.
Verisure will havehas the exclusive right to market and distribute our products in Europe. Our results of operations may be negatively impacted if Verisure is not successful in sellingcontinuing to sell our products in Europe. Even though the Supply Agreement provides for minimum purchase commitments, if Verisure fails to pay on a timely basis, or at all, including because of effects from COVID-19, or otherwise does not perform under the Supply Agreement, our cash flow would be reduced. We are also exposed to increased credit risk if Verisure fails or becomes insolvent. We also cannot provide any assurance that we will successfully develop custom products as specified by Verisure under the Supply Agreement.
The Asset Purchase Agreement and Supply Agreement with Verisure containscontain customary representations and warranties regarding, the Business and the Assets (each as defined in the Asset Purchase Agreement), indemnification
provisions, termination rights, certain financial covenants and other customary provisions. Additionally, we have agreed not to engage in any business that competes with the Business for a period of three years. Our failure to comply with these provisions may have a material adverse effect on our future performance.
We are subject to financial and operating covenants in our business financing agreement with Western Alliance Bank (the “Credit Agreement”) and any failure to comply with such covenants, or obtain waivers in the event of non-compliance, could limit our borrowing availability under the Credit Agreement, resulting in our being unable to borrow under the Credit Agreement and materially adversely impact our liquidity. In addition, our operations may not provide sufficient cash to meet the repayment obligations of debt incurred under the Credit Agreement.
The Credit Agreement contains provisions that limit our future borrowing availability to the lesser of (x) $40.0 million and (y) an amount equal to 60% of our eligible receivables and eligible accounts receivable, less such reserves as Western Alliance Bank may deem proper and necessary from time to time. The Credit Agreement also contains other customary covenants, including certain restrictions on maintaining a minimum cash balance, our ability to incur additional indebtedness, consolidate or merge, enter into acquisitions, pay any dividend or distribution on our capital stock, redeem, retire or purchase shares of our capital stock, make investments or pledge or transfer assets, in each case subject to limited exceptions.
There can be no assurance that we will be able to comply with the financial and other covenants in the Credit Agreement, and the effects of the COVID-19 pandemic may increase the risk of our inability to comply with such covenants. Our failure to comply with these covenants could cause us to be unable to borrow under the Credit Agreement and may constitute an event of default which, if not cured or waived, could result in the acceleration of the maturity of any indebtedness then outstanding under the Credit Agreement, which would require us to pay all amounts then outstanding. If we are unable to repay those amounts, the Lender could proceed against the collateral granted to them to secure that debt, which would seriously harm our business. Such an event could materially adversely affect our financial condition and liquidity. Additionally, such events of non-compliance could impact the terms of any additional borrowings and/or any credit renewal terms. Any failure to comply with such covenants may be a disclosable event and may be perceived negatively. Such perception could adversely affect the market price for our common stock and our ability to obtain financing in the future.
We are dependent on information technology systems, infrastructure and data. System security risks,If our information technology systems or data, protection breachesor those of third parties upon which we rely, are or were compromised, we could experience adverse consequences resulting from such compromise, including but not limited to regulatory investigations or actions; litigation; fines and cyber-attacks could disruptpenalties; disruptions of our products, services, internal operations,business operations; reputational harm; loss of customers or sales; reduced revenue or profits; increased expenses; significant decline in our stock price; and other adverse consequences.
In the ordinary course of our business, we and the third parties upon which we rely, collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, and share (collectively, “processing”) proprietary, confidential, and sensitive data, including personal data about our customers, employees, and others, intellectual property, and trade secrets (collectively, “sensitive information”).
Cyber-attacks, malicious internet-based activity, online and offline fraud, and other similar activities threaten the confidentiality, integrity, and availability of our sensitive information and information technology systems, and could lead to theftthose of our intellectual property, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation, and cause our stock price to decline significantly.
Informationthe third parties upon which we rely. These information security risks have significantly increased in recent years in part due to the proliferation of new technologies and the increased sophistication and activities of organized crime, hackers, terrorists, threat actors, “hacktivists,” personnel (such as through theft or misuse), sophisticated nation states, and nation-state-supported actors and other external parties. Some actors now engage and are expected to continue to engage in cyber-attacks, including without limitation nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we, the third parties upon which we rely may be vulnerable to a heightened risk of these attacks, including foreign privateretaliatory cyber-attacks, that could materially disrupt our systems and operations, supply chain, and ability to produce, sell and distribute our products and services.
We and the third parties upon which we rely are subject to a variety of evolving threats, including but not limited to social-engineering attacks (including through deep fakes, which may be increasingly more difficult to identify as fake, and state actors. phishing attacks), malicious code (such as viruses and worms), malware (including as a result of advanced persistent threat intrusions), denial-of-service attacks, credential stuffing attacks, credential harvesting, personnel misconduct or error, ransomware attacks, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other information technology assets, adware, telecommunications failures, earthquakes, fires, floods, attacks enhanced or facilitated by AI, and other similar threats. In particular, severe ransomware attacks are becoming increasingly prevalent and can lead to significant interruptions in our operations, ability to provide our products or services, loss of sensitive data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments.
Remote work has become more common and has increased risks to our information technology systems and data, as more of our employees utilize network connections, computers and devices outside our premises or network, including working at home, while in transit and in public locations. Future or past business transactions (such as acquisitions or integrations) could expose us to additional cybersecurity risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies. Furthermore, we may discover security issues that were not found during due diligence of such acquired or integrated entities, and it may be difficult to integrate companies into our information technology environment and security program.
We may rely on third-party service providers and technologies to operate critical business systems to process sensitive information in a variety of contexts, including, without limitation, cloud-based infrastructure, data center facilities, encryption and authentication technology, employee email, content delivery to customers, and other functions. We may also rely on third-party service providers to provide other products, services, parts, or otherwise to operate our business. Our ability to monitor these third parties’ information security practices is limited, and these third parties may not have adequate information security measures in place. If our third-party service providers experience a security incident or other interruption, we could experience adverse consequences. While we may be entitled to damages if our third-party
service providers fail to satisfy their privacy or security-related obligations to us, any award may be insufficient to cover our damages, or we may be unable to recover such award. In addition, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties’ infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised.
Any of the previously identified or similar threats could cause a security incident or other interruption that could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive information or our information technology systems, or those of the third parties upon whom we rely. A security incident or other interruption could disrupt our ability (and that of third parties upon whom we rely) to provide our products and services.
We may expend significant resources or modify our business activities to try to protect against security incidents. Certain data privacy and security obligations may require us to implement and maintain specific security measures or industry-standard or reasonable security measures to protect our information technology systems and sensitive information.
Maintaining the security of our computer information systems and communication systems is a critical issue for us and our customers and we devote considerable internal and external resources to network security, data encryption, and other security measures to protect our systems, customers, and users, but these security measures cannot provide absolute security. We have established a crisis management plan and business continuity program. While we regularly test the plan and the program, there can be no assurance that the plan and program can withstand an actual disruption in our business, including a cyber-attack, hacking, fraud, social engineering, or other forms of deception. While we have established service-level and geographic redundancy for our critical systems, our ability to utilize these redundant systems must be tested regularly, failing over to such systems always carries risk and we cannot be assured that such systems are fully functional. For example, much of our order fulfillment process is automated and the order information is stored on our servers. A significant business interruption could result in losses or damages and harm our business. If our computer systems and servers become unavailable at the end of a fiscal quarter, for example, our ability to recognize revenue may be delayed until we are able to utilize back-up systems and continue to process and ship our orders. This could cause our stock price to decline significantly. Changes in how our employees work and access our systems, as experienced during the COVID-19 pandemic, also could lead to additional opportunities for bad actors to launch cyberattacks or for employees to cause inadvertent security risks or incidents. While we have implemented security measures designed to protect against security incidents, including those described above, there can be no assurance that these measures will be effective.
Our products and services may contain unknown security vulnerabilities. We take steps to detect and remediate vulnerabilities, but we have not always been able in the past and may not be able in the future to detect and remediate all vulnerabilities in our information technology systems (including our products) because such threats and techniques used to exploit vulnerabilities change frequently and are often sophisticated in nature. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. Therefore, such vulnerabilities could be exploited but may not be detected until after a security incident has occurred. Unremedied high risk or critical vulnerabilities pose a material risk to our business. For example, the firmware, software, and open source software that we or our manufacturing partners have installed on our products may be susceptible to hacking, unauthorized manipulation, or misuse. In addition, we offer a
comprehensive online cloud management service, Arlo Smart,Secure, paired with our end products, including our cameras, baby monitors, and smart lights and we recently launched our direct to consumer store to sell our products directly to our customers. If malicious actors compromise this cloud service or our direct to consumer store, or if customer confidential information is accessed without authorization, our business will be harmed. Operating an online cloud service and direct to consumer store are a relatively new businesses for us, and we may not have the expertise to properly manage risks related to data security and systems security. We rely on third-party providers for a number of critical aspects of our cloud services and customer support, including web hosting services, billing, and payment processing, and consequently we do not maintain direct control over the security or stability of the associated systems.
Applicable data privacy and security obligations may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and the disclosure or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience a security incident or are perceived to have
experienced a security incident, we may experience adverse consequences such as: government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing sensitive information (including personal data); litigation (including class claims); indemnification obligations; negative publicity; reputational harm; diversion of management’s attention; monetary fund diversions; interruptions in our third-party providers are unableoperations (including availability of data); negative impacts to properly secure our system or successfully prevent breaches of security relating to our products, services, or user private information, including user videos and user personal identification information, or if these third-party systems fail for other reasons, our management could need to spend increasing amounts of time and effort in this area. As a result, we could incur substantial expenses, our brand and reputation could suffer and our business, results of operations and financial condition could be materially adversely affected.condition; financial loss; and other similar harms. Security incidents and attendant consequences may prevent or cause customers to stop using our products and services, deter new customers from using our products and services, and negatively impact our ability to grow and operate our business.
Maintaining the security of our computer information systems and communication systems is a critical issue for us and our customers but the multitude and complexity of our computer systems may make them vulnerable to service interruption or destruction, disruption of data integrity, inadvertent errors that expose our data or systems, malicious intrusion, or random attacks.Likewise, data privacy or security incidents or breaches by employees or others may pose a risk that sensitive data, including our intellectual property, trade secrets or personal information of our employees, customers or other business partners may be exposed to unauthorized persons or to the public. Malicious actors may develop and deploy malware that is designed to manipulate our systems, including our internal network, or those of our vendors or customers. Additionally, outside parties may attempt to fraudulently induce our employees to disclose sensitive information in order to gain access to our information technology systems, our data or our customers’ data. We have established a crisis management plan and business continuity program. While we regularly test the plan and the program, there can be no assurance that the plan and program can withstand an actual or serious disruption in our business, including cyber-attack. While we have established service-level and geographic redundancy for our critical systems, our ability to utilize these redundant systems must be tested regularly, failing over to such systems always carries risk and we cannot be assured that such systems are fully functional. For example, much of our order fulfillment process is automated and the order information is stored on our servers. A significant business interruption could result in losses or damages and harm our business. If our computer systems and servers become unavailable at the end of a fiscal quarter, our ability to recognize revenue may be delayed until we are able to utilize back-up systems and continue to process and ship our orders. This could cause our stock price to decline significantly. Changes in how our employees work and access our systems during the current COVID-19 pandemic also could lead to additional opportunities for bad actors to launch cyberattacks or for employees to cause inadvertent security risks or incidents.
We devote considerable internal and external resources to network security, data encryption, and other security measures to protect our systems, customers, and users, but these security measures cannot provide absolute security. Potential breaches of our security measures and the accidental loss, inadvertent disclosure, or unapproved dissemination of proprietary information or sensitive or confidential data about us, our employees, or our customers or users, including the potential loss or disclosure of such information or data as a result of employee error or other employee actions or inactions, hacking, fraud, social engineering, or other forms of deception could expose us, our customers, or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation, or otherwise materially adversely affect our business, results of operations, and financial condition. The effects of a security breach or privacy violation could be further amplified during the current COVID-19 pandemic. In addition, the cost and operational consequences of implementing further data protection measures could be significant and theft of our intellectual property or proprietary business information could require substantial expenditures to remedy. Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. Further, we cannot be certain that (a) our liability insurance will be adequate or sufficient in type or amount to coverprotect us against claims relatedfrom or to mitigate liabilities arising out of our privacy and security practices or security breaches, cyberattacks and other related breaches; (b) such coverage will cover any indemnification claims against us relating to any incident, will continue to be available to us on economically reasonable terms, or at all; or (c) any insurer will not deny coverage as to any future claim.The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the
imposition of large deductible or co-insurance requirements, could adversely affect our reputation, business, financial condition and results of operations.
Our future success depends on our ability to increase sales of our paid subscription services.
Our future success is largely dependent on increasing sales of our paid subscription services. Even if we are successful in selling our smart connectedsecurity devices and accessories, if we are unable to maintain or increase sales of Arlo SmartSecure, Arlo Total Security, and Arlo Safe services, our revenue and overall gross margin would likely decline.
We depend on a limited number of third-party manufacturers for substantially all of our manufacturing needs. If these third-party manufacturers experience any delay, disruption, or quality control problems in their operations, including due to the COVID-19 pandemic, we could lose market share and our brand may suffer.
All of our products are manufactured, assembled, tested and generally packaged by a limited number of third-party original design manufacturers (“ODMs”). In most cases, we rely on these manufacturers to procure components and, in some cases, subcontract engineering work. We currently outsource manufacturing to Foxconn Cloud Network Technology Singapore Pte. Ltd., Pegatron Corporation, and Sky Light Industrial Ltd. We do not have any long-term contracts with any of these third-party manufacturers, although we have executed product supply agreements with these manufacturers, which typically provide indemnification for intellectual property infringement, epidemic failure clauses, agreed-upon price concessions, and certain product quality requirements. Some of these third-party manufacturers produce products for our competitors. In addition, one of our principal manufacturers, Foxconn closed its acquisition of Belkin International in September 2018, which includes the WeMo brand of home automation products, which may compete directly with us. Due to changing economic conditions, including due to the COVID-19 pandemic, the viability of some of these third-party manufacturers may be at risk. The loss of the services of any of our primary third-party manufacturers could cause a significant disruption in operations and delays in product shipments. Qualifying a new manufacturer and commencing volume production is expensive and time consuming. Ensuring that a contract manufacturer is qualified to manufacture our products to our standards is time consuming. In addition, there is no assurance that a contract manufacturer can scale its production of our products at the volumes and in the quality that we require. If a contract manufacturer is unable to do these things, we may have to move production for the products to a new or existing third-party manufacturer, which would take significant effort and our business, results of operations, and financial condition could be materially adversely affected. In addition, as we contemplate moving manufacturing into different jurisdictions, we may be subject to additional significant challenges in ensuring that quality, processes, and costs, among other issues, are consistent with our expectations. For example, while we expect our manufacturers to be responsible for penalties assessed on us because of excessive failures of the products, there is no assurance that we will be able to collect such reimbursements from these manufacturers, which causes us to take on additional risk for potential failures of our products.
Our reliance on third-party manufacturers also exposes us to the following risks over which we have limited control:
•unexpected increases in manufacturing and repair costs;
•inability to control the quality and reliability of finished products;
•inability to control delivery schedules;
•potential liability for expenses incurred by third-party manufacturers in reliance on our forecasts that later prove to be inaccurate;
•potential lack of adequate capacity to manufacture all or a part of the products we require; and
•potential labor unrest affecting the ability of the third-party manufacturers to produce our products.
All of our products must satisfy safety and regulatory standards and some of our products must also receive government certifications. Our third-party manufacturers are primarily responsible for conducting the tests that support our applications for most regulatory approvals for our products. If our third-party manufacturers fail to timely and accurately conduct these tests, we would be unable to obtain the necessary domestic or foreign regulatory approvals or certificates to sell our products in certain jurisdictions. As a result, we would be unable to sell our products and our sales and profitability could be reduced, our relationships with our sales channel could be harmed, and our reputation and brand would suffer.
Specifically, substantially all of our manufacturing and assembly occurs in the Asia Pacific region, primarily in Vietnam, and any disruptions due to natural disasters, health epidemics, and political, social, and economic instability in the region would affect the ability of our third-party manufacturers to manufacture our products. In particular, in the event the labor market in Vietnam becomes saturated, our third-party manufacturers in Vietnam may increase our costs of production. If these costs increase, it may affect our margins and ability to lower prices for our products to stay competitive. Labor unrest may also affect our third-party manufacturers, as workers may strike and cause production delays. If our third-party manufacturers fail to maintain good relations with their employees or contractors, and production and manufacturing of our products are affected, then we may be subject to shortages of products and the quality of products delivered may be affected. Further, if our manufacturers or warehousing facilities are disrupted or destroyed, we could have no other readily available alternatives for manufacturing and assembling our products, and our business, results of operations, and financial condition could be materially adversely affected.
In the future, we may work with more third-party manufacturers on a contract manufacturing basis, which could result in our exposure to additional risks not inherent in a typical ODM arrangement. Such risks may include our inability to properly source and qualify components for the products, lack of software expertise resulting in increased software defects, and lack of resources to properly monitor the manufacturing process. In our typical ODM arrangement, our ODMs are generally responsible for sourcing the components of the products and warranting that the products will work according to a product’s specification, including any software specifications. In a contract manufacturing arrangement, we would take on much more, if not all, of the responsibility around these areas. If we are unable to properly manage these risks, our products may be more susceptible to defects, and our business, results of operations, and financial condition could be materially adversely affected.
If disruptions in our transportation network occur or our shipping costs substantially increase, including due to the COVID-19 pandemic, we may be unable to sell or timely deliver our products, and our operating expenses could increase.
We are highly dependent upon the transportation systems we use to ship our products, including surface, ocean and air freight. Our attempts to closely match our inventory levels to our product demand intensify the need for our transportation systems to function effectively and without delay. On a quarterly basis, our shipping volume also tends to steadily increase as the quarter progresses, which means that any disruption in our transportation network in the latter half of a quarter will likely have a more material effect on our business than a disruption at the beginning of a quarter.
The transportation network is subject to disruption or congestion from a variety of causes, including labor disputes or port strikes, acts of war or terrorism, natural disasters, and congestion resulting from higher shipping volumes. Labor disputes among freight carriers and at ports of entry are common, particularly in Europe, and we expect labor unrest and its effects on shipping our products to be a continuing challenge for us. A port worker strike, work slow-down, or other transportation disruption in Long Beach, California, where we import our products to fulfill our Americas orders, could significantly disrupt our business. Our international freight is regularly subjected to inspection by governmental entities. As a result of the COVID-19 pandemic, international freight capacity has dropped, causing air and ocean freight rates to materially increase. Transit times have also increased. If our delivery times increase unexpectedly for these or any other reasons, our ability to deliver products on time would be materially adversely affected and result in delayed or lost revenue as well as customer imposed penalties. In addition, if increases in fuel prices occur, our transportation costs would likely increase. Moreover, the cost of shipping our products by air freight is greater than other methods. From time to time in the past, we have shipped products using extensive air freight to meet unexpected spikes in demand and shifts in demand between product categories, to bring new product introductions to market quickly and to timely ship products previously
ordered. If we rely more heavily upon air freight to deliver our products, our overall shipping costs will increase. A prolonged transportation disruption or a significant increase in the cost of freight could materially adversely affect our business, results of operations, and financial condition.
Interruptions with the cloud-based systems that we use in our operations provided by an affiliate of Amazon.com, Inc. ("Amazon"),Amazon, which is also one of our primary competitors, may materially and adversely affect our business, results of operations, and financial condition.
We host our platform using Amazon Web Services (“AWS”) data centers, a provider of cloud infrastructure services, and may in the future use other third-party cloud-based systems in our operations. All of our solutions currently reside on systems leased and operated by us in these data center locations. Accordingly, our operations depend on protecting the virtual cloud infrastructure hosted in AWS by maintaining its configuration, architecture, features, and interconnection specifications, as well as the information stored in these virtual data centers and which third-party internet service providers transmit. Although we have disaster recovery plans that utilize multiple AWS locations, any incident affecting their infrastructure that may be caused by human error, fire, flood, severe storm, earthquake, or other natural disasters, cyber-attacks, terrorist or other attacks, and other similar events beyond our control could negatively affect our platform. A prolonged AWS service disruption affecting our platform for any of the foregoing reasons would negatively impact our ability to serve our end-users and could damage our reputation with current and potential end-users, expose us to liability, cause us to lose customers, or otherwise harm our business. We may also incur significant costs for using alternative equipment or taking other actions in preparation for, or in reaction to, events that damage the AWS services we use. Further, if we were to make updates to our platforms that were not compatible with the configuration, architecture, features, and interconnection specifications of the third-party platform, our service could be disrupted.
Amazon producespreviously produced the Amazon Cloud Cam, which competescompeted with our security camera products, and recently acquired two of our competitors, Blink and Ring.Ring, in 2017 and 2018, respectively. Amazon may choose to hamper our competitive efforts, using provision of AWS services as leverage. In the event that there is a lapse of service, elimination of AWS services or features that we use, interruption of internet service provider connectivity, or damage to such facilities, we could experience interruptions in access to our platform as well as significant delays and additional expense in
arranging or creating new facilities and services and/or re-architecting our solutions for deployment on a different cloud infrastructure service provider, which could materially and adversely affect our business, results of operations, and financial condition.
Our current and future products may experience quality problems, including defects or errors, from time to time that can result in adverse publicity, product recalls, litigation, regulatory proceedings, and warranty claims resulting inand could lead to significant direct or indirect costs, decreased revenue, and operating margin, and harm to our brand.
We sell complex products that could contain design and manufacturing defects in their materials, hardware, and firmware. These defects could include defective materials or components that can unexpectedly interfere with the products’ intended operations or cause injuries to users or property damage. Although we extensively and rigorously test new and enhanced products and services before their release, we cannot assure we will be able to detect, prevent, or fix all defects. Failure to detect, prevent, or fix defects, or an increase in defects, could result in a variety of consequences, including a greater number of product returns than expected from users and retailers, increases in warranty costs, regulatory proceedings, product recalls, and litigation, each of which could materially and adversely affect our business, results of operations, and financial condition. We generally provide a one-year hardware warranty on all of our products. The occurrence of real or perceived quality problems or material defects in our current and future products could expose us to warranty claims in excess of our current reserves. If we experience greater returns from retailers or users, or greater warranty claims, in excess of our reserves, our business, financial condition, and results of operations could be harmed. In addition, any negative publicity or lawsuits filed against us related to the perceived quality and safety of our products could also adversely affect our brand, decrease demand for our products and services, and materially and adversely affect our business, results of operations, and financial condition.
In addition, epidemic failure clauses are found in certain of our customer contracts. If invoked, these clauses may entitle the customer to return for replacement or obtain credits for products and inventory, as well as assess liquidated
damage penalties and terminate an existing contract and cancel future or then-current purchase orders. In such instances, we may also be obligated to cover significant costs incurred by the customer associated with the consequences of such epidemic failure, including freight and transportation required for product replacement and out-of-pocket costs for truck rolls to end-user sites to collect the defective products. Costs or payments we make in connection with an epidemic failure could materially and adversely affect our business, results of operations, and financial condition.
If our products contain defects or errors, or are found to be noncompliant with industry standards, we could experience decreased sales and increased product returns, loss of customers and market share, and increased service, warranty, and insurance costs. In addition, defects in, or misuse of, certain of our products could cause safety concerns, including the risk of property damage or personal injury. If any of these events occurred, our reputation and brand could be damaged, and we could face product liability or other claims regarding our products, resulting in unexpected expenses and adversely impacting our operating results. For instance, if a third party were able to successfully overcome the security measures in our products, such a person or entity could misappropriate end-user data, third-party data stored by our users, and other information, including intellectual property. If that happens, affected end-users or others may file actions against us alleging product liability, tort, or breach of warranty claims.
We rely on a limited number of traditional and online retailers and wholesale distributors for a substantial portion of our sales, and our revenue could decline if they refuse to pay our requested prices or reduce their level of purchases or if there is significant consolidation in our sales channels, which results in fewer sales channels for our products.
We sell a substantial portion of our products through traditional and online retailers, including Amazon, Best Buy Co., Inc. ("Best Buy"), Walmart, Inc., and Costco Wholesale Corporation (“Costco”)Corporation; and to security solutions providers, including Verisure and their respectiveits affiliates. For the year ended December 31, 2020,2023, we derived 20.6%, 17.3%, 14.6% and 12.2%33.5% of our revenue from Costco, Verisure Best Buy and Amazon and their affiliates, respectively.its affiliates. In addition, we sell to wholesale distributors, including Ingram Micro, Inc., D&H Distributing Company, and Synnex Corporation. We expect that a significant portion of our revenue will continue to come from sales to a small number of such retailers, distributors, and other channel partners. In addition, because our accounts receivable are often concentrated within a small group of retailers, distributors, and other channel partners, the failure of any of them to pay on a timely basis, or at all, would reduce our cash flow. If Best Buy or other retailers closes any of its retail stores due to COVID-19 pandemic, our revenue could be adversely impacted. We are also exposed to increased credit risk if any one of these limited numbers of retailer and distributor channel partners fails or becomes insolvent. WeVerisure has an aggregate purchase commitment of $500.0 million during a five-year period commencing January 1, 2020 and continuing through December 2024. Other than with Verisure, we generally have no minimum purchase commitments or long-term contracts with any of theseour retailers, distributors and other channel partners. These purchasers could decide at any time to discontinue, decrease, or delay their purchases of our products. If our retailers, distributors, and other channel partners increase the size of their product orders without sufficient lead-time for us to process the order, our ability to fulfill product orders would be compromised. These channel partners have a variety of suppliers to choose from and therefore can make substantial demands on us, including demands on product pricing and on contractual terms, which often results in the allocation of risk to us as the supplier. Accordingly, the prices that they pay for our products are subject to negotiation and could change at any time. We have historically benefited from NETGEAR’s strong relationships with these retailers, distributors, and other channel partners, and we may not be able to maintain these relationships following our separation from NETGEAR. Our ability to maintain strong relationships with these channel partners is essential to our future performance. If any of our major channel partners reduce their level of purchases or refuse to pay the prices that we set for our products, our revenue and results of operations could be harmed. The traditional retailers that purchase from us have faced increased and significant competition from online retailers. If our key traditional retailers continue to reduce their level of purchases from us, our business, results of operations, and financial condition could be harmed.
Additionally, concentration and consolidation among our channel partner base may allow certain retailers and distributors to command increased leverage in negotiating prices and other terms of sale, which could adversely affect our profitability. In addition, if, as a result of increased leverage, channel partner pressures require us to reduce our pricing such that our gross margin is diminished, we could decide not to sell our products to a particular channel partner, which could result in a decrease in our revenue. Consolidation among our channel partner base may also lead to reduced demand for our products, elimination of sales opportunities, replacement of our products with those of our competitors, and
cancellations of orders, each of which could materially and adversely affect our business, results of operations, and financial condition. If consolidation among the retailers, distributors, or other channel partners who purchase our products becomes more prevalent, our business, results of operations, and financial condition could be materially and adversely affected.
In particular, the retail and connectedsmart security home markets in some countries, including the United States, are dominated by a few large retailers with many stores. These retailers have in the past increased their market share and may continue to do so in the future by expanding through acquisitions and construction of additional stores. These situations concentrate our credit risk with a relatively small number of retailers, and, if any of these retailers were to experience a shortage of liquidity, it could increase the risk that their outstanding payables to us may not be paid. In addition, increasing market share concentration among one or a few retailers in a particular country or region increases the risk that if any one of them substantially reduces its purchases of our devices, we may be unable to find a sufficient number of other retail outlets for our products to sustain the same level of sales. Any reduction in sales by our retailers could materially and adversely affect our business, results of operations, and financial condition.
We depend on large, recurring purchases from certain significant retailers, distributors, and other channel partners, and a loss, cancellation, or delay in purchases by these channel partners could negatively affect our revenue.
The loss of recurring orders from any of our more significant retailers, distributors, and other channel partners could cause our revenue and profitability to suffer. Our ability to attract new retailers, distributors, and other channel partners will depend on a variety of factors, including the cost-effectiveness, reliability, scalability, breadth, and depth of our products. In addition, a change in the mix of our retailers, distributors, and other channel partners, or a change in the mix of direct and indirect sales, could adversely affect our revenue and gross margin.
Although our financial performance may depend on large, recurring orders from certain retailers, distributors, and other channel partners, we do not generally have binding commitments from them. For example:
•our channel partner agreements generally do not require minimum purchases;
•our retailers, distributors, and other channel partners can stop purchasing and stop marketing our products at any time; and
•our channel partner agreements generally are not exclusive.
Further, our revenue may be impacted by significant one-time purchases that are not contemplatedintended to be repeatable. While such purchases are reflected in our financial statements, we do not rely on and do not forecast for continued significant one-time purchases. As a result, lack of repeatable one-time purchases will adversely affect our revenue. Additionally, we may from time to time grant our retailers, distributors, and other channel partners the exceptional right to return certain products, based on the best interests of our mutual businesses, and such returns, if material, could adversely affect our revenue and gross margin.
Because our expenses are based on our revenue forecasts, a substantial reduction or delay in sales of our products to, or unexpected returns from, channel partners, or the loss of any significant channel partners, could materially and adversely affect our business, results of operations, and financial condition. Although our largest channel partners may vary from period to period, we anticipate that our results of operations for any given period will continue to depend on large orders from a small number of channel partners.
The average selling prices of our products typically decrease rapidly over the sales cycle of the product, which may negatively affect our revenue and gross margin.
Our products typically experience price erosion, a fairly rapid reduction in the average unit selling prices over their sales cycles. In order to sell products that have a falling average unit selling price and maintain margins at the same time, we need to continually reduce product and manufacturing costs. To manage manufacturing costs, we must partner with our third-party manufacturers to engineer the most cost-effective design for our products. In addition, we must carefully manage the price paid for components used in our products, and we must also successfully manage our freight and inventory costs to reduce overall product costs. We also need to continually introduce new products with higher sales prices and gross margin in order to maintain our overall gross margin. If we are unable to manage the cost of older products or successfully introduce new products with higher gross margin, our revenue and overall gross margin would likely decline.
We have spent, and expect to continue to spend, significant amounts on advertising and other marketing campaigns, which may not be successful or cost effective.
We have spent, and expect to continue to spend, significant amounts on advertising and other marketing campaigns, such as television, print advertising, and social media, as well as increased promotional activities, to acquire new customers. For the years ended December 31, 2023 and 2022, sales and marketing expenses were $66.1 million and $70.1 million, respectively, representing approximately 13% and 14% of our revenue, respectively. While we seek to structure our advertising campaigns in the manner that we believe is most likely to encourage people to purchase our products and services, we may fail to identify advertising opportunities that satisfy our anticipated return on advertising spend as we scale our investments in marketing or to fully understand or estimate the conditions and behaviors that drive customer behavior. If any of our advertising campaigns prove less successful than anticipated in attracting customers, we may not be able to recover our advertising spend, and our revenue may fail to meet market expectations, either of which could have an adverse effect on our business. There can be no assurance that our advertising and other marketing efforts will result in increased sales of our products or services.
Introducing new products and services may be difficult and expensive. If we are unable to do so successfully, our brand may be adversely affected and we may not be able to maintain or grow our current revenue and profit levels.
To successfully evolve our product offerings of smart security devices to appeal to our consumers, we will be required to predict, understand, and react to the rapidly changing tastes of consumers and provide appealing products in a timely manner. New product models that we introduce may not be successful with consumers or our brand may fall out of favor with consumers. If we are unable to anticipate, identify, or react appropriately to changes in consumer preferences, our revenue may decrease, our brand image may suffer, our operating performance may decline, and we may not be able to execute our growth plans.
We have increased the rate of new product and service introductions, including new lines of Arlo cameras, smart lights, and doorbell products, and we may encounter difficulties that we did not anticipate during the product development stage. If we are not able to efficiently manufacture new products in quantities sufficient to support wholesale, retail, and e-commerce distribution, we may not be able to recover our investment in the development of new product and service iterations and product lines, and we would continue to be subject to the risks inherent to having a limited product line. Even if we develop and manufacture new products and services that consumers find appealing, the ultimate success of any new products or services may depend on our pricing. We may not provide the appropriate level of marketing in order to educate the market and potential consumers about our new products and services. Achieving market acceptance will require us to exert substantial product development and marketing efforts, which could result in a material increase in our research and development and sales and marketing expenses. There can be no assurance that we will have the resources necessary to undertake such efforts effectively or that such efforts will be successful or that we will dedicate our limited marketing resources to the right product lines and services. Failure to gain market acceptance for new products and services could impede our ability to maintain or grow current revenue levels, reduce profits, adversely affect the image of our brand, erode our competitive position, and result in long-term harm to our business and financial results.
If we fail to enhance our brand, our ability to expand our customer base will be impaired and our operating results may suffer.
We believe that developing and maintaining awareness of the Arlo brand is critical to achieving widespread acceptance of our existing and future products and is an important element in attracting new customers. Furthermore, we expect the importance of global brand recognition to increase as competition increases. If customers do not perceive our products to be of high quality, our brand and reputation could be harmed, which could adversely impact our financial results. In addition, brand promotion efforts may not yield significant revenue or increased revenue sufficient to offset the additional expenses incurred in building our brand. Maintaining, protecting, and enhancing our brand may require us to make substantial investments, and these investments may not be successful or we may suspend or reduce the amount of investment spent on brand promotion and awareness efforts. If we fail to successfully maintain, promote, and position our
brand and protect our reputation, or if we incur significant expenses in this effort, our business, financial condition and operating results may be adversely affected.
The reputation of our services may be damaged, and we may face significant direct or indirect costs, decreased revenue, and operating margins if our services contain significant defects or fail to perform as intended.
Our services, including our intelligent cloud and App platform and our Arlo SmartSecure services, are complex, and may not always perform as intended due to outages of our systems or defects affecting our services. Systems outages could be disruptive to our business and damage the reputation of our services and result in potential loss of revenue.
Significant defects affecting our services may be found following the introduction of new software or enhancements to existing software or in software implementations in varied information technology environments. Internal quality assurance testing and end-user testing may reveal service performance issues or desirable feature enhancements that could lead us to reallocate service development resources or postpone the release of new versions of our software. The reallocation of resources or any postponement could cause delays in the development and release of future enhancements to our currently available software, damage the reputation of our services in the marketplace, and result in potential loss of revenue. Although we attempt to resolve all errors that we believe would be considered serious by our partners and customers, the software powering our services is not error-free. Undetected errors or performance problems may be discovered in the future, and known errors that we consider minor may be considered serious by our channel partners and end-users.
System disruptions and defects in our services could result in lost revenue, delays in customer deployment, or legal claims and could be detrimental to our reputation.
Because we store, process, and use data, some of which contain personal information, we are subject to complex and evolving federal, state, and foreign laws and regulations regarding privacy, data protection, and other related matters, which are subject to change.
We are subject to a variety ofstringent and evolving U.S. and foreign laws, and regulations, in the United Statesrules, contractual obligations, policies and other countries that involve matters centralobligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; loss of customers or sales; and other adverse business consequences.
In the ordinary course of business, we process personal data about our customers, employees, and others and other sensitive information, including proprietary and confidential business data, trade secrets, intellectual property, and sensitive third-party data. Our data processing activities may subject us to numerous data privacy and security obligations, such as various laws, regulations, guidance, industry standards, external and internal privacy and security policies, contractual requirements, and other obligations relating to data privacy and security, including with respect to user privacy, rights of publicity, data protection, content, protection of minors, and consumer protection. These laws can be particularly restrictive in countries outside the United States. Both in
In the United States, federal, state, and abroad, theselocal governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), and regulations constantly evolveother similar laws (e.g., wiretapping and remain subjectrecording laws).
For example, the California Consumer Privacy Act of 2018 (“CCPA”) applies to personal information of consumers, business representatives and employees and requires businesses to provide specific disclosures in privacy notices and honor requests of California residents to exercise certain privacy rights, such as those noted below. The CCPA provides for civil penalties of up to $7,500 per violation and allows private litigants affected by certain data breaches to recover significant change.statutory damages. In addition, the applicationCalifornia Privacy Rights Act of 2020 (“CPRA”), which became operative January 1, 2023, expands the CCPA’s requirements, including by adding a new right for individuals to correct their personal information and interpretation of theseestablishing a new regulatory agency to implement and enforce the law. Other states, such as Colorado, Connecticut, Virginia and Utah, have also passed comprehensive privacy laws, and regulationssimilar laws are often unpredictablebeing considered in several other states, as well as at the federal and uncertain, particularly inlocal levels. These state laws and the new and rapidly evolving industry in which we operate. Because we store, process, and use data, some of which containCCPA provide individuals with certain rights concerning their personal information, we are subjectincluding the right to complexaccess, correct, or delete certain personal information, and evolving federal, state,opt-out of certain data processing activities, such as targeted advertising, profiling, and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations could result in investigations, claims, changes to our business practices, increased cost of operations, and declines in user growth, retention, or engagement, any of which could materially adversely affect our business, results of operations, and financial condition.
In the EU/EEA, the General Data Protection Regulation (2016/679) (“GDPR”) went into effect in 2018 and replaced Directive 95/46/EC (the EU Privacy Directive), becoming directly applicable in all European Union member states. The GDPR establishes new requirements applicable to the processing of personal data (i.e., data which identifies an
individualautomated decision-making. The exercise of these rights may impact our business and ability to provide our products and services. These developments further complicate compliance efforts, and increase legal risk and compliance costs for us, the third parties upon whom we rely. Additionally, under various privacy laws and other obligations, we may be required to obtain certain consents to process personal data. For example, some of our data processing practices have in the past and may in the future be challenged under wiretapping laws, because we obtain consumer information from third parties through various methods, including chatbot and session replay providers, or from whichvia third-party marketing pixels. These practices may be subject to increased challenges by class action plaintiffs. Our inability or failure to obtain consent for these practices could result in adverse consequences.
Outside the United States, an individual is identifiable), affords newincreasing number of laws, regulations, and industry standards may govern data protection rights to individuals (e.g.privacy and security. For example, the European Union’s General Data Protection Regulation (“EU GDPR”), the rightUnited Kingdom’s GDPR (“UK GDPR”), Australia’s Privacy Act 1988 (Privacy Act), and Canada’s Personal Information Protection and Electronic Documents Act (“PIPEDA”) and various related provincial laws, as well as Canada’s Anti-Spam Legislation (“CASL”), may apply to erasureour operations and impose strict requirements for processing personal data. For example, under the EU GDPR, companies may face temporary or definitive bans on data processing and other corrective actions; fines of up to 20 million Euros or 4% of annual global revenue, whichever is greater; or private litigation related to processing of personal data)data brought by classes of data subjects or consumer protection organizations authorized at law to represent their interests.
In the ordinary course of business, we may transfer personal data from Europe and imposes penalties for seriousother jurisdictions to the United States or other countries. Europe and other jurisdictions have enacted laws requiring data breaches. Individuals also have a right to compensation under GDPR for financialbe localized or non-financial losses. Additionally, Brexit took effect in January 2020, which will leadlimiting the transfer of personal data to further legislativeother countries. In particular, the European Economic Area (EEA) and regulatory changes. While the Data Protection Act of 2018, that “implements” and complements the GDPR achieved Royal Assent on May 23, 2018 and is now effective in the United Kingdom it is still unclear whether(UK) have significantly restricted the transfer of personal data to the United States and other countries whose privacy laws it believes are inadequate. Other jurisdictions may adopt similarly stringent interpretations of their data localization and cross-border data transfer laws. Although there are currently various mechanisms that may be used to transfer personal data from the EEA and UK to the United Kingdom will remain lawfulStates in compliance with law, such as the EEA and UK’s standard contractual clauses, the UK’s International Data Transfer Agreement / Addendum, and the EU-U.S. Data Privacy Framework and the UK extension thereto (which allows for transfers for relevant U.S.-based organizations who self-certify compliance and participate in the long term under GDPR. WithFramework), these mechanisms are subject to legal challenges, and there is no assurance that we can satisfy or rely on these measures to lawfully transfer personal data to the expiryUnited States. If there is no lawful manner for us to transfer personal data from the EEA, the UK or other jurisdictions to the United States, or if the requirements for a legally-compliant transfer are too onerous, we could face significant adverse consequences, including the interruption or degradation of our operations, the need to relocate part of or all of our business or data processing activities to other jurisdictions (such as Europe) at significant expense, increased exposure to regulatory actions, substantial fines and penalties, the inability to transfer data and work with partners, vendors and other third parties, and injunctions against our processing or transferring of personal data necessary to operate our business. Additionally, companies that transfer personal data out of the transition periodEEA and UK to other jurisdictions, particularly to the United States, are subject to increased scrutiny from regulators, individual litigants, and activist groups. Some European regulators have prevented companies from transferring personal data out of Europe for allegedly violating the GDPR’s cross-border data transfer limitations. For example, in May 2023, the Irish Data Protection Commission determined that a major social media company’s use of the standard contractual clauses to transfer personal data from Europe to the United States was insufficient and levied a 1.2 billion Euro fine against the company and prohibited the company from transferring personal data to the United States.
Our employees and personnel use generative artificial intelligence (“AI”) technologies to perform their work, and the disclosure and use of personal information in generative AI technologies are subject to various privacy laws and other privacy obligations.Governments have passed and are likely to pass additional laws regulating generative AI. Our use of this technology could result in additional compliance costs, regulatory investigations and actions, and consumer lawsuits. If we are unable to use generative AI, it could make our business less efficient and result in competitive disadvantages. We use AI and machine learning (“ML”) to assist us in making certain decisions, which are regulated by certain privacy laws. Due to inaccuracies or flaws in the inputs, outputs, or logic of the AI/ML, the model could be biased and could lead us to make decisions that could bias certain individuals (or classes of individuals), and adversely impact their rights, employment, and ability to obtain certain pricing, products, services, or benefits. We also use AI/ML technologies in our
products and services. The development and use of AI/ML present various privacy and security risks that may impact our business. AI/ML are subject to privacy and data security laws, as well as increasing regulation and scrutiny. Several jurisdictions around the globe, including Europe and certain U.S. states, have proposed or enacted laws governing AI/ML. For example, European regulators have proposed a stringent AI regulation, and we expect other jurisdictions will adopt similar laws. Additionally, certain privacy laws extend rights to consumers (such as the right to delete certain personal data) and regulate automated decision making, which may be incompatible with our use of AI/ML. These obligations may make it harder for us to conduct our business using AI/ML, lead to regulatory fines or penalties, require us to change our business practices, retrain our AI/ML, or prevent or limit our use of AI/ML. For example, the FTC has required other companies to turn over (or disgorge) valuable insights or trainings generated through the use of AI/ML where they allege the company has violated privacy and consumer protection laws. If we cannot use AI/ML or are restricted in the use of AI/ML, our business may be less efficient, or we may be at a competitive disadvantage.
We use identity verification technologies in connection with the “person detection” feature in some of our products and services that may subject us to biometric privacy laws. For example, the Illinois Biometric Information Privacy Act (“BIPA”) regulates the collection, use, safeguarding, and storage of biometric information. BIPA provides for substantial penalties and statutory damages and has generated significant class action activity, and the cost of litigating and settling past and any future claims that we have violated BIPA or similar laws could be significant. In addition to litigation, regulators, such as the Federal Trade Commission (FTC), have indicated that use of biometric technologies (including facial recognition technologies) may be subject to additional scrutiny.
In addition to data privacy and security laws, we may be contractually subject to industry standards adopted by industry groups and may become subject to such obligations in the future. For example, we may also be subject to the Payment Card Industry Data Security Standard (“PCI DSS”). The PCI DSS requires companies to adopt certain measures to ensure the security of cardholder information, including using and maintaining firewalls, adopting proper password protections for certain devices and software, and restricting data access. Noncompliance with PCI-DSS can result in penalties ranging from $5,000 to $100,000 per month by credit card companies, litigation, damage to our reputation, and revenue losses. We also rely on December 31, 2020, companies will havevendors to process payment card data, and those vendors may be subject to PCI DSS, and our business may be negatively affected if our vendors are fined or suffer other consequences as a result of PCI DSS noncompliance.
We may also be bound by contractual obligations related to data privacy and security, and our efforts to comply with such obligations may not be successful. For example, certain privacy laws, such as the GDPR and the GDPR as incorporated into United Kingdom national law, which has the abilityCCPA, require our customers to separately fine up to the greater of £17.5 million or 4% of global turnover. The relationship between the United Kingdom and the European Union in relation to certain aspects of data protection law remains unclear, for example around how data can lawfully be transferred between each jurisdiction, which exposes us to further compliance risk.impose specific contractual restrictions on their service providers. We may incur liabilities, expenses, costs,publish privacy policies, marketing materials and other operational losses under GDPRstatements, such as compliance with certain certifications or self-regulatory principles, regarding data privacy and applicable EU Member States and the United Kingdom privacy lawssecurity. If these policies, materials or statements are found to be deficient, lacking in connection with any measurestransparency, deceptive, unfair, or misrepresentative of our practices, we takemay be subject to comply with them.investigation, enforcement actions by regulators or other adverse consequences.
California also recently enacted legislation that has been dubbed the first “GDPR-like” law in the U.S. Known as the California Consumer Privacy Act (“CCPA”), it creates new individual privacy rights for consumers (as that word is broadly defined in the law) and places increasedObligations related to data privacy and security (and consumers’ data privacy expectations) are quickly changing, becoming increasingly stringent, and creating uncertainty. Additionally, these obligations on entities handlingmay be subject to differing applications and interpretations, which may be inconsistent or conflict among jurisdictions. Preparing for and complying with these obligations requires us to devote significant resources, which may necessitate changes to our services, information technologies, systems, and practices and to those of any third parties that process personal data of consumers or households. The CCPA, which went into effect on January 1, 2020, requires covered companies to provide new disclosures to California consumers, and provides such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability.
Further, California voters approved a new privacy law, the California Privacy Rights Act (“CPRA”) in the November 3, 2020 election. Effective starting on January 1, 2023, the CPRA will significantly modify the CCPA, including by expanding consumers’ rights with respect to certain sensitive personal information. The CPRA also creates a new state agency that will be vested with authority to implement and enforce the CCPA and the CPRA. New legislation proposed or enacted in various other states will continue to shape the data privacy environment nationally. Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to confidential, sensitive and personal information than federal, international or other state laws, and such laws may differ from each other, which may complicate compliance efforts.
Some observers have noted that the CCPA and CPRA could mark the beginning of a trend toward more stringent privacy legislation in the U.S., which could increase our potential liability and adversely affect our business. GDPR and CCPA will impose additional responsibility and liability in relation to our processing of personal data. GDPR, CCPA, and CPRAbehalf. In addition, these obligations may require us to change our policies and procedures and, ifbusiness model. Our business model materially depends on our ability to process personal data, so we are particularly exposed to the risks associated with the rapidly changing legal landscape. For example, we may be at heightened risk of regulatory scrutiny, and any changes in the regulatory framework could require us to fundamentally change our business model.
We may at times fail (or be perceived to have failed) in our efforts to comply with our data privacy and security obligations. We have in the past received inquiries and/or been the subject of reports regarding our data privacy and security practices and processing. Moreover, despite our efforts, our personnel or third parties on whom we rely may fail to comply with such obligations, which could negatively impact our business operations. If we or the third parties on which
we rely fail, or are perceived to have failed, to address or comply with applicable data privacy and security obligations, we could face significant consequences, including but not compliant,limited to: government enforcement actions (e.g., investigations, fines, penalties, audits, inspections, and similar); litigation (including class-action claims); additional reporting requirements and/or oversight; bans on processing personal data; orders to destroy or not use personal data; and imprisonment of company officials. Any of these events could have a material adverse effect on our reputation, business, or financial condition, including but not limited to: loss of customers; interruptions or stoppages in our business operations; inability to process personal data or to operate in certain jurisdictions; limited ability to develop or commercialize our products; expenditure of time and resources to defend any claim or inquiry; adverse publicity; or substantial changes to our business model or operations.
We are subject to financial and operating covenants in the Credit Agreement with Bank of America, N.A. and any failure to comply with such covenants, or obtain waivers in the event of non-compliance, could limit our borrowing availability under the Credit Agreement, resulting in our being unable to borrow under the Credit Agreement and materially and adversely impact our liquidity. In addition, our operations may not provide sufficient cash to meet the repayment obligations of debt incurred under the Credit Agreement.
The Credit Agreement contains provisions that limit our future borrowing availability to the lesser of (x) $40.0 million and (y) an amount equal to 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 from time to time request 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. The Credit Agreement contains other customary covenants, including certain restrictions on maintaining a minimum cash balance, achieving certain fixed charge coverage ratio for two consecutive quarters, our ability to incur additional indebtedness, consolidate or merge, enter into acquisitions, pay any dividend or distribution on our capital stock, redeem, retire or purchase shares of our capital stock, make investments or pledge or transfer assets, in each case subject to limited exceptions.
There can be no assurance that we will be able to comply with the financial and other covenants in the Credit Agreement. Our failure to comply with these covenants could cause us to be unable to borrow under the Credit Agreement and may constitute an event of default which, if not cured or waived, could result in the acceleration of the maturity of any indebtedness then outstanding under the Credit Agreement, which would require us to pay all amounts then outstanding. If we are unable to repay those amounts, the Lender could proceed against the collateral granted to them to secure that debt, which would seriously harm our business. Such an event could materially and adversely affect our financial condition and liquidity. Additionally, such events of non-compliance could impact the terms of any additional borrowings and/or any credit renewal terms. Any failure to comply with such covenants may be a disclosable event and may be perceived negatively. Such perception could adversely affect the market price for our common stock and our ability to obtain financing in the future.
Instability in geographies where we have operations and personnel or where we derive amounts of revenue could have a material adverse effect on our business, results ofcustomers, operations and financial condition.results.
Economic, civil, military and political uncertainty exists and may increase in regions where we operate and derive our revenue. Various countries in which we operate are experiencing and may continue to experience military action and civil and political unrest. We have operations in the emerging market economies of Eastern Europe, utilizing employees and contractors who perform services relating to new product releases. In late February 2022, Russian military forces launched significant military action against Ukraine. The conflict remains ongoing. The impact to Belarus, Russia and Ukraine, as well as actions taken by other countries, including new and stricter export controls and sanctions by Canada, the United Kingdom, the European Union, the U.S. and other countries and organizations against officials, individuals, regions, and industries in Russia, Belarus and Ukraine, and each country’s potential response to such sanctions, tensions and military actions, could have a material adverse effect on our product development timelines and increase our research and development expenditure. Material adverse effects from the conflict and enhanced sanctions activity has caused us to transition our operations out of Belarus to other countries. We are actively monitoring the security of our remaining employees and contractors in Eastern Europe and the stability of our infrastructure, including communications and internet availability. To date we have not experienced any material interruptions in our operations there.
Global geopolitical, economic and business conditions could materially and adversely affect our revenue and results of operations.
Our business has been, and may continue to be, affected by a number of factors that are beyond our control, such asincluding but not limited to general geopolitical, economic and business conditions, conditions in the financial markets, and changes in the overall demand for connected lifestylesmart security products. Our products and services may be considered discretionary items for our consumer and small business end-users. A severe and/or prolonged economic downturn, the ongoing conflict in Ukraine, hostilities in the Middle-East, inflation, supply chain disruptions, rising interest rates, fluctuating consumer confidence, or current financial conditions within the banking industry, including as a resultthe effects of the COVID-19 pandemic,recent failures of financial institutions, among other things, could adversely affect our customers’ financial condition and thetheir levels of business activityactivity. As a result of our customers.stimulus programs put in place over the past three years, the U.S. and many countries are currently experiencing an inflationary environment. In addition, the U.S. Federal Reserve has raised, and may again raise, interest rates in response to concerns about inflation, which in turn has negatively impacted equity values. The U.S. capital markets experienced and continue to experience extreme volatility and disruption following the Russian invasion of Ukraine, and inflationary pressures. Weakness in, and uncertainty about, global economic conditions may also cause businesses to postpone spending in response to tighter credit, rising interest rates, inflation, lower consumer confidence, negative financial news and/or general declines in income or asset values, which could have a material negative effect on the demand for our products.products and services.
In the recent past, various regions worldwide have experienced slow economic growth. In addition, current economic challenges in China including any global economic ramifications of these challenges, may continue to put negative pressure on global economic conditions. If conditions in the global economy, including in Europe, China, Australia and the United States, or other key vertical or geographic markets deteriorate, such conditions could materially and adversely
affect our business, results of operations, and financial condition. If we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, which could materially and adversely affect our business, results of operations, and financial condition. In addition, the economic problems affecting the financial markets and the uncertainty in global economic conditions resulted in a number of adverse effects, including a low level of liquidity in many financial markets, extreme volatility in credit, equity, currency, and fixed income markets, instability in the stock market, and high unemployment.
For example,In addition, the challenges faced by the European Union to stabilize some of its member state economies, such as Greece, Portugal, Spain, Hungary, and Italy, have had international implications, affecting the stability of global financial markets and hindering economies worldwide. Many member nationsstates in the European Union have been addressing the issues with controversial austerity measures. In addition, the potential consequences of the “Brexit” process in the United Kingdom have led to significant uncertainty in the region. Should the European Union monetary policy measures be
insufficient to restore confidence and stability to the financial markets, or should the United Kingdom’s “Brexit” decision lead to additional economic or political instability, the global economy, including the U.S. and European Union economies where we have a significant presence, could be hindered, which could have a material adverse effect on us.our business, results of operations, and financial condition. There could also be a number of other follow-on effects from these economic developments on our business, including the inability of customers to obtain credit to finance purchases of our products, customer insolvencies, decreased customer confidence to make purchasing decisions, decreased customer demand, and decreased customer ability to pay their trade obligations.
In addition, availability of our products from third-party manufacturers and our ability to distribute our products into non-U.S. jurisdictions may be impacted by factors such as ongoing supply chain disruptions, an increase in duties, tariffs, or other restrictions on trade; raw material shortages, work stoppages, strikes and political unrest; economic crises and international disputes or conflicts; changes in leadership and the political climate in countries from which we import products;products. Further, the imposition of and failure ofchanges in the United States to maintain normalU.S.' and other governments' duties, trade regulations, trade wars, tariffs, other restrictions or other geopolitical events, including the evolving relations between U.S. and China and evolving relations with ChinaRussia due to the current hostilities between Russia and other countries.Ukraine, create uncertainty regarding our ability to market and distribute our products into non-U.S. jurisdictions and any failure to effectively anticipate or respond to such events could materially and adversely affect our business, results of operations, and financial condition.
A portion of our global and U.S. sales are comprised of goods assembled and manufactured in our facilities in Taiwan and the People’s Republic of China, andAsia. The components for a number of our goods are sourced from suppliers in the People’s Republic of China. When tariffs, duties, or other restrictions are placed on goods imported into the United States from China or any related counter-measures are taken by China, our revenue and results of operations may be materially harmed.
On September 17, 2018, President Trump announcedIn recent years, the imposition of an additional 10%U.S. Government has imposed increases to the ad valorem duty on approximately $200 billion worthduties applicable to certain products imported from China, including increases of Chinese imports, known as List 3, pursuant to Section 301 of the Trade Act of 1974. The Office of the U.S. Trade Representative concurrently published the final list of products that are subject to the additional duty, effective September 24, 2018. On May 10, 2019, the President increased the additional dutyup to 25% ad valorem, and has since proposed a further increase of this rate to 30%, though the increase is not currently scheduled to take effect. In addition, on August 20, 2019, the President announced an additional 15% import duty on other Chinese imports, known as List 4, with the additional duties on certain items (List 4A) effective September 1, 2019, and the remainder (List 4B) effective December 15, 2019. While the additional duty on List 4A has gone into effect, the implementation of the additional duty on List 4B has been suspended in definitely. Further, as of February 14, 2020, the additional duty rate on items listed on List 4A is reduced from 15% to 7.5%.for some items. We are actively addressing the risks related to these additional and potential ad valorem duties, which have affected, or have the potential to affect, at least some of our imports from China. Although we have already taken some steps to mitigate these risks, including by moving a significant portion of our manufacturing and assembly to Vietnam and other areas in the Asia Pacific region outside of China, if these duties are imposed, the cost of our products may increase. These duties may also make our products more expensive for consumers, which may reduce consumer demand. We may need to offset the financial impact by, among other things, moving even more of our product manufacturing to other locations, modifying other business practices or raising prices. If we are not successful in offsetting the impact of any such duties, our revenue, gross margins, and operating results may be materially and adversely affected.
Our stock price may be volatile and your investment in our common stock could suffer a decline in value.
There has been significant volatility in the market price and trading volume of securities of technology and other companies, including recently in connection with the ongoing COVID-19 pandemic, which may be unrelated to the financial performance of these companies. These broad market fluctuations may negatively affect the market price of our common stock.
Some specific factors that may have a significant effect on the market price of our common stock include:
•actual or anticipated fluctuations in our results of operations or our competitors’ operating results;
•actual or anticipated changes in the growth rate of the connected lifestylesmart security market, our growth rate or our competitors’ growth rates;
•delays in the introduction of new products by us or market acceptance of these products;
•conditions in the financial markets in general or changes in general economic conditions, including due to the COVID-19 pandemic;conditions;
•changes in governmental regulation, including taxation and tariff policies;
•interest rate or currency exchange rate fluctuations;
•our ability to forecast or report accurate financial results; and
•changes in stock market analyst recommendations regarding our common stock, other comparable companies, or our industry generally.
We depend substantially on our sales channels, and our failure to maintain and expand our sales channels would result in lower sales and reduced revenue.
To maintain and grow our market share, revenue, and brand, we must maintain and expand our sales channels. Our sales channels consist primarily of traditional retailers, online retailers, and wholesale distributors, but also include service providers such as wireless carriers and telecommunications providers. We generally have no minimum purchase commitments or long-term contracts with any of these third parties.
Traditional retailers have limited shelf space and promotional budgets, and competition is intense for these resources. A competitor with more extensive product lines and stronger brand identity may have greater bargaining power with these retailers. Any reduction in available shelf space or increased competition for such shelf space would require us to increase our marketing expenditures simply to maintain current levels of retail shelf space, which would harm our operating margin. Our traditional retail customers have faced increased and significant competition from online retailers. If we cannot effectively manage our business amongst our online customers and traditional retail customers, our business would be harmed. The recent trend in the consolidation of online retailers has resulted in intensified competition for preferred product placement, such as product placement on an online retailer’s internet home page. In addition, our efforts to realign or consolidate our sales channels may cause temporary disruptions in our product sales and revenue, and these efforts may not result in the expected longer-term benefits that prompted them.
In addition, to the extent our retail and distributor channel partners supply products that compete with our own, it is possible that these channel partners may choose not to offer our products to end-users or to offer our products to end-users on less favorable terms, including with respect to product placement. If this were to occur, we may not be able to increase or maintain our sales, and our business, results of operations, and financial condition could be materially and adversely affected. For example, Amazon, one of our primary retailers, produces the Amazon Cloud Cam, which competes with our
security camera products, and also recently acquired two of our competitors, Blink and Ring. For the year ended December 31, 2020,2023, we derived 12.2%33.5% of our revenue from AmazonVerisure and its affiliates.
We must also continuously monitor and evaluate emerging sales channels. If we fail to establish a presence in an important developing sales channel, our business, results of operations, and financial condition could be materially and adversely affected.
If we do not effectively manage our sales channel inventory and product mix, we may incur costs associated with excess inventory, or lose sales from having too few products.
If we are unable to properly monitor, control, and manage our sales channel inventory and maintain an appropriate level and mix of products with our distributors and within our sales channels, we may incur increased and unexpected costs associated with this inventory. We generally allow distributors and traditional retailers to return a limited amount of our products in exchange for other products. Under our price protection policy, if we reduce the list price of a product, we are often required to issue a credit in an amount equal to the reduction for each of the products held in inventory by our wholesale distributors and retailers. If our wholesale distributors and retailers are unable to sell their inventory in a timely manner, we might lower the price of the products, or these parties may exchange the products for newer products. Also, during the transition from an existing product to a new replacement product, we must accurately predict the demand for the existing and the new product.
We determine production levels based on our forecasts of demand for our products. Actual demand for our
products depends on many factors, which makes it difficult to forecast. We have experienced differences between our actual and our forecasted demand in the past and expect differences to arise in the future. If we improperly forecast demand for our products, we could end up with too many products and be unable to sell the excess inventory in a timely manner, if at all, or, alternatively, we could end up with too few products and not be able to satisfy demand. This problem is exacerbated because we attempt to closely match inventory levels with product demand, leaving limited margin for error. If these events occur, we could incur increased expenses associated with writing off excessive or obsolete inventory, lose sales, incur penalties for late delivery, or have to ship products by air freight to meet immediate demand, thereby incurring incremental freight costs above the sea freight costs, a preferred method, and suffering a corresponding decline in gross margin.
If we are unable to secure and protect our intellectual property rights, our ability to compete could be harmed.
We rely on a combination of copyright, trademark, patent, and trade secret laws, nondisclosure agreements with employees, consultants, and suppliers, and other contractual provisions to establish, maintain, and protect our intellectual property and technology. Despite efforts to protect our intellectual property, unauthorized third parties may attempt to design around, copy aspects of our product design or obtain and use technology or other intellectual property associated with our products. Furthermore, our competitors may independently develop similar technology or design around our intellectual property. Our inability to secure and protect our intellectual property rights could materially and adversely affect our brand and business, results of operations, and financial condition.
We rely upon third parties for technology that is critical to our products, and if we are unable to continue to use this technology and future technology, our ability to develop, sell, maintain, and support technologically innovative products would be limited.
We rely on third parties to obtain non-exclusive patented hardware and software license rights in technologies that are incorporated into and necessary for the operation and functionality of most of our products. In these cases, because the intellectual property we license is available from third parties, barriers to entry into certain markets may be lower for potential or existing competitors than if we owned exclusive rights to the technology that we license and use. Moreover, if a competitor or potential competitor enters into an exclusive arrangement with any of our key third-party technology providers, or if any of these providers unilaterally decides not to do business with us for any reason, our ability to develop and sell products containing that technology would be severely limited. In addition, certain of Arlo’s firmware and the AI-
basedAI-based algorithms that we use in our Arlo SmartSecure and Arlo Total Security services incorporate open source software, the licenses for which may include customary requirements for, and restrictions on, use of the open source software.
If we are offering products or services that contain third-party technology that we subsequently lose the right to license, then we will not be able to continue to offer or support those products or services. In addition, these licenses may require royalty payments or other consideration to the third-party licensor. Our success will depend, in part, on our continued ability to access these technologies, and we do not know whether these third-party technologies will continue to be licensed to us on commercially acceptable terms, if at all. In addition, if these third-party licensors fail or experience instability, then we may be unable to continue to sell products and services that incorporate the licensed technologies, in addition to being unable to continue to maintain and support these products and services. We do require escrow arrangements with respect to certain third-party software which entitle us to certain limited rights to the source code, in the event of certain failures by the third party, in order to maintain and support such software. However, there is no guarantee that we would be able to fully understand and use the source code, as we may not have the expertise to do so. We are increasingly exposed to these risks as we continue to develop and market more products containing third-party technology and software. If we are unable to license the necessary technology, we may be forced to acquire or develop alternative technology, which could be of lower quality or performance standards. The acquisition or development of alternative technology may limit and delay our ability to offer new or competitive products and services and increase our costs of production. As a result, our business, results of operations, and financial condition could be materially and adversely affected.
We also utilize third-party software development companies and contractors to develop, customize, maintain, and support software that is incorporated into our products and services. If these companies and contractors fail to timely deliver or continuously maintain and support the software, as we require of them, we may experience delays in releasing new products and services or difficulties with supporting existing products, services, and our users.
Our sales and operations in international markets expose us to operational, financial and regulatory risks.
International sales comprise a significant amount of our overall revenue. International sales were 28.4%, 26.6%,39% and 22.6%45% of overall revenue in fiscal 2020, 2019,for the years ended December 31, 2023 and 2018,2022, respectively. We continue to be committed to growing our international sales, and while we have committed resources to expanding our international operations and sales channels, these efforts may not be successful and could be impacted by COVID-19 pandemic.successful. International operations are subject to a number of risks, including but not limited to:
•exchange rate fluctuations;
•political and economic instability, international terrorism, and anti-American sentiment, particularly in emerging markets;
•potential for violations of anti-corruption laws and regulations, such as those related to bribery and fraud;
•preference for locally branded products, and laws and business practices favoring local competition;
•potential consequences of, and uncertainty related to, the “Brexit” process in the United Kingdom, which could lead to additional expense and complexity in doing business there;
•increased difficulty in managing inventory;
•delayed revenue recognition;
•less effective protection of intellectual property;
•stringent consumer protection and product compliance regulations, including but not limited to General Data Protection Regulation in the European Union, European competition law, the Restriction of
Hazardous Substances directive, the Waste Electrical and Electronic Equipment directive and the European Ecodesign directive, that are costly to comply with and may vary from country to country;
•difficulties and costs of staffing and managing foreign operations;
•business difficulties, including potential bankruptcy or liquidation, of any of our worldwide third-party logistics providers; and
•changes in local tax and customs duty laws or changes in the enforcement, application, or interpretation of such laws.
We are also required to comply with local environmental legislation, and those who sell our products rely on this compliance in order to sell our products. If those who sell our products do not agree with our interpretations and requirements of new legislation, they may cease to order our products and our business, results of operations, and financial condition could be materially and adversely affected.
Governmental regulations of imports or exports affecting internet security could affect our revenue.
Any additional governmental regulation of imports or exports or failure to obtain required export approval of our
encryption technologies could adversely affect our international and domestic sales. The United States and various foreign governments have imposed controls, export license requirements, and restrictions on the import or export of some technologies, particularly encryption technology. In addition, from time to time, governmental agencies have proposed additional regulation of encryption technology, such as requiring the escrow and governmental recovery of private encryption keys. In response to terrorist activity, governments could enact additional regulation or restriction on the use, import, or export of encryption technology. This additional regulation of encryption technology could delay or prevent the acceptance and use of encryption products and public networks for secure communications, resulting in decreased demand for our products and services. In addition, some foreign competitors are subject to less stringent controls on exporting their encryption technologies. As a result, they may be able to compete more effectively than we can in the United States and the international internet security market.
We are involved in litigation matters in the ordinary course and may in the future become involved in additional litigation, including litigation regarding intellectual property rights, which could be costly and subject us to significant liability.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding infringement of patents, trade secrets, and other intellectual property rights. From time to time, third parties have asserted, and may continue to assert, exclusive patent, copyright, trademark, and other intellectual property rights against us, demanding license or royalty payments or seeking payment for damages, injunctive relief, and other available legal remedies through litigation. These also include third-party non-practicing entities who claim to own patents or other intellectual property that they believe cover our products. If we are unable to resolve these matters or obtain licenses on acceptable or commercially reasonable terms, we could be sued or we may be forced to initiate litigation to protect our rights. The cost of any necessary licenses and litigation related to alleged infringement could materially and adversely affect our business, results of operations, and financial condition.
In the event successful claims of infringement are brought by third parties, and we are unable to obtain licenses or independently develop alternative technology on a timely basis, we may be subject to indemnification obligations, be unable to offer competitive products, or be subject to increased expenses. If we do not resolve these claims on a favorable basis, our business, results of operations, and financial condition could be materially and adversely affected.
36We have been subject to securities class action and derivative litigation in the past, as more fully discussed under the heading “Litigation and Other Legal Matters” in Note 8, Commitments and Contingencies in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, and may in the future become involved in such litigation. In the event we are involved in such litigation, regardless of the merits or ultimate results of such litigation, this could result in substantial costs, which would hurt our financial condition and results of operations and divert management’s attention and resources from our business.
As part of growing our business, we may make acquisitions. If we fail to successfully select, execute, or integrate our acquisitions, then our business, results of operations, and financial condition could be materially and adversely affected and our stock price could decline.
From time to time, we may undertake acquisitions to add new product and service lines and technologies, acquire talent, gain new sales channels, or enter into new sales territories. Acquisitions involve numerous risks and challenges, including relating to the successful integration of the acquired business, entering into new territories or markets with which we have limited or no prior experience, establishing or maintaining business relationships with new retailers, distributors, or other channel partners, vendors, and suppliers, and potential post-closing disputes.
We cannot ensure that we will be successful in selecting, executing, and integrating acquisitions. Failure to manage and successfully integrate acquisitions could materially harm our business, financial condition, and results of operations. In addition, if stock market analysts or our stockholders do not support or believe in the value of the acquisitions that we choose to undertake, our stock price may decline.
The success of our business depends on customers’ continued and unimpeded access to our platform on the internet.
Our users must have internet access in order to use our platform. Some providers may take measures that affect their customers’ ability to use our platform, such as degrading the quality of the data packets we transmit over their lines, giving those packets lower priority, giving other packets higher priority than ours, blocking our packets entirely, or attempting to charge their customers more for using our platform.
In December 2010, the Federal Communications Commission (the “FCC”), adopted net neutrality rules barring internet providers from blocking or slowing down access to online content, protecting services like ours from such interference. Recently,In December 2017, the FCC voted in favor of repealing the net neutrality rules, and it is currently uncertain how the U.S. Congress will respond to this decision. To the extent network operators attempt to interfere with our services, extract fees from us to deliver our solution, or otherwise engage in discriminatory practices, our business, results of operations, and financial condition could be materially and adversely affected. Within such a regulatory environment, we could experience discriminatory or anti-competitive practices that could impede our domestic and international growth, cause us to incur additional expense, or otherwise materially and adversely affect our business, results of operations, and financial condition.
In addition, the enactment or application of network neutrality laws could impact our business. For example, California’s state-specific “network neutrality” law took effect in early 2021, and the FCC has proposed to re-adopt federal network neutrality rules and other states could begin to enforce existing laws or adopt new network neutrality requirements. As we are reliant on robust internet connectivity, failure to broadly require the application of network neutrality could result in discriminatory or anti-competitive practices that could impede our domestic and international growth, increased expenses, or otherwise negatively affect our business. To the extent internet service providers attempt to interfere with our services, extract fees from us in exchange for making our platform available, or otherwise engage in discriminatory practices, our business could be adversely impacted.
Changes in tax laws or exposure to additional income tax liabilities could affect our future profitability.
Factors that could materially affect our future effective tax rates include, but are not limited to:
•changes in tax laws or the regulatory environment;
•changes in the valuation allowance against deferred tax assets;
•increases in interests and penalties related to income taxes;
•changes in accounting and tax standards or practices;
•changes in the composition of operating income by tax jurisdiction; and
•changes in our operating results before taxes.
We are subject to income taxes in the United States and numerous foreign jurisdictions. Because we do not have a long history of operating as a separate company and we have significant expansion plans, our effective tax rate may fluctuate in the future. Future effective tax rates could be affected by operating losses in jurisdictions where no tax benefit
can be recognized under GAAP,U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), changes in the composition of earnings in countries with differing tax rates, changes in deferred tax assets and liabilities, or changes in tax laws.
As of December 31, 2023, our U.S. federal and state net operating loss carryforwards were approximately $70.5 million and approximately $72.4 million, respectively. These amounts have been reduced by the amount of net operating losses expected to be utilized to reduce taxable income for such year. Moreover, our U.S. federal and state research and development tax credits were approximately $9.2 million and approximately $8.7 million, respectively, with
the amount of federal credit already reduced by the expected utilization for such year. The utilization of our net operating loss and tax credit carryforwards may be subject to annual limitation due to ownership changes as provided by Sections 382 and 383 of the Code and similar state provisions. Such an annual limitation could result in the expiration of portions of our net operating loss and tax credit carryforwards before utilization. In the event that we experience ownership changes due to future transactions in our stocks, the utilization of net operating loss and tax credit carryforwards to reduce our future taxable income and tax liabilities may be limited, which could affect our profitability.
The Internal Revenue Services ("IRS") and several foreign tax authorities have increasingly focused attention on intercompany transfer pricing with respect to sales of products and services and the use of intangibles. Tax authorities could disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. If we do not prevail in any such disagreements, our profitability may be affected.
In addition, the Organization for Economic Co-operation and Development (“OECD”) haveOECD has been working on new laws on the taxation of the digital economy to provide taxing rights to jurisdictions where the customers or users are located. Some countries have enacted, and others have proposed the new laws to tax digital transactions. These developments may result in material impacts to our financial statements.
We are subject to income tax examinations by taxing authorities globally. We apply judgment in determining our provision for income taxes and other tax liabilities. While we believe our estimates are reasonably adequate, there are many transactions where the final tax determination is uncertain. If any adverse outcome from an examination determines the taxes we owe are higher than accrued or drives an increase in our effective tax rates, our results of operations could be affected.
We must comply with indirect tax laws in multiple jurisdictions, as well as complex customs duty regimes worldwide. Audits of our compliance with these rules may result in additional liabilities for taxes, duties, interest and penalties related to our international operations which would reduce our profitability.
Our operations are routinely subject to audit by tax authorities in various countries. Many countries have indirect tax systems where the sale and purchase of goods and services are subject to tax based on the transaction value. These taxes are commonly referred to as value-added tax (“VAT”) or goods and services tax (“GST”). In addition, the distribution of our products subjects us to numerous complex customs regulations, which frequently change over time. Failure to comply with these systems and regulations can result in the assessment of additional taxes, duties, interest, and penalties. While we believe we are in compliance with local laws, we cannot assure that tax and customs authorities will agree with our reporting positions and upon audit such tax and customs authorities may assess additional taxes, duties, interest, and penalties against us. Adverse action by any government agencies related to indirect tax laws could materially and adversely affect our business, results of operations and financial condition.
Additionally, some of our productsWe are subject to governmental export and import controls, economic sanctions, and anti-corruption laws regulations,that could impair our ability to compete in international markets and subject us to liability if we are not in full compliance with applicable laws.
Our business activities are subject to various restrictions under U.S. export controls and similar laws and regulations, including the Export Administration Regulations and economic sanctions administered by the Office of Foreign Assets Control. We also incorporate encryption technology into certain of our solutions. These encryption solutions and underlying technology may be exported outside of the United States only with the required export authorizations or exceptions, including by license, a license exception, appropriate classification notification requirement, and encryption authorization.
Furthermore, our activities are subject to U.S. economic sanctions laws and regulations that prohibit the shipment of certain products and services without the required export authorizations, including to countries, governments, and persons targeted by U.S. embargoes or sanctions. Additionally, the Trump administration has been critical of existing trade agreements and may impose more stringent export and import controls. Obtaining the necessary export license or other authorization for a particular sale may be time consuming, and may result in delay or loss of sales opportunities even if the export license ultimately is granted. While we take precautions to prevent our solutions from being exported in violation of these laws,
including using authorizations or exceptions for our encryption products and implementing IP address blocking and screenings against U.S. government and international lists of restricted and prohibited persons and countries, we have not been able to guarantee, and cannot guarantee, that the precautions we take will prevent all violations of export control and sanctions laws, including if purchasers of our products bring our products and services into sanctioned countries without our knowledge. Violations of U.S. sanctions or export control laws can result in significant fines or penalties and incarceration could be imposed on employees and managers for criminal violations of these laws.
Also, various countries, in addition to the United States, regulate the import and export of certain encryption and other technology, including import and export licensing requirements, and have enacted laws that could limit our ability to distribute our products and services or our end-users’ ability to utilize our solutions in their countries. Changes in our products and services or changes in import and export regulations may create delays in the introduction of our products in international markets. Furthermore, recent actions by the Trump administration announcing increased duties on products imported from China may severely impact the priceAny decreased use of our goods imported into the United States in the future, and other countries may follow suit and increase dutiessolutions or limitation on goods produced in China.
Adverse action by any government agencies relatedour ability to indirect tax lawsexport or sell our solutions could materially adversely affect our business, results of operations and financial condition.
We are also subject to various domestic and international anti-corruption laws, such as the United States Foreign Corrupt Practices Act, as well as other similar anti-bribery laws and regulations. These laws and regulations generally prohibit companies and their employees and intermediaries from authorizing, offering, providing, and accepting improper payments or benefits for improper purposes. These laws also require that we keep accurate books and records and maintain compliance procedures designed to prevent any such actions. Although we take precautions to prevent violations of these laws, our exposure for violating these laws increases as our international presence expands and as we increase sales and operations in foreign jurisdictions.
We are subject to, and must remain in compliance with, numerous laws and governmental regulations concerning the manufacturing, use, distribution, and sale of our products, as well as any such future laws and regulations. Some of our customers also require that we comply with their own unique requirements relating to these matters. Any failure to comply with such laws, regulations, and requirements, and any associated unanticipated costs, could materially and adversely affect our business, results of operations, and financial condition.
We manufacture and sell products which contain electronic components, and such components may contain materials that are subject to government regulation in both the locations where we manufacture and assemble our products, as well as the locations where we sell our products. For example, certain regulations limit the use of lead in electronic components. To our knowledge, we maintain compliance with all applicable current government regulations concerning the materials utilized in our products for all the locations in which we operate. Since we operate on a global basis, this is a complex process which requires continual monitoring of regulations and an ongoing compliance process to ensure that we and our suppliers are in compliance with all existing regulations. There are areas where new regulations have been enacted which could increase our cost of the components that we utilize or require us to expend additional resources to ensure compliance. For example, the SEC’s “conflict minerals” rules apply to our business, and we are expending resources to ensure compliance. The implementation of these requirements by government regulators and our partners and/or customers could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of certain components used in our products. In addition, the supply-chain due diligence investigation required by the conflict minerals rules will require expenditures of resources and management attention regardless of the results of the investigation. If there is an unanticipated new regulation which significantly impacts our use of various components or requires more expensive components, that regulation could materially and adversely affect our business, results of operations, and financial condition.
One area that has a large number of regulations is environmental compliance. Management of environmental pollution and climate change has produced significant legislative and regulatory efforts on a global basis, and we believe this will continue both in scope and in the number of countries participating. These changes could directly increase the cost of energy, which may have an impact on the way we manufacture products or utilize energy to produce our products. In addition, any new regulations or laws in the environmental area might increase the cost of raw materials we use in our products. Environmental regulations require us to reduce product energy usage, monitor and exclude an expanding list of restricted substances, and participate in required recovery and recycling of our products. While future changes in
regulations are certain, we are currently unable to predict how any such changes will impact us and if such impacts will be material to our business. If there is a new law or regulation that significantly increases our costs of manufacturing or causes us to significantly alter the way that we manufacture our products, this could have a material adverse effect on our business, financial condition, and results of operations.
Our selling and distribution practices are also regulated in large part by U.S. federal and state as well as foreign, antitrust and competition laws and regulations. In general, the objective of these laws is to promote and maintain free competition by prohibiting certain forms of conduct that tend to restrict production, raise prices or otherwise control the market for goods or services to the detriment of consumers of those goods and services. Potentially prohibited activities under these laws may include unilateral conduct or conduct undertaken as the result of an agreement with one or more of our suppliers, competitors, or customers. The potential for liability under these laws can be difficult to predict as it often depends on a finding that the challenged conduct resulted in harm to competition, such as higher prices, restricted supply, or a reduction in the quality or variety of products available to consumers. We utilize a number of different distribution channels to deliver our products to customers and end-users and regularly enter into agreements with resellers of our products at various levels in the distribution chain that could be subject to scrutiny under these laws in the event of private litigation or an investigation by a governmental competition authority. In addition, many of our products are sold to consumers via the internet. Many of the competition-related laws that govern these internet sales were adopted prior to the advent of the internet and, as a result, do not contemplate or address the unique issues raised by online sales. New interpretations of existing laws and regulations, whether by courts or by the state, federal, or foreign governmental
authorities charged with the enforcement of those laws and regulations, may also impact our business in ways we are currently unable to predict. Any failure on our part or on the part of our employees, agents, distributors, or other business partners to comply with the laws and regulations governing competition can result in negative publicity and diversion of management time and effort and may subject us to significant litigation liabilities and other penalties.
We are exposed to the credit risk of some of our customers and sublease counterparties and to credit exposures in certain markets, which could result in material losses.
A substantial portion of our sales are on an open credit basis, with typical payment terms of 30 to 60 days in the United States and, because of local customs or conditions, longer in some markets outside the United States. We monitor individual customer financial viability in granting such open credit arrangements, seek to limit such open credit to amounts we believe the customers can pay and maintain reserves we believe are adequate to cover exposure for doubtful accounts.
Any bankruptcies or illiquidity among our customer base or sublease counterparties could harm our business and have a material adverse effect on our financial condition and results of operations. To the degree that turmoil in the credit markets makes it more difficult for some customers or sublease counterparties to obtain financing, our customers’ or sublease counterparties' ability to pay could be adversely impacted, which in turn could materially and adversely affect our business, results of operations, and financial condition.
In June 2021, we entered into a sublease agreement, with a term that runs concurrent with the term of the head lease, for our San Jose office space in light of the COVID-19 pandemic and its impact on the changing nature of office space use by our workforce. We believe we have secured a quality subtenant with appropriate sublease terms. However, if the subtenant default on their sublease obligations with us or otherwise terminate their sublease with us, we may experience a loss of planned sublease rental income, which could result in a material charge against our operating results. If that were to happen, we may be unable to enter into a new sublease on acceptable terms or at all and even if we do, such sublease may result in our incurring liabilities and expenses in future periods or the rent payments we receive from a new subtenant being less than our rent obligations under the head lease. Under these circumstances, we would be responsible for any shortfall.
If our products are not compatible with some or all leading third-party IoT products and protocols, we could be materially and adversely affected.
A core part of our solution is the interoperability of our platform with third-party IoT products and protocols. TheWe have designed the Arlo platform to seamlessly integratesintegrate with third-party IoT products and protocols, such as Amazon Alexa, Apple HomeKit, Apple TV, Google Assistant, IFTTT, Stringify, and Samsung SmartThings. If these third parties were to alter their products, we could be adversely impacted if we fail to timely create compatible versions of our products, and such incompatibility could negatively impact the adoption of our products and solutions. A lack of interoperability may also result in significant redesign costs, and harm relations with our customers. Further, the mere announcement of an incompatibility problem relating to our products could materially and adversely affect our business, results of operations, and financial condition.
In addition, to the extent our competitors supply products that compete with our own, it is possible these competitors could design their technologies to be closed or proprietary systems that are incompatible with our products or work less effectively with our products than their own. As a result, end-users may have an incentive to purchase products that are compatible with the products and technologies of our competitors over our products.
The marketability of our products may suffer if wireless telecommunications operators do not deliver acceptable wireless services.
The success of our business depends, in part, on the capacity, affordability, reliability, and prevalence of wireless data networks provided by wireless telecommunications operators and on which our IoT hardware products and solutions operate. Growth in demand for wireless data access may be limited if, for example, wireless telecommunications operators cease or materially curtail operations, fail to offer services that customers consider valuable at acceptable prices, fail to maintain sufficient capacity to meet demand for wireless data access, delay the expansion of their wireless networks and services, fail to offer and maintain reliable wireless network services, or fail to market their services effectively.
We are exposed to adverse currency exchange rate fluctuations in jurisdictions where we transact in local currency, which could materially and adversely affect our business, results of operations, and financial condition.
Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our financial condition, results of operations, and cash flows. Although a portion of our international sales are currently invoiced in U.S. dollars, we have implemented and continue to implement
for certain countries and customers both invoicing and payment in foreign currencies. Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales primarily in Europe and Australia, as well as our global operations, and non-U.S. dollar-denominated operating expenses and certain assets and liabilities. In addition, weaknesses in foreign currencies for U.S. dollar-denominated sales could adversely affect demand for our products. Conversely, a strengthening in foreign currencies against the U.S. dollar could increase foreign currency-denominated costs. As a result, we may attempt to renegotiate pricing of existing contracts or request payment to be made in U.S. dollars. We cannot be sure that our customers would agree to renegotiate along these lines. This could result in customers eventually terminating contracts with us or in our decision to terminate certain contracts, which would adversely affect our sales.
We established a hedging program after the IPOour initial public offering (the "IPO") to hedge our exposure to fluctuations in foreign currency exchange rates as a response to the risk of changes in the value of foreign currency-denominated assets and liabilities. We may enter into foreign currency forward contracts or other instruments. We expect that such foreign currency forward contracts will reduce, but will not eliminate, the impact of currency exchange rate movements. For example, we may not execute forward contracts in all currencies in which we conduct business. In addition, we may hedge to reduce the impact of volatile exchange rates on revenue, gross profit and operating profit for limited periods of time. However, the use of these hedging activities may only offset a portion of the adverse financial effect resulting from unfavorable movements in foreign exchange rates.
Risks Related to Our Separation from NETGEAR
If the Distribution (as defined below), together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, NETGEAR, Arlo and Arlo stockholders could be subject to significant tax liabilities, and, in certain circumstances, we could be required to indemnify NETGEAR for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement.
In November 2018, NETGEAR announced that its board of directors had approved a special stock dividend (the “Distribution”) to its stockholders, consisting of 62,500,000 shares of our common stock owned by NETGEAR. In connection with the Distribution, NETGEAR received an opinion from outside tax counsel regarding qualification of the Distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. The opinion was based upon and relied on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings of NETGEAR and us, including those relating to the past and future conduct of NETGEAR and us. If any of these representations, statements or undertakings are, or become, incomplete or inaccurate, or if we or NETGEAR breach any of the respective covenants in any of the separation-related agreements (in connection with our separation from NETGEAR (the “Separation”)), the opinion of the outside tax counsel could be invalid and the conclusions reached therein could be jeopardized.
Notwithstanding the opinion of the outsideThere is a 2018 California Franchise Tax Board and a 2016-2018 Texas Franchise tax counsel, the IRS could determine on an audit that the Distribution, together with certain related transactions, should be taxable if it determines that any of the facts, assumptions, representations, statements or undertakings were incorrect or had been violated, or if it disagrees with the conclusions in the opinion. The opinion of counsel is not binding on the IRS or the courts, and we cannot assure that the IRS or a court would not assert a contrary position. NETGEAR has not requested, and does not intend to request, a ruling from the IRS with respect to the treatment of the Distribution or certain related transactionsstill ongoing for U.S. federal income tax purposes.
The consolidated U.S federal income tax return for the calendar year 2018 that we filed with NETGEAR to report the Distribution together with certain related transactions is currently under audit by the IRS. If the Distribution, together with certain related transactions, were to fail to qualify as a tax-free transaction for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, in general, NETGEAR would recognize taxable gain as if it had sold our common stock in a taxable sale for its fair market value, and NETGEAR stockholders who receive shares of our common stock in the Distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.NETGEAR.
We entered into the tax matters agreement with NETGEAR to indemnify NETGEAR for any taxes (and any related costs and other damages) resulting from the Separation and Distribution, and certain other related transactions, to
the extent such amounts were to result from (i) an acquisition after the Distribution of all or a portion of our equity securities, whether by merger or otherwise (and regardless of whether we participated in or otherwise facilitated the acquisition), (ii) other actions or failures to act by us or (iii) any of the representations or undertakings contained in any of the Separation-related agreements or in the documents relating to the opinion of counsel being incorrect or violated. Any such indemnity obligations arising under the tax matters agreement could be material.
NETGEAR has agreed to indemnify us for certain liabilities. However, we cannot assure that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that NETGEAR’s ability to satisfy its indemnification obligation will not be impaired in the future.
Pursuant to the master separation agreement entered into between us and NETGEAR and certain other agreements with NETGEAR, NETGEAR has agreed to indemnify us for certain liabilities. The master separation agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of NETGEAR’s business with NETGEAR. Under the intellectual property rights cross-license agreement entered into between us and NETGEAR, each party, in its capacity as a licensee, indemnifies the other party, in its capacity as a licensor, as well as its directors, officers, agents, successors and subsidiaries against any losses suffered by such indemnified party as a result of the indemnifying party’s practice of the intellectual property licensed to such indemnifying party under the intellectual property rights cross-license agreement. Also, under the tax matters agreement entered into between us and NETGEAR, each party is liable for, and indemnifies the other party and its subsidiaries from and against any liability for, taxes that are allocated to such party under the tax matters agreement. In addition, we have agreed in the tax matters agreement that each party will generally be responsible for any taxes and related amounts imposed on us or NETGEAR as a result of the failure of the Distribution, together with certain related transactions, to qualify as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) and certain other relevant provisions of the Code, to the extent that the failure to so qualify is attributable to actions, events or transactions relating to such party’s respective stock, assets or business, or a breach of the relevant representations or covenants made by that party in the tax matters agreement. The transition services agreement generally provides that the applicable service recipient indemnifies the applicable service
provider for liabilities that such service provider incurs arising from the provision of services other than liabilities arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement, and that the applicable service provider indemnifies the applicable service recipient for liabilities that such service recipient incurs arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement. Pursuant to the registration rights agreement, we have agreed to indemnify NETGEAR and its subsidiaries that hold registrable securities (and their directors, officers, agents and, if applicable, each other person who controls such holder under Section 15 of the Securities Act) registering shares pursuant to the registration rights agreement against certain losses, expenses and liabilities under the Securities Act, common law or otherwise. NETGEAR and its subsidiaries that hold registrable securities similarly indemnify us but such indemnification will be limited to an amount equal to the net proceeds received by such holder under the sale of registrable securities giving rise to the indemnification obligation.
However, third parties could also seek to hold us responsible for any of the liabilities that NETGEAR has agreed to retain, and we cannot assure that an indemnity from NETGEAR will be sufficient to protect us against the full amount of such liabilities, or that NETGEAR will be able to fully satisfy its indemnification obligations in the future. Even if we ultimately succeed in recovering from NETGEAR any amounts for which we are held liable, we may be temporarily required to bear these losses. Each of these risks could materially and adversely affect our business, results of operations, and financial condition.
Risks Related to Ownership of Our Common Stock
We may change our dividend policy at any time.
Although we currently intend to retain future earnings to finance the operation and expansion of our business and therefore do not anticipate paying cash dividends on our capital stock in the foreseeable future, our dividend policy may change at any time without notice to our stockholders. The declaration and amount of any future dividends to holders of our common stock will be at the discretion of our board of directors in accordance with applicable law and after taking into account various factors, including our financial condition, results of operations, current and anticipated cash needs, cash flows, impact on our effective tax rate, indebtedness, contractual obligations, legal requirements, and other factors that our board of directors deems relevant. As a result, we cannot assure you that we will pay dividends at any rate or at all.
Future sales, or the perception of future sales, of our common stock may depress the price of our common stock.
The market price of our common stock could decline significantly as a result of sales or other distributions of a large number of shares of our common stock in the market. The perception that these sales might occur could depress the market price of our common stock. These sales, or the possibility that these sales may occur, might also make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
The 11,747,250 shares of our common stock sold in the IPO are freely tradable in the public market. On December 31, 2018, NETGEAR completed the Distribution to its stockholders of the 62,500,000 shares of Arlo common stock that it owned. As of December 31, 2020,2023, we have 79,336,24295,380,281 shares of common stock outstanding.
In the future, we may issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock.
Any impairment of goodwill, other intangible assets, and long-lived assets could negatively impact our results of operations.
Under generally accepted accounting principles, we review our intangible assets and long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is
required to be tested for impairment at least annually. Factors that may be considered when determining if the carrying value of our goodwill, other intangible assets and long-lived assets may not be recoverable include a significant decline in our expected future cash flows or a sustained, significant decline in our stock price and market capitalization.
If, in any period our stock price decreases to the point where the fair value of our assets (as partially indicated by our market capitalization) is less than our book value, this could indicate a potential impairment and we may be required to record an impairment charge in that period. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from actual results. As a result, we may incur substantial impairment charges to earnings in our financial statements should an impairment of our goodwill, other intangible assets and long-lived assets be determined resulting in an adverse impact on our results of operations. If there is a decline in the Company’sour stock price based on market conditions and deterioration of the Company’sour business, the Companywe may have to record a charge to itsour earnings for the associated goodwill impairment of up to $11.0 million.
We are subject to securities class action and derivative litigation.
We are subject to various securities class action and derivative complaints, as more fully discussed in the heading under “Litigation and Other Legal Matters” in Note 11, Commitments and Contingencies, in the Notes to Consolidated Financial Statements in Part II of Item 8 of this Annual Report on Form 10-K.
Regardless of the merits or ultimate results of the above-described litigation matters, they could result in substantial costs, which would hurt the Company's financial condition and results of operations and divert management’s attention and resources from our business. At this point, however, it is too early to reasonably estimate any financial impact to the Company resulting from these litigation matters.
Your percentage ownership in Arlo may be diluted in the future.
In the future, your percentage ownership in Arlo may be diluted because of equity awards that Arlo may grant to Arlo’s directors, officers, and employees or otherwise as a result of equity issuances for acquisitions or capital market transactions. In addition, following the Distribution, Arlo and NETGEAR employees hold awards in respect of shares of our common stock as a result of the conversion of certain NETGEAR stock awards (in whole or in part) to Arlo stock awards in connection with the Distribution. Such awards have a dilutive effect on Arlo’s earnings per share, which could adversely affect the market price of Arlo common stock. From time to time, Arlo will issue additional stock-based awards to its employees under Arlo’s employee benefits plans.
In addition, Arlo’s amended and restated certificate of incorporation authorizes Arlo to issue, without the approval of Arlo’s stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over Arlo’s common stock respecting dividends and distributions, as Arlo’s board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, Arlo could grant the holders of preferred stock the right to elect some number of Arlo’s directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences that Arlo could assign to holders of preferred stock could affect the residual value of the common stock.
We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common shares less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including exemption from compliance with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We will remain an emerging growth company until the earliest of (1) December 31, 2023, (2) the last day of the fiscal year in which we have total annual revenue of at least $1.07 billion, (3) the last day of the fiscal year in which we become a large accelerated filer, which means that we have been public for at least 12 months, have filed at least one annual report and the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last day of our then most recently completed second fiscal quarter, or (4) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements including exemption from compliance with the auditor attestation requirements of Section 404 and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.
We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price may be more volatile.
Certain provisions in our amended and restated certificate of incorporation and amended and restated bylaws and of Delaware law may prevent or delay an acquisition of Arlo, which could decrease the trading price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others:
•the inability of our stockholders to call a special meeting;
•the inability of our stockholders to act without a meeting of stockholders;
•rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;
•the right of our board of directors to issue preferred stock without stockholder approval;
•the division of our board of directors into three classes of directors, with each class serving a staggered three-year term, and this classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult;
•a provision that stockholders may only remove directors with cause while the board of directors is classified; and
•the ability of our directors, and not stockholders, to fill vacancies on our board of directors.
In addition, because we have not elected to be exempt from Section 203 of the Delaware General Corporation Law (the “DGCL”), this provision could also delay or prevent a change of control that you may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation (an “interested stockholder”) shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which the person became an interested stockholder, unless (i) prior to such time, the board of directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (iii) on or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.
We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make Arlo immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent
an acquisition that our board of directors determines is not in the best interests of Arlo and its stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.
Our amended and restated certificate of incorporation contains exclusive forum provisions that may discourage lawsuits against us and our directors and officers.
Our amended and restated certificate of incorporation provides that unless the board of directors otherwise determines, the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: any derivative action or proceeding brought on behalf of Arlo, any action asserting a claim of breach of a fiduciary duty owed by any director or officer of Arlo to Arlo or Arlo’s stockholders, any action asserting a claim against Arlo or any director or officer of Arlo arising pursuant to any provision of the DGCL or Arlo’s amended and restated certificate of incorporation or bylaws, or any action asserting a claim against Arlo or any director or officer of Arlo governed by the internal affairs doctrine under Delaware law. This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation further provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated
certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. These exclusive forum provisions may limit the ability of Arlo’s stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with Arlo or Arlo’s directors or officers, which may discourage such lawsuits against Arlo and Arlo’s directors and officers. Alternatively, if a court were to find one or more of these exclusive forum provisions inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, Arlo may incur further significant additional costs associated with resolving such matters in other jurisdictions or forums, all of which could materially and adversely affect Arlo’s business, financial condition, or results of operations.
Our board of directors has the ability to issue blank check preferred stock, which may discourage or impede acquisition attempts or other transactions.
Our board of directors has the power, subject to applicable law, to issue series of preferred stock that could, depending on the terms of the series, impede the completion of a merger, tender offer or other takeover attempt. For instance, subject to applicable law, a series of preferred stock may impede a business combination by including class voting rights, which would enable the holder or holders of such series to block a proposed transaction. Our board of directors will make any determination to issue shares of preferred stock on its judgment as to our and our stockholders’ best interests. Our board of directors, in so acting, could issue shares of preferred stock having terms which could discourage an acquisition attempt or other transaction that some, or a majority, of the stockholders may believe to be in their best interests or in which stockholders would have received a premium for their stock over the then prevailing market price of the stock.
General Risks
The market price of our common stock could be volatile and is influenced by many factors, some of which are beyond our control.
The market price of our common stock could be volatile and is influenced by many factors, some of which are beyond our control, including those described above in “Risks Related to Our Business” and the following:
•the failure of securities analysts to cover our common stock or changes in financial estimates by analysts;
•the inability to meet the financial estimates of securities analysts who follow our common stock or changes in earnings estimates by analysts;
•strategic actions by us or our competitors;
•announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;
•our quarterly or annual earnings, or those of other companies in our industry;
•actual or anticipated fluctuations in our operating results and those of our competitors;
•general economic and stock market conditions;
•the public reaction to our press releases, our other public announcements and our filings with the SEC;
•risks related to our business and our industry, including those discussed above;
•changes in conditions or trends in our industry, markets or customers;
•the trading volume of our common stock;
•future sales of our common stock or other securities; and
•investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives.
In particular, the realization of any of the risks described in these “Risk Factors” could have a material adverse impact on the market price of our common stock in the future and cause the value of your investment to decline. In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low.
We incur significant costs as a result of operating as a public company, and our management devotes substantial time to complying with public company regulations.
Prior to the Separation, we historically operated our business as a segment ofAs a public company. As a standalone public company, we have additional legal, accounting, insurance, compliance, and other expenses that we had not incurred historically. We are obligated to file with the SEC annual and quarterly reports and other reports that are specified in Section 13 and other sections of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We are also required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting
requirements on a timely basis. In addition, we are and will continue to become subject to other reporting and corporate governance requirements, including certain requirements of the NYSE,New York Stock Exchange (“NYSE”), and certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”SOX Act”) and the regulations promulgated thereunder, which will impose significant compliance obligations upon us.
Sarbanes-Oxley,Section 404 of the SOX Act, as well as rules subsequently implemented by the SEC and the NYSE, have imposed increased regulation and disclosure and required enhanced corporate governance practices of public companies. We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard are likely to result in increased selling, general, and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. These changes will require a significant commitment of additional resources. We may not be successful in implementing these requirements and implementing them could materially and adversely affect our business, results of operations and financial condition. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our operating results on a timely and accurate basis could be impaired. If we do not implement such requirements in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC and the NYSE. Any such action could harm our reputation and the confidence of investors and customers in us and could materially and adversely affect our business and cause our share price to fall.
We have identified a material weakness in our internal control over financial reporting related to certain ineffective information technology general controls. Failure to achieve and maintain effective internal controlscontrol over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could materially and adversely affect our business, results of operations, financial condition, and stock price.
As a public company, we are required to document and test our internal control proceduresover financial reporting in order to satisfy the requirements of rules and regulations of the SEC regarding compliance with Section 404 of Sarbanes-Oxley (“Section 404”),the SOX Act, which will requirerequires an annual management assessmentsassessment of the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K for the year ended December 31, 2019. Upon loss of status as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”), an annual report byreporting. We are required to provide our independent registered public accounting firm that addressesfirm’s annual report addressing the effectiveness of internal control over financial reporting will be required.reporting. During the course of our testing, we may identify deficiencies which we may not be able to remediate in time to meet our deadline for compliance with Section 404.404 of the SOX Act. Testing and maintaining internal control over financial reporting can divert our management’s attention from other matters that are important to the operation of our business. We also expect the regulations under Sarbanes-OxleySection 404 of the SOX Act to increase
our legal and financial compliance costs, make it more difficult to attract and retain qualified officers and members of our board of directors, particularly to serve on our audit committee, and make some activities more difficult, time consuming, and costly. We may
As of December 31, 2023, management identified certain control deficiencies in the area of our information technology general controls (“ITGCs”) related to (i) user access controls that restrict user and privileged access to appropriate personnel; (ii) program change management controls; and (iii) certain computer operations controls that, when aggregated, arise to a material weakness. There is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis as a result of such material weakness. However, this material weakness did not result in any material misstatements in our consolidated financial statements or disclosures in any of the fiscal years ended December 31, 2023, 2022 or 2021. Management did not identify any deficiencies related to the key non-IT internal control over financial reporting as of December 31, 2023. Management has developed and is implementing a remediation plan to address the material weakness. However, we cannot provide assurance that the testing of the design and operational effectiveness of the new controls will be complete within a specific timeframe.
There is no assurance that additional material weaknesses will not occur or that we will be able to conclude on an ongoing basis thatremediate such material weaknesses in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of the SOX Act. If we have effectiveidentify any additional material weaknesses in our internal control over our financial reporting in accordanceor are unable to comply with the requirements of Section 404 of the SOX Act in a timely manner or continue to assert that our internal control over financial reporting is ineffective, or if our independent registered public accounting firm may not be able or willingcontinues to issueexpress an unqualified report onadverse opinion as to the effectiveness of our internal control over financial reporting. If we conclude that our internal control over financial reporting, is not effective, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or their effect on our operations because there is presently no precedent available by which to measure compliance adequacy. If either we are unable to conclude that we have effective internal control over our financial reporting or our independent auditors are unable to provide us with an unqualified report as required by Section 404, then investors couldmay lose confidence in the accuracy and completeness of our reported financial information, which could have a negative effect onreports and the tradingmarket price of our stock.common stock could be materially adversely affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our stock, or if our operating results do not meet their expectations, our stock price could decline.
The trading market for our common stock will be influenced by the research, reports and recommendations that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrades our stock or if our operating results do not meet their expectations, our stock price could decline.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Risk Management and Strategy
We have implemented and maintain various information security processes designed to identify, assess and manage material risks from cybersecurity threats to our critical computer networks, third party hosted services, communications systems, hardware and software, and our critical data, including intellectual property, confidential information that is proprietary, strategic or competitive in nature, and data related to our customers and employees (“Information Systems and Data”).
Our Chief Information Officer, Vice President of Cybersecurity and Information Security, Engineering, Legal, Risk Management teams, together with our third-party service providers, help identify, assess and manage our cybersecurity threats and risks, including through the use of our cybersecurity risk assessment program. In doing so, they identify and assess risks from cybersecurity threats by monitoring and evaluating our threat environment and our risk profile using various methods including, for example automated and manual tools, third party threat assessments and intelligence feeds, subscribing to reports and services that identify cybersecurity threats, analyzing reports of threats and threat actors, conducting scans of the threat environment, evaluating our and the industry’s risk profile, evaluating reported threats, coordinating with law enforcement relating to threats, performing internal and external audits, conducting threat assessments for internal and external threats, conducting vulnerability assessments to identify vulnerabilities, and conducting red/blue team testing and tabletop incident response exercises jointly with external third parties.
Depending on the environment, we implement and maintain various technical, physical, and organizational measures, processes, standards and policies designed to manage and mitigate material risks from cybersecurity threats to our Information Systems and Data, including, for example: an incident response plan and policy, incident detection and response, vulnerability management policy, disaster recovery and business continuity plans, risk assessments, implementation of security standards and certifications, encryption of data, network security controls, access controls, physical security, asset management, tracking and disposal, systems monitoring, penetration testing, dedicated cybersecurity staff, vendor risk management program, and employee training. In addition, we maintain cybersecurity insurance.
Our assessment and management of material risks from cybersecurity threats are integrated into our overall risk management processes. For example, (1) cybersecurity risk is addressed as a component of our enterprise risk management program and identified in our risk register; (2) our information security department works with management to prioritize our risk management processes and mitigate cybersecurity threats that are more likely to lead to a material impact to our business; and (3) our senior management evaluates material risks from cybersecurity threats against our overall business objectives and reports to the Board of Directors, which evaluates our overall enterprise risk.
We use third-party service providers to assist us from time to time to identify, assess, and manage material risks from cybersecurity threats, including, for example, professional services firms (e.g., legal counsel), threat intelligence service providers, cybersecurity consultants, cybersecurity software providers, managed cybersecurity service providers, penetration testing and dark web monitoring services.
We use third-party service providers to perform a variety of functions throughout our business, such as application providers and hosting companies. We have a vendor management program to manage cybersecurity risks associated with our use of these providers. The program includes a risk assessment for each vendor, a security questionnaire, a review of the vendor’s written security program, a review of security assessments and reports, audits, vulnerability scans related to the vendor, and security assessment calls with the vendor's security personnel. Depending on the nature of the services provided, the sensitivity of the Information Systems and Data at issue, and the identity of the provider, our vendor
management process may involve different levels of assessment designed to help identify cybersecurity risks associated with a provider and impose contractual obligations related to cybersecurity on the provider. For a description of the risks from cybersecurity threats that may materially affect us and how they may do so, see our risk factors under Part 1, Item 1A Risk Factors in this Annual Report on Form 10-K.
Governance
Our Cybersecurity and Privacy Committee, at the direction and on behalf of the Board of Directors, addresses our cybersecurity risk management as part of its general oversight function. Our cybersecurity risk assessment and management processes are implemented and maintained by certain members of management, including our Chief Information Officer and Senior Vice President, who has 35 years of Application/Systems experience and our Vice President of Cybersecurity, who has 20 years of Cyber/Network experience.
The Chief Information Officer is responsible for hiring appropriate personnel, helping to integrate cybersecurity risk considerations into our overall risk management strategy, and communicating key priorities to relevant personnel. The Chief Information Officer and the Director of Privacy are also responsible for approving budgets, helping prepare for cybersecurity incidents, approving cybersecurity processes, and reviewing security assessments and other security-related reports. Additionally, the Cybersecurity and Privacy Committee reviews and has oversight over these functions.
Our cybersecurity incident response and vulnerability management processes are designed to escalate certain cybersecurity incidents to members of management depending on the circumstances, including our Information Security department. Our Chief Information Officer and Vice President of Cybersecurity work with our incident response team to help us mitigate and remediate cybersecurity incidents of which they are notified. In addition, our incident response vulnerability management processes include reporting to the Cybersecurity and Privacy Committee for certain cybersecurity incidents.
The Cybersecurity and Privacy Committee receives quarterly reports from the Chief Information Officer concerning our significant cybersecurity threats and risk and the processes we have implemented to address them. The Cybersecurity and Privacy Committee also receives various reports, summaries or presentations related to cybersecurity threats, risk and mitigation.
Item 2. Properties
We are a global company with dual corporate headquarters located in San Jose,Carlsbad, California, and Carlsbad, California. Effective June 2018,where we entered intooccupy approximately 43,500 square feet of office space pursuant to a lease agreement for our San Jose corporate headquarters forthat expires in November 2024. We also lease approximately 77,800 square feet of office space whichin San Jose pursuant to a lease agreement that expires in June 2029. Effective December 1, 2018,In June 2021, we entered into a sublease agreement, with a term that runs concurrent with the term of the head lease, for Carlsbad headquarters for approximately 63,500 square feetour San Jose office space in light of the COVID-19 pandemic and its impact on the changing nature of office space which expires in November 2024. Until December 31, 2018, we shared office space with NETGEAR in NETGEAR’s San Jose and Carlsbad headquarters and paid NETGEAR a fee in connection with such use.use by our workforce.
OurDuring fiscal year 2023, our international headquarters occupy approximately 5,000 square feetresearch and development personnel used leased facilities in an office complexRichmond (Canada), Cork (Ireland), and Taipei (Taiwan), international general and administration personnel in Cork Ireland, under a lease that expires(Ireland), and international operations personnel in December 2026. During fiscal 2020,Taipei (Taiwan). We also maintain our internationalCalifornia-based marketing and research and development facilities in Milpitas, Irvine, and Carlsbad in the United States. Our sales personnel arewere based out of local sales offices or a home officesoffice in Australia and Canada. Our operations personnel use leased facilities in Hong Kong. We maintain our marketing and research and development facilities in San JoseFlorida (the United States), Irvine (the United States), Carlsbad (the United States), Richmond (Canada) and Taipei (Taiwan). In addition, we use third parties to provide warehousing services to us, consisting of facilities in Southern California, Texas, Tennessee, Mexico, Hong Kong, and Hong Kong.
We believe that the facilities described above are suitable and adequate for our present purposes and that the productive capacity in our facilities is substantially being utilized or we have plans to utilize it. Beginning in March 2020, our employees across all geographic regions have shifted to working from home due to the COVID-19 pandemic. Our focus remains on promoting employee health and safety as we carefully evaluate reopening plans and timelines. As of December 31, 2020, we have not terminated any significant lease arrangements. We believe our facilities are adequate for the conduct of our business should we decide to reopen our facilities in the next twelve months.Australia.
Item 3. Legal Proceedings
The information set forthWe are subject to legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. Our material legal proceedings are described under the heading “Litigation and Other Legal Matters” in Note 11,8, Commitments and Contingencies, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, is incorporated herein by reference.10-K. For additional discussion of certain risks associated with legal proceedings, see Item 1A, Risk Factors.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “ARLO”.
Holders of Common Stock
On February 19, 2021, we had 823, 2024, there were nine stockholders of record, one of which was Cede & Co., a nominee for Depository Trust Company (“DTC”). All of the shares of our common stock.stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC and are therefore considered to be held of record by Cede & Co. as one stockholder. The number of record holders is based upon the actual number of holders registered on our books at such date and does not include holders of shares held by brokers in “street names” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.companies, and we are unable to estimate the total number of stockholders represented by these record holders.
Dividends
We have not historically declared or paid cash dividends on our common stock. We do not anticipate paying cash dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
See Item 12 of Part III of this Annual Report on Form 10-K regarding information about securities authorized for issuance under our equity compensation plans.
Recent Sales of Unregistered Securities and Issuer Purchases of Equity Securities by the Issuer
For the year ended December 31, 2020, we did not sell any unregistered securities.None.
Stock Performance Graph
Notwithstanding any statement to the contrary in any of our previous or future filings with the SEC, the following information relating to the price performance of our common stock shall not be deemed “filed” with the SEC or “soliciting material” under the Exchange Act and shall not be incorporated by reference into any such filings.
The following graph shows a comparison from August 3, 2018December 31, 2019 through December 31, 20202023 of cumulative total return for our common stock, the NYSE Composite Index, the Standard and Poor’s 600 Information Technology Index, (“S&P 600 Information Technology Index”) and, the Standard and Poor’s Small Cap 600 Index (“S&P Small Cap 600 Index”). The measurement points in the graph below are August 3, 2018 (the first trading day of our common stock on the NYSE) and the last trading day of each fiscal quarter through the fiscal year ended December 31, 2020.Russell 2000 Index. The graph assumes that $100 was invested in Arlo common stock at the closing price of $22.10$4.21 on August 3, 2018December 31, 2019 and in the NYSE Composite Index, the S&P 600 Information Technology Index, and the S&P Small Cap 600 Index and the Russell 2000 Index on August 3, 2018,December 31, 2019, and assumes reinvestment of any dividends. We have never paid dividends on our common stock and have no present plans to do so. The stock price performance shown in the following graph is not intended to forecast or be indicative of possible future stock price performance.
Item 6. [Reserved]
Item 6. Selected Financial Data
The following selected consolidated financial data are qualified in their entirety, and should be read in conjunction with the consolidated financial statements and related notes thereto, and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this Annual Report on Form 10-K.
The consolidated statements of operations data for each of the years ended December 31, 2020, 2019, and 2018 and the consolidated balance sheets data as of December 31, 2020 and 2019 are derived from our audited consolidated financial statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10‑K. The consolidated statements of income data for the years ended December 31, 2017 and 2016 and the consolidated balance sheets data as of December 31, 2018, 2017 and 2016 are derived from our audited consolidated financial statements, except as otherwise noted, that are not included in this Annual Report on Form 10-K. Historical results are not necessarily indicative of results to be expected for future periods.
The full years of 2016 and 2017 and first quarter and second quarter of 2018, are based on carve-out financials and reflect the transactions which are directly attributable to Arlo and certain allocated costs, whereas third quarter and fourth quarter of 2018 and fiscal years of 2019 and 2020 are based on our actual results for the periods as a standalone public company.
Consolidated Statements of Operations Data
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| (In thousands, except per share data) |
Revenue (1) | $ | 357,154 | | | $ | 370,007 | | | $ | 464,918 | | | $ | 370,658 | | | $ | 184,604 | |
Cost of revenue (2) | 301,765 | | | 334,203 | | | 372,843 | | | 279,424 | | | 146,570 | |
| Gross profit | 55,389 | | | 35,804 | | | 92,075 | | | 91,234 | | | 38,034 | |
| Operating expenses: | | | | | | | | | |
Research and development (2) | 60,137 | | | 69,384 | | | 58,794 | | | 34,683 | | | 24,438 | |
Sales and marketing (2) | 49,064 | | | 56,985 | | | 52,593 | | | 34,340 | | | 18,455 | |
General and administrative (2) | 51,096 | | | 47,624 | | | 28,209 | | | 15,096 | | | 8,289 | |
| Separation expense | 248 | | | 1,913 | | | 27,252 | | | 1,384 | | | — | |
Gain on sale of business (3) | (292) | | | (54,881) | | | — | | | — | | | — | |
| Total operating expenses | 160,253 | | | 121,025 | | | 166,848 | | | 85,503 | | | 51,182 | |
| Income (loss) from operations | (104,864) | | | (85,221) | | | (74,773) | | | 5,731 | | | (13,148) | |
| Interest income | 802 | | | 2,737 | | | 1,239 | | | — | | | — | |
| Other income (expense), net | 3,436 | | | 913 | | | (1,177) | | | 1,946 | | | (512) | |
| Income (loss) before income taxes | (100,626) | | | (81,571) | | | (74,711) | | | 7,677 | | | (13,660) | |
| Provision for income taxes | 625 | | | 4,380 | | | 772 | | | 1,128 | | | 83 | |
| Net income (loss) | $ | (101,251) | | | $ | (85,951) | | | $ | (75,483) | | | $ | 6,549 | | | $ | (13,743) | |
| Net income (loss) per share: | | | | | | | | | |
Basic (4) | $ | (1.30) | | | $ | (1.14) | | | $ | (1.12) | | | $ | 0.11 | | | $ | (0.22) | |
Diluted (4) | $ | (1.30) | | | $ | (1.14) | | | $ | (1.12) | | | $ | 0.11 | | | $ | (0.22) | |
_________________________
(1) On January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606) (“ASC 606”) and applied this guidance to those contracts which were not completed at the date of adoption using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods (“ASC 605”). The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of Net parent investment.
(2) Stock-based compensation expense was allocated as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Total | | Total | | Direct | | Indirect | | Total | | Direct | | Indirect | | Total | | Direct | | Indirect | | Total |
| | | (In thousands) |
| Cost of revenue | $ | 2,961 | | | $ | 2,013 | | | $ | 608 | | | $ | 583 | | | $ | 1,191 | | | $ | 102 | | | $ | 599 | | | $ | 701 | | | $ | 61 | | | $ | 266 | | | $ | 327 | |
| Research and development | 9,055 | | | 6,868 | | | 3,078 | | | 396 | | | 3,474 | | | 1,959 | | | 455 | | | 2,414 | | | 1,349 | | | 195 | | | 1,544 | |
| Sales and marketing | 4,106 | | | 3,859 | | | 1,992 | | | 969 | | | 2,961 | | | 390 | | | 866 | | | 1,256 | | | 110 | | | 407 | | | 517 | |
| General and administrative | 19,125 | | | 10,154 | | | 3,153 | | | 2,100 | | | 5,253 | | | — | | | 2,547 | | | 2,547 | | | — | | | 1,216 | | | 1,216 | |
| Total | $ | 35,247 | | | $ | 22,894 | | | $ | 8,831 | | | $ | 4,048 | | | $ | 12,879 | | | $ | 2,451 | | | $ | 4,467 | | | $ | 6,918 | | | $ | 1,520 | | | $ | 2,084 | | | $ | 3,604 | |
(3) Relates to the sale of our commercial operations in Europe in the fourth quarter of 2019. Refer to Note 4, Disposal of Business, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for a complete discussion of this disposal.
(4) Information regarding calculation of per share data is described in Note 14, Net Income (Loss) Per Share, in Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.
Consolidated Balance Sheets Data:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| (In thousands) |
Cash, cash equivalents and short-term investments (1) | $ | 206,124 | | | $ | 256,670 | | | $ | 201,027 | | | $ | 108 | | | $ | 220 | |
| Working capital | $ | 119,202 | | | $ | 175,668 | | | $ | 233,484 | | | $ | 112,878 | | | $ | 54,967 | |
Total assets (2) | $ | 413,968 | | | $ | 542,712 | | | $ | 595,946 | | | $ | 269,820 | | | $ | 158,581 | |
| Deferred revenue (current and non-current) | $ | 69,705 | | | $ | 66,098 | | | $ | 49,991 | | | $ | 47,404 | | | $ | 23,393 | |
Non-current operating lease liabilities (2) | $ | 25,029 | | | $ | 29,001 | | | $ | — | | | $ | — | | | $ | — | |
Non-current financing lease obligation (3) | $ | — | | | $ | — | | | $ | 19,978 | | | $ | — | | | $ | — | |
| Total liabilities | $ | 280,201 | | | $ | 339,336 | | | $ | 326,444 | | | $ | 144,401 | | | $ | 85,407 | |
| Stockholders’ equity | $ | 133,767 | | | $ | 203,376 | | | $ | 269,502 | | | $ | 125,419 | | | $ | 73,174 | |
_________________________
(1) In fiscal year 2018, reflects $70.9 million in cash contributed by NETGEAR prior to the completion of the IPO in 2018, and the net proceeds of $173.4 million raised from the IPO, net of the portion of the offering cost paid by Arlo, which portion was $1.4 million. Our total offering cost is $4.6 million, of which $3.2 million was paid by NETGEAR. In fiscal year 2019, reflects $75.2 million from Verisure related to sale of the Company's commercial operations in Europe, an advance payment for product purchases, and NRE services under the Supply Agreement.
(2) On January 1, 2019, the Company adopted ASU 2016-12, "Leases" (Topic 842) and applied this guidance utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of the first fiscal quarter of 2019. Refer to Note 11, Commitments and Contingencies in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for further information about our leases.
(3) The Company was deemed to be the accounting owner of its build-to-suit lease arrangement for its San Jose corporate headquarters and the construction was in progress at adoption date. As such, the Company reevaluated its build-to-suit lease arrangement under ASU 2016-02 to ascertain whether it meets the criteria as the accounting owner of the build-to-suit lease arrangement through control of the underlying leased asset. The Company concluded that it did not have control over the underlying leased asset. As a result, the Company de-recognized the build to suit asset and liability as of January 1, 2019.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with the"Note about Forward-Looking Statements", Part I, Item 1A "Risk Factors," and our audited consolidated financial statements and the accompanying notes to the financial statements included elsewhere inunder Item 8 of this Annual Report on Form 10-K.
This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under “Risk Factors” in Part I, Item 1A above.
Business and Executive Overview
Arlo combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that is transforming the wayways in which people experience the connected lifestyle.can protect everything that matters to them with advanced home, business, and personal security services that combine a globally scaled cloud platform, advanced monitoring and analytics capabilities, and award-winning app-controlled devices to create a personalized security ecosystem. Arlo’s deep expertise in product design,cloud services, cutting-edge AI and computer vision analytics, wireless connectivity cloud infrastructure and cutting-edge AI capabilities focuses on delivering aintuitive user experience design delivers seamless, smart home experiencesecurity for Arlo users that is easy to setup and interactengage with every day. Our highly secure, 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. connection – all rooted in a commitment to safeguard privacy for our users and their personal data.
Since the launch of our first product in December 2014, we have shipped over 19.232.2 million smart connected devices, and assecurity devices. As of December 31, 2020, our smart2023, the Arlo platform had approximately 5.08.7 million cumulative registered accounts across more than 100 countries around the world.world coupled with 2.8 million cumulative paid subscribers and annual recurring revenue of $210.1 million.
We conduct business across three geographic regions-theregions—(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'sArlo’s direct to consumer store and paid subscription services. International revenue was 28.4%, 26.6% and 22.6% of our revenue for the years ended December 31, 2020, 2019 and 2018, respectively.
For the years ended December 31, 2020, 20192023 and 2018,2022, we generated total revenue of $357.2 million, $370.0$491.2 million and $464.9$490.4 million, respectively. Loss from operations was $104.9$24.9 million $85.2 million, $74.8and $56.9 million for the years ended December 31, 2020, 20192023 and 2018, respectively. Income (loss) from operations for the years ended December 31, 2020, 2019 and 2018 included separation expense of $0.2 million, $1.9 million and $27.3 million, respectively. Income (loss) from operations for the years ended December 31, 2020 and 2019 included gain on sale of business of $0.3 million and $54.9 million,2022, respectively.
Our goal is to continue to develop innovative, world-class connected lifestylesmart security solutions to expand and further monetize our current and future user and subscriberpaid account bases. We believe that the growth of our business is dependent on many factors, including our ability to innovate and launch successful new products on a timely basis and grow our installed base, to increase subscription-based recurring revenue, to invest in brand awareness and channel partnerships and to continue our global expansion. We expect to maintainincrease our investment in research and development going forward as we continue to introduce new and innovative products and services to enhance the Arlo platform.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.
Key Business Metrics
In addition to the measures presented in our consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions. In 2019, management’s incentive compensation was partially determined using certain of these key business metrics. 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended As of and for the Year Ended December 31, |
| 2020 | | % Change | | 2019 | | % Change | | 2018 |
| (In thousands, except percentage data) |
| Cumulative registered accounts | 5,047 | | | 25.7 | % | | 4,015 | | | 40.9 | % | | 2,850 | |
| Cumulative paid accounts | 435 | | | 89.1 | % | | 230 | | | 59.7 | % | | 144 | |
| | | | | | | | | | | | | | | | | |
| As of and for the Year Ended December 31, |
| 2023 | | % Change | | 2022 |
| (In thousands, except percentage data) |
| Cumulative registered accounts | 8,652 | | | 19.8 | % | | 7,220 | |
Cumulative paid accounts (1) | 2,813 | | | 51.1 | % | | 1,862 | |
| Annual recurring revenue | $ | 210,078 | | | 52.5 | % | | $ | 137,764 | |
_________________________
(1) The number of cumulative paid accounts as of December 31, 2023 included paid accounts managed by Verisure in our EMEA region which are 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 particular period. The number of registered accounts does not necessarily reflect the number of end-users on the Arlo platform as one registered account may be used by multiple people. We changed our definition from registered usersend-users to registered accounts starting inmonitor the fourth quarter of 2019 duedevices attached to the Verisure transaction. Verisure will own the registered accounts but we will continue to provide services to these European customers under the Verisure Agreements.that household.
Cumulative Paid Accounts.Accounts. Paid accounts worldwide measuredare defined as any account worldwide where a subscription to a paid service is being collected (either by the Companyus or by the Company’sour customers or channel partners), plus paid service plans of a duration of more than 3 months bundled with products (such bundles being counted as a paid account after 90 days have elapsed from the date of registration). In the fourth quarter of 2019, we redefined paid subscribers as paid accounts to include customers that were transferred to Verisure as part of the disposal of our commercial operations in Europe because we will continue to provide services to these European customers and receive payments associated with them, under the Verisure Agreements.
Impact of COVID-19
On March 11, 2020, the World Health Organization announced that COVID-19, a respiratory illness, caused by a novel coronavirus, is a pandemic. COVID-19 has spread to many of the countries in which we, our customers, our suppliers and our other business partners, conduct business. Governments in affected regions have implemented, and may continue to implement, safety precautions which include quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary. Many organizations and individuals, including the Company and its employees are taking additional steps to avoid or reduce infection, including limiting travel and staying home from work. These measures are disrupting normal business operations both in and outside of affected areas and have had significant negative impacts on businesses and financial markets worldwide. We anticipate that our financial results could be adversely impacted due to:
•temporary closure or decrease in foot traffic to our major customers' retail stores and shift of focus to essential goods distribution;
•disruption to our supply chain caused by delayed delivery of components from our third-party manufacturers and other suppliers located in regions affected by COVID-19;Verisure).
•Annual Recurring Revenue (“ARR”)deferment. We believe ARR enables measurement of customer spending dueour business initiatives, and serves as an indicator of our future growth. ARR represents the amount of paid service revenue that we expect to economic uncertainty;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.
•decreased productivity due to travel bans, work-from-home policies or shelter in place orders; and
•a slow-down in the global economy or a credit crisis.
The onset of the COVID-19 pandemic started to affect our product shipments in the second quarter of 2020 due to our major customers' retail stores facing temporary closures and decreases in foot traffic, certain of our customers shifting focus to essential goods distribution, and other uncertainties caused by the pandemic. The decline in product shipments continued throughout the fourth quarter of 2020. As of December 31, 2020, Americas retail channel inventory
declined compared to December 31, 2019 due to lower inventory holding by our Retail Channel customers during the pandemic. This has contributed to a 6.8% decline in net revenue in the Americas, compared to the prior year. In addition, international freight capacity has dropped, causing airImpact of Global Geopolitical, Economic and ocean freight rates to materially increase. Furthermore, transit times have also increased. ForBusiness Conditions
During the year ended December 31, 2020,2023, we saw a 56% increase in freight-in expense compared to the prior year, as a result of the higher sea and airfreight rates.
While this is expected to be temporary, the current circumstances are dynamic and the future impacts of COVID-19 on our business operations, including their duration and impact on overall customer demand, cannot be reasonably estimated at this time. Our priorities and actions during the COVID-19 pandemic areremained focused on protecting the health and safety of all those we serve, our employees, our customers, our suppliers and our communities, including implementing early and continuous updates to our health and safety policies and processes. We have successfully migrated all but a limited number of our global workforce to work remotely while local and state governments have imposed shelter-in-place ordersongoing conflict in Ukraine, hostilities in the United States and around the world. We are focused on providing our team with the resources that they need to meet the needs of our customers and deliver new innovations to the markets we serve, despite challenges introduced by the COVID-19 pandemic. We continue to work with our suppliers to address anyMiddle-East, supply chain disruptions, which might include larger component backlogs, travel restrictionsthe inflationary macro environment, fluctuating consumer confidence and logistics changes that can impact our operations. For example, increased demand for electronics as a result of the COVID-19 pandemic, effects of the U.S. trade war with China, increased demand for chips in the automotive industry and certain other factors have led to a global shortage of semiconductors. Due to such shortage, starting in the fourth quarter of 2020 we started to experience component shortages, including longer lead times for components, and supply constraints, which we expect to continue into 2021. Such shortages and constraints are affecting our ability to meet scheduled product deliveries and worldwide demand for our products in the first quarter of 2021 and potentially beyond. As a result, we could experience material charges from potential adjustments of the carrying value of our inventories and trade receivables, impairment charges on our long-lived assets, intangible assets and goodwill, and changes in the effectiveness of the Company’s hedging instruments, among others. We also anticipate that COVID-19 could continue to reduce our revenues and increase product and service costs and operating expenses for fiscal year 2021.
We are focused on navigating these recent challenges presentedrising interest rates by COVID-19 through preserving our liquidity and managing our cash flow throughby 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'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 deferment of hiring.subleasing or reducing excess office space. We continue to monitor this rapidly developingthe situation and may, as necessary, reduce expenditures further, borrow under our revolving credit facility, or pursue other sources of capital that may include other forms of external financing in order to maintain our cash position and preserve financial flexibility in response to the uncertainty in the United States and global markets resulting from the COVID-19 pandemic.ongoing conflict in Ukraine, hostilities in the Middle-East, supply chain disruptions, the inflationary macro environment, fluctuating consumer confidence and rising interest rates, current financial conditions within the banking industry, including the effects of recent failures of other financial institutions, and liquidity levels.
Comparability of Historical Results
Through July 1, 2018, the operating results of Arlo had historically been disclosed as a reportable segment within the consolidated financial statements of NETGEAR, enabling the identification of directly attributable transactional information, functional departments, and headcount. Revenue and Cost of revenue, with the exception of channel sales incentives, were derived from transactional information specific to Arlo products and services. Directly attributable operating expenses were derived from activities relating to Arlo functional departments and headcount. Arlo employees also historically participated in NETGEAR’s stock-based incentive plans, in the form of restricted stock units (“RSUs”), stock options, and purchase rights issued pursuant to NETGEAR’s employee stock purchase plan. Stock-based compensation expense has been either directly reported by or allocated to Arlo based on the awards and terms previously granted to NETGEAR’s employees.
The consolidated statements of operations of the Company as presented for the year ended 2018 reflect the directly attributable transactional information specific to Arlo and certain additional allocated costs through July 1, 2018. The allocated costs for corporate functions included, but were not limited to, allocations of general corporate expenses
from NETGEAR including expenses related to corporate services, such as executive management, information technology, legal, finance and accounting, human resources, tax, treasury, research and development, sales and marketing, shared facilities and other shared services. These costs were allocated based on revenue, headcount, or other measures the Company has determined as reasonable. Following July 1, 2018, the consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
The amount of these allocations from NETGEAR reflected within operating expenses in the consolidated statements of operations was $30.6 million from January 1, 2018 to the date of the completion of the IPO, which included $9.4 million for research and development, $10.0 million for sales and marketing, and $11.2 million for general and administrative expense.
The management of Arlo believes the assumptions underlying the consolidated financial statements, including the assumptions regarding the allocated expenses, reasonably reflect the utilization of services provided, or the benefit received by Arlo during the periods presented. Nevertheless, the consolidated financial statements may not be indicative of Arlo’s future performance and do not necessarily reflect Arlo’s results of operations, financial position, and cash flows had Arlo been a standalone company during the period presented.
Components of Our Operating Results of Operations
Revenue
Our gross revenue consists primarily of sales of devices, prepaid and paid subscription service revenue and NRE service revenue from Verisure.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. Our First generation camera products under our old business model come with a prepaid service that provides users with rolling seven-day cloud video storage, the ability to connect up to five cameras and 90 days of customer support. Our second generation camera, doorbell and floodlight products under our new business model come with a prepaid service that includes a one-year free trial period of Arlo Smart bundled with our Arlo Ultra products launched in early 2019, and a three-month free trial period of Arlo Smart bundled with our products launched after September 2019. Upon device shipment, we attribute a portion of the sales price to the prepaid service, deferring this revenue at the outset and subsequently recognizing it ratably over the estimated useful life of the device or free trial period, as applicable. Our paid subscription services relate to sales of subscription plans to our registered accounts. Our services also include certain development services provided to Verisure under a NRE arrangement as part of the disposal of our commercial operations in Europe in the fourth quarter of 2019. Refer to Note 4, Disposal of Business, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for a complete discussion of the NRE arrangement.
Our revenue consists of gross revenue, less end-user customer rebates and other channel sales incentives, deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, allowances for estimated sales returns, price protection, and net changes in deferred revenue. A significant portion of our marketing expenditure is with customers and is deemed to be a reduction of revenue under authoritative guidance for revenue recognition.
Under the Supply Agreement, Verisure became the exclusive distributor of our products in Europe for all channels, and will non-exclusively distribute our products through its direct channels globally. We expect that our revenue and profitability in Europe will improve over the lifetime of the Supply Agreement. Refer to Note 4, Disposal of Business, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for a complete discussion of the Supply Agreement.
Cost of Revenue
Cost of revenue consists of both product costs and costs of service.service costs. Product costs primarily consist of:of the cost of finished products from our third-party manufacturers;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; and amortization expense of certain acquired intangibles. Cost of service consists parties. Service costs consist of costs attributable to the provision and maintenance of our cloud-based platform, including personnel, storage, security and computing, as well as NRE service costs incurred under the Verisure NRE arrangement.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:limitation product mix, sales channel mix, registered accounts'accounts’ acceptance of paid subscription service offerings, fluctuation in foreign exchange rates and changes in our cost of goods sold due to fluctuations in prices paid for components, net of vendor rebates, cloud platform costs, warranty and overhead costs, inbound freight and duty product conversion costs, and charges for excess or obsolete inventory, and amortization of acquired intangibles.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 servicesservice costs and gross margin.margin and allows us to adapt to changing market dynamics and supply chain constraints.
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. WeGenerally, we recognize research and development expenseexpenses as it isthey 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. We expect research and development expense to stay relatively flat in absolute dollars for fiscal 2021 as we manage our expenses while continuing to develop new product and service offerings to support the connected lifestyle market.
Sales and Marketing
Sales and marketing expense consists primarily of personnel expense for sales and marketing staff;staff, technical support expense; advertising;expense, advertising, trade shows;shows, media and placement, corporate communications and other marketing expense;expense, product marketing expense;expense, IT and facilities overhead; andoverhead, outbound freight costs.costs, and credit card processing fees. We expect our sales and marketing expense to fluctuate forincrease in the foreseeable future based on the seasonality of our business, the growth of our direct to consumer store, and the extent to whichas we invest in marketing to drive awareness of our brand and drive demand for our products.products and 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 stay relatively flat in absolute dollars. However, we also 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.
Separation ExpenseImpairment Charges
SeparationDuring the second quarter of 2021, we reviewed certain of our right-of-use assets and other lease-related assets for impairment in conjunction with our decision to sublease our office space in San Jose, California. As a result, we recorded an impairment charge for the right-of-use asset and other lease-related assets included in the San Jose office asset group.
Others
Others include separation expense, which consists primarily of costs associated with our separation from NETGEAR, including third-party advisory, consulting,of legal and professional services for separation matters including IPO-related litigation, IT-related expenses directly related to our separation from NETGEAR,and restructuring charges, which consist of severance costs, office exit expense, and other items that are incrementalexit expense associated with the abandonment of certain lease contracts and one-time in nature. To operate as a standalone company, we have incurred separation costscancellation of $0.2 million, $1.9 million and $27.3 million during the years ended December 31, 2020, 2019 and 2018, respectively, to replicatecontractual services arrangements with certain services previously provided by NETGEAR. The significant reduction during the years ended December 31, 2020 and 2019 was as a result of the substantial completion of our Separation from NETGEAR on December 31, 2018.suppliers.
Gain on sale of business
Gain on sale of business represents the gain on sale of the Company's commercial operations in Europe in the fourth quarter of 2019.
Interest Income
Interest income represents interest earned on our cash, cash equivalents and short-term investments. We expect our interest income in absolute dollars to decrease as we use up our short-term investments and cash and cash equivalents to fund our operations, while interest rates have also declined.
Other Income (Expense), Net
Other income (expense), net primarily represents gains and losses on transactions denominated in foreign currencies, foreign currency contract gain (loss), net, and other miscellaneous income and expense. We have also included any reimbursement for the Verisure TSA in Other income.
Income Taxes
We record our provision for income taxes in our consolidated financial statements using the asset and liability method. Under this method, we recognize income tax liabilities or receivable for the current year. We also recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. Our assessment considers the recognition of deferred tax assets on a jurisdictional basis. Accordingly, in assessing our future taxable income on a jurisdictional basis, we consider the effect of its transfer pricing policies on that income. We have placed a valuation allowance against U.S. federal and state deferred tax assets and certain foreign tax attribute carryforwards since we do not anticipate to realize the benefits of deferred tax assets.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. As we expand internationally, we will face increased complexity in determining the appropriate tax jurisdictions for revenue and expense items. Our policy is to adjust these unrecognized tax benefits in the period when facts and circumstances change, such as the closing of a tax audit, the expiration of statute of limitation for a relevant taxing authority to examine a tax position, or when additional information becomes available. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results. The provision for income taxes includes the effects of any accruals that we believe are appropriate, as well as the related interest and penalties.
The Tax Cut and Jobs Act of 2017 ("Tax Act") introduced the global intangible low-taxed income (“GILTI”) provisions effective in 2018, which generally impose a tax on the net income earned by foreign subsidiaries of U.S company in excess of a deemed return on their tangible assets. We recognize the tax on GILTI as a period cost when the tax is incurred.
Results of Operations
We operate as one operatingIn this section, we discuss the results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. For a discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021, please refer to Part II, Item 7, “Management’s Discussion and reportable segment. Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022.
The following table sets forth for the periods presented, theour consolidated statements of operations data, which we derived from the accompanying consolidated financial statements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | (In thousands, except percentage data) |
| Revenue: | | | | | | | | | | | |
| Products | $ | 284,868 | | | 79.8 | % | | $ | 323,242 | | | 87.4 | % | | $ | 427,113 | | | 91.9 | % |
| Services | 72,286 | | | 20.2 | % | | 46,765 | | | 12.6 | % | | 37,805 | | | 8.1 | % |
| Total revenue | 357,154 | | | 100.0 | % | | 370,007 | | | 100.0 | % | | 464,918 | | | 100.0 | % |
| Cost of revenue: | | | | | | | | | | | |
| Products | 263,905 | | | 73.9 | % | | 307,348 | | | 83.1 | % | | 354,023 | | | 76.1 | % |
| Services | 37,860 | | | 10.6 | % | | 26,855 | | | 7.3 | % | | 18,820 | | | 4.0 | % |
| Total cost of revenue | 301,765 | | | 84.5 | % | | 334,203 | | | 90.3 | % | | 372,843 | | | 80.2 | % |
| Gross profit | 55,389 | | | 15.5 | % | | 35,804 | | | 9.7 | % | | 92,075 | | | 19.8 | % |
| Operating expenses: | | | | | | | | | | | |
| Research and development | 60,137 | | | 16.8 | % | | 69,384 | | | 18.8 | % | | 58,794 | | | 12.6 | % |
| Sales and marketing | 49,064 | | | 13.7 | % | | 56,985 | | | 15.4 | % | | 52,593 | | | 11.3 | % |
| General and administrative | 51,096 | | | 14.3 | % | | 47,624 | | | 12.9 | % | | 28,209 | | | 6.1 | % |
| Separation expense | 248 | | | 0.1 | % | | 1,913 | | | 0.5 | % | | 27,252 | | | 5.9 | % |
| Gain on sale of business | (292) | | | (0.1) | % | | (54,881) | | | (14.8) | % | | — | | | — | % |
| Total operating expenses | 160,253 | | | 44.9 | % | | 121,025 | | | 32.7 | % | | 166,848 | | | 35.9 | % |
| Loss from operations | (104,864) | | | (29.4) | % | | (85,221) | | | (23.0) | % | | (74,773) | | | (16.1) | % |
| Interest income | 802 | | | 0.2 | % | | 2,737 | | | 0.7 | % | | 1,239 | | | 0.3 | % |
| Other income (expense), net | 3,436 | | | 1.1 | % | | 913 | | | 0.2 | % | | (1,177) | | | (0.3) | % |
| Loss before income taxes | (100,626) | | | (28.1) | % | | (81,571) | | | (22.0) | % | | (74,711) | | | (16.1) | % |
| Provision for income taxes | 625 | | | 0.2 | % | | 4,380 | | | 1.2 | % | | 772 | | | 0.1 | % |
| Net loss | $ | (101,251) | | | (28.3) | % | | $ | (85,951) | | | (23.2) | % | | $ | (75,483) | | | (16.2) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 |
| | (In thousands, except percentage data) |
| Revenue: | | | | | | | |
| Products | $ | 289,938 | | | 59.0 | % | | $ | 353,935 | | | 72.2 | % |
| Services | 201,238 | | | 41.0 | % | | 136,479 | | | 27.8 | % |
| Total revenue | 491,176 | | | 100.0 | % | | 490,414 | | | 100.0 | % |
| Cost of revenue: | | | | | | | |
| Products | 270,663 | | | 55.1 | % | | 308,692 | | | 63.0 | % |
| Services | 52,950 | | | 10.8 | % | | 45,687 | | | 9.3 | % |
| Total cost of revenue | 323,613 | | | 65.9 | % | | 354,379 | | | 72.3 | % |
| Gross profit | 167,563 | | | 34.1 | % | | 136,035 | | | 27.7 | % |
| Operating expenses: | | | | | | | |
| Research and development | 68,647 | | | 14.0 | % | | 64,709 | | | 13.2 | % |
| Sales and marketing | 66,141 | | | 13.5 | % | | 70,081 | | | 14.3 | % |
| General and administrative | 56,371 | | | 11.5 | % | | 55,932 | | | 11.4 | % |
| Others | 1,307 | | | 0.2 | % | | 2,192 | | | 0.4 | % |
| Total operating expenses | 192,466 | | | 39.2 | % | | 192,914 | | | 39.3 | % |
| Loss from operations | (24,903) | | | (5.1) | % | | (56,879) | | | (11.6) | % |
| Interest income | 3,935 | | | 0.8 | % | | 926 | | | 0.2 | % |
| Other income, net | 107 | | | 0.0 | % | | 302 | | | 0.1 | % |
| Loss before income taxes | (20,861) | | | (4.3) | % | | (55,651) | | | (11.3) | % |
| Provision for income taxes | 1,175 | | | 0.2 | % | | 975 | | | 0.2 | % |
| Net loss | $ | (22,036) | | | (4.5) | % | | $ | (56,626) | | | (11.5) | % |
Revenue
We conduct business across three geographic regions: Americas, EMEA,regions—(i) the Americas; (ii) EMEA; and APAC. We(iii) APAC—and generally base revenue by geographygeographic region on the ship-tobill-to location of the customer for device sales and device location for service sales.
| | | | | Year Ended December 31, |
| | | | | | | | | | | | | | | | | | | | | | | | | | | 2023 | | % Change | | 2022 |
| | | Year Ended December 31, | | (In thousands, except percentage data) |
| | | 2020 | | % Change | | 2019 | | % Change | | 2018 |
| | | (In thousands, except percentage data) |
| Americas | Americas | $ | 269,395 | | | (6.8) | % | | $ | 289,160 | | | (23.3) | % | | $ | 376,805 | |
| | Americas | |
| | Americas | |
| Percentage of revenue | Percentage of revenue | 75.4 | % | | 78.1 | % | | 81.0 | % | Percentage of revenue | 61.4 | % | | | | 55.8 | % |
| | EMEA | |
| | EMEA | |
| | EMEA | EMEA | $ | 61,832 | | | 8.0 | % | | $ | 57,232 | | | (12.6) | % | | $ | 65,462 | |
| Percentage of revenue | Percentage of revenue | 17.3 | % | | 15.5 | % | | 14.1 | % | Percentage of revenue | 33.5 | % | | | | 40.1 | % |
| | APAC | |
| | APAC | |
| | APAC | APAC | $ | 25,927 | | | 9.8 | % | | $ | 23,615 | | | 4.3 | % | | $ | 22,651 | |
| Percentage of revenue | Percentage of revenue | 7.3 | % | | 6.4 | % | | 4.9 | % | Percentage of revenue | 5.1 | % | | | | 4.1 | % |
| Total revenue | Total revenue | $ | 357,154 | | | (3.5) | % | | $ | 370,007 | | | (20.4) | % | | $ | 464,918 | |
Revenue by classification is as follows:
60 | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | % Change | | 2022 |
| | (In thousands, except percentage data) |
| Product Revenue | $ | 289,938 | | | (18.1) | % | | $ | 353,935 | |
| Service Revenue | 201,238 | | | 47.4 | % | | 136,479 | |
| Total revenue | $ | 491,176 | | | 0.2 | % | | $ | 490,414 | |
RevenueProduct revenue decreased 3.5% across all geographic regionsby $64.0 million, or 18.1% for the year ended December 31, 20202023 compared to the prior year. The decrease wasdeclines were experienced mainly in EMEA and the Americas and were primarily driven by a decreasereduction 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 shipmentsmix, driven by the softening consumer demand as a result of disruption to our sales channels due to the COVID-19 pandemiccurrent macro-economic factors and a slowdownseasonality. This decline in our customer demand for connected cameras,revenue was partially offset by an increasethe revenue generated from the Essential 2 camera portfolio which was launched in service revenue and less provisions for sales returns, price protection and marketing expenditures that are deemed to be a reductionthe third quarter of revenue. 2023.
Service revenue increased in all regions by $25.5$64.8 million, or 54.6%47.4%, for the year ended December 31, 20202023 compared to the prior year, primarily due to increaseda 51.1% increase in cumulative paid accounts and recognition of NRE and other incremental service revenue from Verisurean approximated 30% increase in the fiscal year 2020.
Revenue decreased 20.4% across all geographic regionsrates for the year ended December 31, 2019 compared to the prior year. The decrease was primarily driven by a slowdown in our customer demand for connected cameras, increased competition, higher marketing expenditures deemed to be a reduction of revenues, increased provisions for price protection that are deemed to be a reduction of revenue, offset by higher service revenue. We launched Arlo Ultra, with 4K video resolution capability, in the first fiscal quarter of 2019, Arlo Pro 3, with 2K video resolution capability, in the third fiscal quarter of 2019 and Arlo Video Doorbell with 180 degree viewing angle, in the fourth quarter of 2019. Service revenue increased by $9.0 million, or 23.7%, for the year ended December 31, 2019 compared to the prior year, as our paid subscribers increased compared to the prior year.subscription plans.
Cost of Revenue
The following table presents cost of revenue for the periods indicated:
| | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2020 | | % Change | | 2019 | | % Change | | 2018 | | 2023 | | % Change | | 2022 |
| | | (In thousands, except percentage data) | | (In thousands, except percentage data) |
| Cost of revenue: | Cost of revenue: | |
| Products | Products | $ | 263,905 | | | (14.1) | % | | $ | 307,348 | | | (13.2) | % | | $ | 354,023 | |
| Products | |
| Products | |
| Services | Services | 37,860 | | | 41.0 | % | | 26,855 | | | 42.7 | % | | 18,820 | |
| Total cost of revenue | Total cost of revenue | $ | 301,765 | | | (9.7) | % | | $ | 334,203 | | | (10.4) | % | | $ | 372,843 | |
|
Cost of productsproduct revenue decreased for the year ended December 31, 2020, primarily due to the decrease in product revenue and overhead costs, partially offset by higher excess and obsolete inventory provision2023 compared to the prior year. The increase in excess and obsolete inventory provision reflects lower expected future demand for certain older product lines for the fiscal year, 2020 as we transition to newer technologies. The increase in cost of services revenue is in line with the service revenue growth andprimarily due to our continued investmentdecreases in our cloud service offeringsproduct shipments coupled with decreases in freight-in costs due to improve our customer experiencenormalization of the supply chain and to enhance our security profile, as well as Verisure NRE service costs,utilization of ocean freight, partially offset by cost optimizations implemented during the year.increases in inventory reserves.
Cost of products revenue decreased for the year ended December 31, 2019, due primarily to a decline in product revenue compared to the prior year. Cost of servicesservice revenue increased for the year ended December 31, 2019, in line with2023 compared to the prior year, primarily due to service revenue growth as a result of increases in cumulative paid accounts and due torates for our continued investment in our cloud service offerings to improve our customer experience and to enhance our security profile,subscription plans, partially offset by cost optimizations implemented during the year.optimizations.
Gross Margin
The following table presents gross margin for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | % Change | | 2019 | | % Change | | 2018 |
| | (In thousands, except percentage data) |
| Gross profit: | | | | | | | | | |
| Products | $ | 20,963 | | | 31.9 | % | | $ | 15,894 | | | (78.3) | % | | $ | 73,090 | |
| Services | 34,426 | | | 72.9 | % | | 19,910 | | | 4.9 | % | | 18,985 | |
| Total gross profit | $ | 55,389 | | | 54.7 | % | | $ | 35,804 | | | (61.1) | % | | $ | 92,075 | |
| Gross profit percentage: | | | | | | | | | |
| Products | 7.4 | % | | | | 4.9 | % | | | | 17.1 | % |
| Services | 47.6 | % | | | | 42.6 | % | | | | 50.2 | % |
| Total gross profit percentage | 15.5 | % | | | | 9.7 | % | | | | 19.8 | % |
Gross marginProfit
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | % Change | | 2022 |
| | (In thousands, except percentage data) |
| Gross profit: | | | | | |
| Products | $ | 19,275 | | | (57.4) | % | | $ | 45,243 | |
| Services | 148,288 | | | 63.3 | % | | 90,792 | |
| Total gross profit | $ | 167,563 | | | 23.2 | % | | $ | 136,035 | |
| Gross margin: | | | | | |
| Products | 6.6 | % | | | | 12.8 | % |
| Services | 73.7 | % | | | | 66.5 | % |
| Total gross margin | 34.1 | % | | | | 27.7 | % |
Product gross profit decreased for the year ended December 31, 2023 compared to the prior year, 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 year ended December 31, 20202023 compared to the prior year, due to a combination of both product and service margin increases. The product margin increase is primarily due to decreased provisionsservice revenue growth in all regions as a result of increases in cumulative paid accounts and rates for price protectionour subscription plans, as well as cost optimizations.
Operating Expenses
Research and marketing expenditures that are deemed to be reductions of revenueDevelopment | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | % Change | | 2022 |
| | (In thousands, except percentage data) |
| Research and development expense | $ | 68,647 | | | 6.1 | % | | $ | 64,709 | |
Research and decreased product overhead, partially offset by higher excess and obsolete inventory provision. Service margindevelopment expense increased $3.9 million for the year ended December 31, 2020,2023 compared to the prior year, primarily due to increases of $3.0 million in personnel-related expenses mainly from compensation recorded as a result of an increase in headcount and $2.1 million in outside professional services, partially offset by a decrease of $0.6 million in corporate IT and facilities overhead.
Sales and Marketing | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | % Change | | 2022 |
| | (In thousands, except percentage data) |
| Sales and marketing expense | $ | 66,141 | | | (5.6) | % | | $ | 70,081 | |
Sales and marketing expense decreased $3.9 million for the year ended December 31, 2023 compared to the prior year, primarily due to a decrease of $9.2 million in marketing expenditures as a result of the suspension of our brand
awareness advertising campaign, partially offset by increases of $2.1 million in credit card processing fees as a result of increases in Arlo.com store sales and paid subscriber accounts, $2.1 million in customer care services as we continue to invest in improving our customer experience, and $1.8 million in freight-out expenses due to increase in customer shipment volume in Arlo.com store.
General and Administrative | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | % Change | | 2022 |
| | (In thousands, except percentage data) |
| General and administrative expense | $ | 56,371 | | | 0.8 | % | | $ | 55,932 | |
General and administrative expense increased $0.4 million for the year ended December 31, 2023 compared to the prior year, primarily due to an increase in paid service revenue and cost optimizations implemented.
Gross margin decreased for the year ended December 31, 2019 compared to the prior year, due to a combination of both product and service margin declines. The product margin decline is primarily due to increased marketing expenditures deemed to be a reduction of revenues, increased provisions for price protection that are deemed to be reductions of revenue, increased warranty costs, product overhead and freight-related costs, offset by less charges for excess or obsolete inventory. Service margin decreased for the year ended December 31, 2019 compared to the prior year, primarily due to higher service cost growth which included the cost of the free 3-month and 12-month trials of Arlo Smart included in our new product offerings in fiscal 2019.
Operating Expenses
The first and second quarters of 2018, are based on carve-out financials and reflect the transactions which are directly attributable to Arlo and certain allocated costs, whereas third quarter and fourth quarter of 2018 and full years of 2019 and 2020 are based on our actual results for the periods as a standalone public company.
Research and Development
The following table presents research and development expense for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | % Change | | 2019 | | % Change | | 2018 |
| | (In thousands, except percentage data) |
| Research and development expense | $ | 60,137 | | | (13.3) | % | | $ | 69,384 | | | 18.0 | % | | $ | 58,794 | |
Research and development expense decreased for the year ended December 31, 2020 compared to the prior year, due to decreases of $2.6$2.2 million in personnel-related expenses primarily as a result of the reduction in force implemented in the last quarter of 2019,mainly from stock-based compensation and $4.1 million in IT and facility overhead, partially offset by an increase of $2.0 million in expenses related to outside professional services. Also contributing to the reduction in Research and development expense, various research and development expenses amounting to $4.1 million were attributed to the Verisure NRE arrangement, and are classified as cost of service revenue in fiscal year 2020.
Research and development expense increased for the year ended December 31, 2019 compared to the prior year due tomerit increases, of $2.5 million in personnel-related expenses and $8.3 million in IT and facilities overhead. The increased expenditures on personnel-related expense and engineering projects were due to continuous investment in strategic focus areas, principally the expansion of our Arlo product and service offerings and the growth of our cloud platform capabilities. The increase in IT and facilities overhead is due to the fact that starting in late 2018 Arlo moved to separate facilities globally and for the full year of 2019 Arlo maintained its own facilities and IT infrastructures and systems globally as a standalone public company.
Sales and Marketing
The following table presents sales and marketing expense for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | % Change | | 2019 | | % Change | | 2018 |
| | (In thousands, except percentage data) |
| Sales and marketing expense | $ | 49,064 | | | (13.9) | % | | $ | 56,985 | | | 8.4 | % | | $ | 52,593 | |
Sales and marketing expense decreased for the year ended December 31, 2020 compared to the prior year, primarily due to decreases in personnel-related expenses of $5.5 million, outside professional services of $2.1 million, and IT and facility overhead of $2.1 million, partially offset by an increase in credit card processing fees of $1.0 million driven by the growth in sales from Arlo's direct to consumer store and paid accounts service revenue. The decreases are as a result of a general reduction of headcount within salesand marketing as well as the transfer of our European sales and marketing team to Verisure on December 30, 2019, coupled with a reduction in travel related expense as a result of COVID-19 restrictions.
Sales and marketing expense increased for the year ended December 31, 2019 compared to the prior year, primarily due to an increase in outside professional services of $2.0 million, IT and facilities overhead of $2.7 million, and personnel-related expenses of $1.2 million. The increases were partially offset by a decrease of $1.5$1.8 million in expenses related to NETGEAR Transition Service Agreement ("TSA"). The increase incorporate IT and facilities overhead is due to the fact that starting in late 2018 Arlo moved to separate facilities globally and for the whole of 2019 Arlo maintained its own facilities and IT infrastructures and systems globally as a standalone public company.professional consulting services.
GeneralInterest Income and AdministrativeOther Income, Net
The following table presents general and administrative expense for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | % Change | | 2019 | | % Change | | 2018 |
| | (In thousands, except percentage data) |
| General and administrative expense | $ | 51,096 | | | 7.3 | % | | $ | 47,624 | | | 68.8 | % | | $ | 28,209 | |
General and administrative expense increased for the year ended December 31, 2020 compared to the prior year, primarily due to higher personnel-related expenditures of $7.8 million, partially offset by decreases of $2.2 million in legal and professional services and $1.1 million of transaction costs related to the disposal of our commercial operations in Europe in the fourth quarter of 2019. The increase in personnel-related expenditures were mainly driven by the $7.4 million stock-based compensation expense recognized for the voluntary forfeiture of certain options by our Chief Executive Officer in January 2020, partially offset by the reversal of the previously recognized stock-based compensation expense amounting to $1.2 million of unvested options and restricted stock units upon the separation of our former Chief Financial Officer in June 2020.
General and administrative expense increased for the year ended December 31, 2019 compared to the prior year, primarily due to higher IT and facilities overhead of $9.7 million, higher personnel-related expenditures of $6.0 million, higher legal and professional services of $5.3 million, and transaction costs of $1.9 million related to the disposal of our commercial operations in Europe, partially offset by $4.2 million decrease in NETGEAR TSA related expenses. The increase in general and administrative expense was driven by the increase in related IT and facilities overhead due to the fact that starting in late 2018 Arlo moved to separate facilities globally and for the whole of 2019 Arlo maintained its own facilities and IT infrastructures and systems globally, increased customary public company costs, including outside legal and audit fees, insurance and other costs as our company became a standalone public company since August 2018.
Separation Expense
The following table presents separation expense for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | % Change | | 2019 | | % Change | | 2018 |
| | (In thousands, except percentage data) |
| Separation expense | $ | 248 | | | (87.0) | % | | $ | 1,913 | | | ** | | $ | 27,252 | |
**Percentage change not meaningful.
Separation expense consists primarily of charges for third-party advisory, consulting, legal and professional services, IT-related expenses, and other items that are incremental and one-time in nature related to our separation from NETGEAR. To operate as a standalone company, we have incurred separation costs. The significant reduction for fiscal years of 2020 and 2019 was as a result of the substantial completion of our Separation from NETGEAR effective December 31, 2018.
Gain on sale of business
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | % Change | | 2019 | | % Change | | 2018 |
| | (In thousands, except percentage data) |
| Gain on sale of business | $ | (292) | | | ** | | $ | (54,881) | | | ** | | $ | — | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | % Change | | 2022 |
| | (In thousands, except percentage data) |
| Interest income, net | $ | 3,935 | | | ** | | $ | 926 | |
| Other income, net | $ | 107 | | | ** | | $ | 302 | |
**Percentage change not meaningful.
In the fourth quarter of 2019, we sold our commercial operations in Europe which resulted in a gain on sale of business of $54.9 million. In the first quarter of 2020, we recognized an additional gain of $0.3 million as a result of the final working capital adjustment. There was no gain on sale of business for the year ended December 31, 2018. Refer to Note 4, Disposal of Business, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for a complete discussion of this disposal.
Interest Income and Other Income (Expense), Net
The following table presents other income, (expense), net for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | % Change | | 2019 | | % Change | | 2018 |
| | (In thousands, except percentage data) |
| Interest income | 802 | | | ** | | 2,737 | | | ** | | 1,239 | |
| Other income (expense), net | 3,436 | | | ** | | 913 | | | ** | | (1,177) | |
**Percentage change not meaningful.
During the year ended December 31, 2020, we earned interest income of $0.8 million from our cash equivalents and short-term investments. The reduction, compared to the prior year, is primarily due to the decrease in our short-term investments and cash and cash equivalents as we funded our operations and the decline in interest rates. Other income (expense), net increased for the year ended December 31, 20202023, compared to the prior year, primarily due to Verisure TSA related income of $4.0 million recognizedthe increase in fiscal year 2020.
During the year ended December 31, 2019, we earned interest income of $2.7 million from our cash equivalents and short-term investments. Other income (expense), net increased for the year ended December 31, 2019 compared to the prior year, primarily due to Verisure TSA related income of $0.8 million and higher foreign currency transaction gains, mainlyinvestments as well as a result of the U.S. dollar strengthening against transaction currencies.higher interest rates.
Provision for Income Taxes
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | % Change | | 2022 |
| | (In thousands, except percentage data) |
| Provision for income taxes | $ | 1,175 | | | 20.5 | % | | $ | 975 | |
| Effective tax rate | (5.6) | % | | | | (1.8) | % |
Provision for income taxes and effective tax rate consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | % Change | | 2019 | | % Change | | 2018 |
| | (In thousands, except percentage data) |
| Provision for income taxes | $ | 625 | | | (85.7) | % | | $ | 4,380 | | | (31.6) | % | | $ | 772 | |
| Effective tax rate | (0.6) | % | | | | (5.4) | % | | | | (1.0) | % |
The decrease in provision forwas primarily attributable to income taxes for the year ended December 31, 2020 compared to the prior year was primarily due to loweron foreign earnings in 2020, resulting from the sale of our commercial operations in Europe during the fourth quarter of 2019. Furthermore, 2019 included the gain on sale of certain assets related to the Company's commercial operations in Europe during the fourth quarter of 2019. Losses incurred predominantly in the U.S continue to be subjectand to a full valuation allowance.
lesser extent U.S. taxable income. The increase in provision for income taxes for the year ended December 31, 20192023 compared to the prior year was primarily due to (i) the higher foreignU.S. earnings, in 2019 and gain(ii) the application of Section 174 of the Internal Revenue Code requiring capitalization of research and experimental expenses. 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 sale of certainthese deferred tax assets related to the Company's commercial operations in Europe during the fourth quarter of 2019. Losses incurred predominantly in the U.S continue tosince it is more likely than not that these deferred tax assets will not be subject to a full valuation allowance.realized.
The effective tax rate for the year ended December 31, 2023 was lower than the U.S. federal income tax rate due to a lower effective tax rate on foreign earnings and valuation allowance on our net U.S. deferred tax assets and certain foreign tax attributes as it is more likely than not that some or all of our deferred tax assets will not be realized.
Liquidity and Capital Resources
As of December 31, 2023, our cash and cash equivalents and short-term investments totaled $136.5 million, and we had unused borrowing capacity of $13.9 million based on the terms and conditions of our revolving credit facility. We have a history of losses and may continue to incur operating and net losses forin the foreseeable future. As of December 31, 2020,2023, our accumulated deficit was $232.8$367.5 million. Historically, we have funded our principal business activities through cash flows generated from operations and available cash on hand.
Our principal sources of liquidity are cash, cash equivalents and short-term investments. Short-term investments are marketable government securities with an original maturity or a remaining maturity at the time of purchase of greater than three months and no more than 12 months. The marketable securities are held in our company’s name with a high quality financial institution, which acts as our custodian and investment manager. As of December 31, 2020, we had cash, cash equivalents and short-term investments totaling $206.1 million. As of December 31, 2020, 23.3% of our cash and cash equivalents were held outside of the U.S. Starting in 2018, as a result of the Tax Act, the tax impact on the repatriation of foreign earnings is generally immaterial. The cash and cash equivalents balance outside of the U.S is subject to fluctuation based on the settlement of intercompany balances. In November 2019, we entered into a business financing agreement with Western Alliance Bank providing for a credit facility of up to $40.0 million and as of December 31, 2020, we have not borrowed against this credit facility. Refer to Note 10. Debt in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for further details on such business financing agreement.Material Cash Requirements
Based on our current plans, the business financing agreement with Western Alliance Bank, and market conditions, weWe believe that suchour existing sources of liquidity will be sufficient to satisfymeet our anticipated cash requirements for at least the next 12 months.months and beyond. However, in the future we may require or desire additional funds to support our operating
expenses and capital requirements or for other purposes, such as acquisitions,requirements. To the extent that current and anticipated future sources of liquidity are insufficient, we may seek to raise such additional funds through public or private equity or debt financings or collaborative agreements or from other sources. However, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our capacity to support our operating expenses and capital requirements or to make investments for other purposes, such as acquisitions.
equity. We have no commitments to obtain such additional financing and cannot assure youprovide 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, as well as the ability to increase our gross margin dollars, as well as cost optimization initiatives and continue to maintain 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 Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for further information about our operating leases, purchase obligations, and legal contingencies.
Cash Flow
The following table presents our cash flows for the periods presented.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands) |
| Net cash provided by (used in) operating activities | $ | (46,530) | | | $ | 9,171 | | | $ | (17,686) | |
| Net cash provided by (used in) investing activities | (3,975) | | | 76,262 | | | (71,285) | |
| Net cash provided by (used in) financing activities | (23) | | | (38) | | | 244,287 | |
| Net increase (decrease) in cash and cash equivalents and restricted cash | $ | (50,528) | | | $ | 85,395 | | | $ | 155,316 | |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
| (In thousands) |
| Net cash provided by (used in) operating activities | $ | 38,302 | | | $ | (45,962) | |
| Net cash used in investing activities | (50,686) | | | (31,773) | |
| Net cash used in financing activities | (15,142) | | | (13,942) | |
| Net cash decrease | $ | (27,526) | | | $ | (91,677) | |
Operating activities
Net cash used inprovided by (used in) operating activities increased by $55.7$84.3 million for the year ended December 31, 2020 compared to the prior year. This increase comprised a $55.8 million reduction in adjusted net loss for cash flows, offset by an increase in working capital used in operations of $111.5 million, mainly due to a reduction in accounts payable in 2020, compared to an increase in accounts payable in 2019 and an initiative to right-size inventory in 2019 which was not repeated in 2020.
Net cash provided by operating activities increased by $26.9 million for the year ended December 31, 20192023 compared to the prior year due primarily to improved working capital management, offset by a $55.0 million year over year decrease in the adjusted net loss from operations. Our cash inflow from changes in assets and liabilities increased by $81.9 million year over year as a result of increased accounts receivable collections, prepayments from Verisure product purchases and NRE services under the Supply Agreement and lower inventory balance.
Our days sales outstanding (“DSO”) decreased to 64 days as of December 31, 2020 as compared to 97 days as of December 31, 2019, primarily as a result of customer mix, an increase in service revenue and growth in sales from Arlo's direct to consumer store, all of which have shorter payment terms. Typically, our DSO in the fourth quarter is higher due to seasonal payment terms provided to our larger customers, while service revenue is typically a lower percentage of our revenue in the fourth quarter. Inventory decreased to $64.7 million as of December 31, 2020 from $68.6 million as of December 31, 2019,period, primarily due to lower inventory purchases. Our ending inventory turns were 5.0ximproved profitability driven by growth in the three months ended December 31, 2020 down from 5.9x turnspaid accounts and increased subscription rates and changes in the three months ended December 31, 2019, primarily as a result of a reduction in product shipments which was not offset by a corresponding reduction in inventory. Our accounts payable decreased to $62.2 million as of December 31, 2020 from $111.7 million as of December 31, 2019, primarilyworking capital as a result of lower inventory purchases and earlier payments to suppliers for purchases made.trade payable balances and increase in deferred revenue.
Investing activities
Net cash used in investing activities increased by $80.2$18.9 million for the year ended December 31, 20202023 compared to the prior year period, primarily due to a reductionincreases in proceeds from maturitynet purchases, and maturities of short-term investments of $30.3 million and a reduction in proceeds from sale of our commercial operations in Europe in 2019 of $52.7 million, partially offset by less purchases of property and equipment of $2.8 million due to the completion of leasehold improvements in 2019 at our San Jose headquarters.
Net cash provided by investing activities increased by $147.5 million for the year ended December 31, 2019 compared to the prior year, primarily due to the more maturity of short-term investments in the amount of $55.0 million, less purchases of short-term investments of $24.9 million, less purchases of property equipment of $15.0 million, and proceeds from sale of our commercial operations in Europe in the amount of $52.7 million.equipment.
Financing activities
Net cash used in financing activities was $23 thousandslightly increased by $1.2 million for the year ended December 31, 2020 and comprised2023 compared to the prior year period, primarily due to an increase in withholding tax from restricted stock unit releases, of $4.78 million,partially offset by higher proceeds from Employee Stock Purchase Plan contributions and exercises of stock options of $4.76 million.
Net cash used in financing activities was $38 thousand in the year ended December 31, 2019 and comprised proceeds from Employee Stock Purchase Plan contributions of $1.8 million, offset by $1.9 million in tax withholdings from restricted stock unit releases.
Backlog
Our backlog consists of products for which customer purchase orders have been received and that are scheduled or in the process of being scheduled for shipment. As of December 31, 2020, we had a backlog of $5.7 million, comparedrelated to $5.4 million as of December 31, 2019 and $18.9 million as of December 31, 2018. As we typically fulfill orders received within a relatively short period after receipt, our revenue in any fiscal year depends primarily upon orders booked and the availability of supply of our products in that year. In addition, most of our backlog is subject to rescheduling or cancellation with minimal penalties. As a result, our backlog as of any particular date may not be an indicator of revenue for any succeeding period. Similarly, there is a lack of meaningful correlation between year-over-year changes in backlog as compared with year-over-year changes in revenue. Accordingly, we do not believe that backlog information is material to an understanding of our overall business, and backlog as of any particular date should not be considered a reliable indicator of our ability to achieve any particular level of revenue or financial performance.
Contractual Obligations
The following table summarizes our non-cancelable operating lease commitments and purchase obligations as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments due by period |
| | | Less Than | | 1-3 | | 3-5 | | More Than |
| Total | | 1 Year | | Years | | Years | | 5 Years |
| (In thousands) |
| Operating leases | $ | 35,821 | | | $ | 5,931 | | | $ | 10,747 | | | $ | 7,645 | | | $ | 11,498 | |
| Purchase obligations | 19,532 | | | 19,532 | | | — | | | — | | | — | |
| $ | 55,353 | | | $ | 25,463 | | | $ | 10,747 | | | $ | 7,645 | | | $ | 11,498 | |
Operating leases
We entered into several office lease agreements under non-cancelable operating leases with various expiration dates through June 2029. The terms of certain of our facility leases provide for rental payments on a graduated scale. We recognize rent expense on a straight-line basis over the lease period and have accrued for rent expense incurred but not paid. The amounts presented are consistent with contractual terms and are not expected to differ significantly, unless a substantial change in our headcount requires us to exit an office facility early or expand our occupied space. For the years ended December 31, 2020 and 2019, rent expense was $7.0 million and $7.0 million, respectively. For the six months ended July 1, 2018, rent expense reflected allocations from NETGEAR and may not be indicative of our results. Rent expense was $1.4 million after the Separation through December 31, 2018.
Letters of Credit
In connection with the lease agreement for the headquarters located in San Jose, California, we executed a letter of credit with the landlord as the beneficiary. As of December 31, 2020, we had approximately $3.6 million of unused letters of credit outstanding, of which $3.1 million pertains to the lease arrangement.
Purchase obligations
We enter into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of the orders are cancelable by giving notice of 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 not cancelable within 30 days prior to the expected shipment date. As of December 31, 2020, we had $19.5 million in non-cancelable purchase commitments with suppliers. We expect to sell all products for which we have committed purchases from suppliers.
Uncertain tax position
As of December 31, 2020, the total gross unrecognized tax benefits and related interest and penalties was $1.4 million. The timing of any payments that could result from these unrecognized tax benefits will depend upon a number of factors. The unrecognized tax benefits have been excluded from the contractual obligations table because reasonable estimates cannot be made of whether, or when, any cash payments for such items might occur. We do not expect to reduce our liabilities for uncertain tax positions in any jurisdiction, where the impact would affect the statement of operations, in the next 12 months.
Off-Balance Sheet Arrangements
As of December 31, 2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.employee benefit plans.
Critical Accounting Policies and Estimates
OurWe prepare the consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of AmericaU.S. GAAP and pursuant to the regulations of the SEC.U.S. Securities and Exchange Commission (“SEC”). The preparation of the consolidated financial statements requires management to make assumptions, judgments and estimates that can have a significant impact on the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various other assumptions believed to bethat we believe are applicable and reasonable under the circumstances. Actual results could differ significantly fromWe evaluate these estimates. These estimates may changeon an ongoing basis, as new events occur, asour operating environment changes, or additional information is obtained, and as our operating environment changes. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of theour Board of Directors.
Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K describes the significant accounting policies used inand the preparation of the
consolidated financial statements. We have listed below our critical accounting policies that we believe to have the greatest potential impacteffect on our consolidated financial statements.
Revenue Recognition
Revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The majority of revenue comes from sales of hardware products to customers (retailers, distributors, and service providers). Revenue is recognized at a point in time when control of the goods is transferred to the customer, generally occurring upon shipment or delivery dependent upon the terms of the underlying contract. The amount recognized reflects the consideration we expect to be entitled to in exchange for the transferred goods.
We sell paid subscription services to our end user customers where we provide customers access to our cloud services. Revenue for subscription sales is generally recognized on a ratable basis over the contract term, beginning on the date that the service is made available to the customers at the time of registration. The subscription contracts are generally 30 days or 12 months in length, billed in advance. All such service or support sales are typically recognized using an output measure of progress by looking at the time elapsed as the contracts generally provide the customer equal benefit throughout the contract period. In addition to selling paid subscriptions, we also sell services bundled with hardware products and accounts for these sales in line with the multiple performance obligations guidance.
Revenue from all sales types is recognized at transaction price, the amount we expect to be entitled to in exchange for transferring goods or providing services. Transaction price is calculated as selling price net of variable consideration which may include estimates for futuresales returns, sales incentives, and price protection related to current period product revenue. Our standard obligation to our direct customers generally provides for a full refund in the event that such product is not merchantable or is found to be damaged or defective. In determining estimates for futuresales returns, management analyzes certain factors, including historical sales
and returns data, channel inventory levels, current economic trends, and changes in customer demand for our products. Sales incentives and price protection are determined based on a combination of the actual amounts committed and estimated future expenditure based upon historical customary business practice. Typically, variable consideration does not need to be constrained as estimates are based on predictive historical data or future commitments that we plan and control. However, we continue to assess variable consideration estimates such that it is probable that a significant reversal of revenue will not occur.
Contracts with Multiple Performance Obligations
Some of our contracts with customers contain multiple promised goods or services. Such contracts include hardware products with bundled services, various subscription services, and support. For these contracts, we account for the promises separately as individual performance obligations if they are distinct. Performance obligations are determined to be considered distinct if they are both capable of being distinct and distinct within the context of the contract. In determining whether performance obligations meet the criteria for being distinct, we consider a number of factors, such as the degree of interrelation and interdependence between obligations, and whether or not the good or service significantly modifies or transforms another good or service in the contract. The embedded software in most of the hardware products is not considered distinct and therefore the combined hardware and incidental software are treated as one performance obligation and recognized at the point in time when control of product transfers to the customer. Services that are included with certain hardware products are considered distinct and therefore the hardware and service are treated as separate performance obligations.
After identifying the separate performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are generally determined based on the prices charged to customers or using an adjusted market assessment. Standalone selling price of the hardware
is directly observable from add-on camera and base station sales. Standalone selling price of the premium services are directly observable from direct sales to end users, while the service is estimated using an adjusted market approach.
Revenue is then recognized for each distinct performance obligation as control is transferred to the customer. Revenue attributable to hardware is recognized at the time control of the product transfers to the customer. The transaction price allocated to the service is recognized over the specified service period or over the estimated useful life of the hardware, beginning when the customer is expected to activate their account. Useful life of the hardware is determined by industry norms, technical and financial relevance, frequency of new model releases, and user history.
Long-term Supply Arrangement - Verisure
We have entered into a Supply Agreement as part of the disposal of our commercial operations in Europe where Verisure prepays future product purchases with a minimum product purchase commitment also required. The Supply Agreement includes product purchases, paid subscription services, basic services, and an option for Verisure to acquire development services by submitting a statement of work (“SOW”). Products sold come with a standard twelve month warranty. Verisure assumes responsibilities for all warranty claims, returns of products and certain technical support provided to end users. We provide technical support for paid subscription services where Verisure cannot resolve the issue. Verisure is responsible for any marketing and promotion of our products and services sold in Europe.
Products are priced at a cost plus markup based on markups specified in the agreement and that price varies based on the cost of the product. The paid subscription service and basic service pricing is based on the number of users monthly and is priced at a cost plus markup specified in the Supply Agreement, which varies based on the user and service type. The transaction price for products and paid subscription services is entirely variable because the consideration is dependent on the actual costs. We allocate variable consideration specified for products entirely to products, and variable consideration specified for the paid subscription services entirely to the paid subscription services. For development services, no contract exists until an SOW is submitted and approved by both parties. For products, since quantity and product types are not specified in the agreement, contracts are not deemed to exist until we receive and accept the customer purchase order ("PO"). Each product with a valid PO is a single performance obligation.
We recognize variable consideration for products upon delivery and for services when the monthly service is rendered for paid subscription services and basic services. The non-refundable product prepayments does not relate to future goods or services, as such no further assessment of material rights is required. Further, as the transfer of products is at the discretion of the customer (i.e. when Verisure issues a PO), a significant financing component does not exist as it relates to the product prepayments. We also expect that the product prepayments will be fully utilized by Verisure within 12 to 18 months, hence, no additional accounting consideration is necessary for breakage. We also concluded that we are acting as the principal in the Supply Agreement and determined that revenue should be presented gross.
Non-recurring Engineering Arrangement - Verisure
The Supply Agreement also provides for certain development services under an SOW to Verisure ("NRE arrangement") as part of the disposal of our commercial operations in Europe. In the NRE arrangement, Verisure pays non-refundable installments upon the commencement of agreed-upon milestones. There is a single performance obligation as the distinct goods and services promised under the SOW are highly interdependent or interrelated inputs that produce a single combined output given the nature of such arrangement. The output (or work-in-progress of such output) typically has no alternative use to us given the customized nature of the arrangement and we have enforceable rights given that the non-refundable milestone payments are prepayments in nature; control for NRE development services therefore transfers over time.
We determined that the most appropriate measure of progress for revenue recognition is the input method based on cost because we can reasonably estimate the total costs for the NRE, and the costs incurred reasonably reflects our efforts to satisfy the performance obligation. The NRE costs include labor, material, overhead as well as the use of outside services. The total estimated NRE costs are based on a combination of historical costs together with quotes from vendors
for supplying parts or services towards the completion. Adjustments to cost and profit estimates are made periodically due to changes in scope of work, hours to complete and estimated profitability, including those arising from final contract settlements. These changes may result in revisions to revenue and costs and are recognized in the period in which the revisions are determined. Any losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. If total NRE costs calculated upon completion in the current period are more than the estimated total costs at completion used to calculate revenue in a prior period, then the profits in the current period will be lower than if the estimated costs used in the prior period calculation were equal to the actual total costs upon completion.
Allowances for Warranty Obligations and Returns due to Stock Rotation
Our standard warranty obligation to our direct customers generally provides for a right of return of any product for a full refund in the event that such product is not merchantable or is found to be damaged or defective. At the time we recognize revenue, we record an estimate of futuresales warranty returns to reduce revenue in the amount of the expected credit or refund to be provided to our direct customers. At the timecustomers as a contra revenue, and we record the reduction to revenue related to warranty returns, we include within cost of revenue a write-down to reduce the carrying value of such products to net realizable value. Our standard warranty obligation to end-users provides for replacement of a defective product for one or more years. Factors that affect the warranty obligation include product failure rates, material usage and service delivery costs incurred in correcting product failures. We record the estimated cost associated with fulfilling the warranty obligation to end-users invalue as cost of revenue. Because our products are manufactured by third-party manufacturers, in certain cases we have recourse to the third-party manufacturer for replacement or credit for the defective products. We give consideration to amounts recoverable from our third-party manufacturers in determining our warranty liability. Our estimated allowances for product warranties can vary from actual results, and we may have to record additional contra revenue reductions or charges to cost of revenue, which could materially impact our financial position and results of operations.
In addition As of December 31, 2023 and 2022, accrued sales warranty returns amounted to warranty-related returns, certain distributors$16.6 million and retailers generally have the right to return products for stock rotation purposes. Upon shipment of the product, we reduce revenue by an estimate of potential future stock rotation returns related to the current period product revenue. We analyze historical returns, channel inventory levels, current economic trends and changes in customer demand for our products when evaluating the adequacy of the allowance for stock rotation returns. Our estimated allowances for returns due to stock rotation can vary from actual results, and we may have to record additional revenue reductions, which could materially impact our financial position and results of operations.
Sales Incentives$17.7 million, respectively.
We accrue forrecognize sales incentives offered to customers as a marketing expense if we receive an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit received; otherwise, it is recordedrecognized as a reduction tocontra revenue. As a consequence,Consequently, we recordrecognize a substantial portion of oursales incentives as channel marketing costs accounted as a reduction ofcontra revenue. We recordaccrue estimated reductions tocontra revenue or marketing expense for sales incentives when the related revenue is recognized or ahead of customer or end customer commitment if customary business practice creates an implied expectation that such activities will occur in the future. As of December 31, 2023 and 2022, accrued sales incentives amounted to $28.2 million and $36.3 million, respectively.
Valuation of InventoryLong-Lived Assets
We value our inventory atLong-lived assets, including property and equipment and operating lease right-of-use assets, are reviewed for possible impairment whenever events or circumstances indicate that the lowercarrying amount of cost or net realizable value, cost being determined usingsuch assets may not be recoverable. Recoverability of these assets is measured by a comparison of the first-in, first-out method. We continually assesscarrying amounts to the value of our inventory and will periodically write down its value to account for estimated excess and obsolete inventory based upon assumptions about future demand and market conditions. On a quarterly basis, we review inventory quantities on hand and on order under non-cancelable purchase commitments and compare those quantities to our estimated forecast of product demand for the next nine months to determine what inventory, if any, is not saleable. We base our analysis on the product demand forecast but take into account market conditions, product development plans, product life expectancy and other factors. Based on this analysis, we write down the carryinganticipated undiscounted value of the affected inventoryassets are expected to account for estimated excessgenerate from the use and obsolete amounts. Ateventual disposition. If such review indicates that the pointcarrying amount of loss recognition, a new, lower cost basis for that inventoryproperty and equipment and operating lease assets is established,not recoverable, the carrying amount of such assets is reduced to the fair value. During the year ended December 31, 2023 and subsequent changes in facts and circumstances do
not result in the restoration or increase in that newly established cost basis. As demonstrated during prior years, demand for our products can fluctuate significantly. If actual demand is lower than our forecasted demand and we fail to reduce our manufacturing accordingly, we could be required to write down the value of additional inventory, which would have a negative effect on our gross profit.long-lived assets has been identified.
Valuation of Goodwill
Goodwill pertains to the acquisitions of Avaak, Inc. (“Avaak”) and Placemeter, Inc. (“Placemeter”). Goodwill represents the purchase price exceeds the estimated fair value of net assets of businesses acquired in a business combination. We perform an annual impairment assessment of goodwill at the reporting unit level onon the first day of the fourth fiscal quarter. The analysis may include both qualitativequarter of each year and quantitative factors to assess the likelihood of an impairment. Should certainwhenever events or indicatorschanges in circumstances indicate the carrying value may not be recoverable. We operate as one operating and reportable segment. In the annual assessment, a qualitative assessment was performed in consideration of impairment occur between annual impairment tests, we will perform the impairment test as those events or indicators occur. Examples of such events or circumstances include: a significant decline in our expected future cash flows, a sustained, significant declinemacroeconomic conditions, industry and market conditions, cost factors, overall company financial performance, and changes in our stock price and market capitalization, a significant adverse change in the business climate and slower growth rates.
price. We test goodwill for impairment at the reporting unit level by first performing a qualitative assessment to determine whetherbelieved that it is more likely than not (that is, a likelihood of more than 50%)was more-likely-than-not that the fair value of the reporting unit is lesswas greater than itsthe respective carrying amount. The qualitative assessment considers: macroeconomic conditions, industryvalue and market considerations, cost factors, overall company financial performance, events affectingtherefore performing the next step of impairment test for the reporting units and changesunit was unnecessary. If there are events occurred or circumstances changed (i.e. a decline in our stock price. If the reporting unit doesprice based on market conditions and deterioration of our business) that would more likely than not pass the qualitative assessment, we estimate itsreduce our fair value and compare the fair value withbelow the carrying amount, we may have to record a charge to our earnings for the associated goodwill impairment of up to $11.0 million. No goodwill impairment was recognized in the reporting unit, including goodwill. If the fair value is greater than the carrying amount of the reporting unit, we do not record an impairment.years ended December 31, 2023 and 2022.
We also test goodwill for impairment by performing a quantitative assessment, which is used to identify both the existence of impairment and the amount of impairment loss. The quantitative assessment compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value is less than the carrying amount, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. We would record any impairment charge within earnings in the consolidated statements of operations.
Stock-based compensation
Our employees have historically participated in NETGEAR’s stock-based compensation plans. Stock-based compensation expense has been allocated to us based on the awards and terms previously granted to our employees as well as an allocation of NETGEAR’s corporate and shared functional employee expenses. We measure stock-based compensation at the grant date based on the fair value of the award. The fair value of stock options and the shares offered under the employee stock purchase plan is estimated using the Black-Scholes option pricing model. Estimated compensation cost relating to restricted stock units ("RSUs") is based on the closing fair market value of NETGEAR’s common stock on the date of grant.
Equity awards granted by the Company under its own stock-based compensation plans on or after the completion of the IPO are comprised of performance-based stock options (the “PSOs”), stock options, RSUs, performance RSUs ("PSUs"), and market-based performance RSUs ("MPSUs"). The Company uses the fair value method of accounting for its equity awards granted to employees and measures the cost of employee services received in exchange for the stock-based awards. The Company recognizes this compensation expense generally on a straight-line basis over the requisite service period of the award. The fair value of stock options and PSOs is estimated on the grant or offering date using the Black-Scholes option pricing model and the forfeitures are recorded as they occur. The fair value of RSUs and PSUs is measured on the grant date based on the closing fair market value of the Company’s common stock. The Company utilizes a Monte Carlo pricing model customized to the specific provisions of the 2018 Plan to value the MPSUs awards on the grant date. The fair value determined using the Monte Carlo simulation model varies based on the assumptions used for the expected stock price volatility, the correlation coefficient between the Company and Russell 2000 Index, risk-free interest rates, and dividend yield.
The stock-based compensation cost is recognized ratably over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period, which is generally four years for stock options and three to four years for RSUs. For PSOs and PSUs, stock-based compensation expense associated with individual performance milestones is recognized over the expected performance achievement period when the achievement becomes probable. For MPSUs, stock-based compensation expense is recognized ratably over the performance period subject to achievement of market conditions.
Our 2018 Employee Stock Purchase Plan (“ESPP”) is intended to provide employees with the opportunity to purchase our common stock through accumulated payroll deductions at the end of specified purchase period. Eligible employees may contribute up to 15% of compensation, subject to certain income limits, to purchase shares of our common stock. The terms of the plan include a look-back feature that enables employees to purchase stock semi-annually at a price equal to 85% of the lesser of the fair market value at the beginning of the offering period or the purchase date. The duration of each purchasing period is generally six months. We determine the fair value using the Black-Scholes Model using various inputs, including our estimate of expected volatility, term, dividend yield and risk-free interest rate. We recognize compensation costs for the ESPP on a straight-line basis over the requisite service period of the award.
Income Taxes
We record our provision for income taxes in our consolidated financial statements using the asset and liability method. Under this method, we recognize income tax liabilities or receivable for the current year. We also recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. Our assessment considers the recognition of deferred tax assets on a jurisdictional basis. Accordingly, in assessing our future taxable income on a jurisdictional basis, we consider the effect of its transfer pricing policies on that income. We have placed a valuation allowance against U.S. federal and state deferred tax assets and certain foreign tax attribute carryforwards since we do not anticipate to realize the benefits of deferred tax assets.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. As we expand internationally, we will face increased complexity in determining the appropriate tax jurisdictions for revenue and expense items. Our policy is to adjust these unrecognized tax benefits in the period when facts and circumstances change, such as the closing of a tax audit, the expiration of statute of limitation for a relevant taxing authority to examine a tax position, or when additional information becomes available. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results. The provision for income taxes includes the effects of any accruals that we believe are appropriate, as well as the related interest and penalties.
The Tax Act introduced the GILTI provisions effective in 2018, which generally impose a tax on the net income earned by foreign subsidiaries of U.S company in excess of a deemed return on their tangible assets. We recognize the tax on GILTI as a period cost when the tax is incurred.
Recent Accounting Pronouncements
For a complete description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on financial condition and results of operations, refer to Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.
Emerging Growth Company Status
As an emerging growth company (“EGC”), under the Jumpstart Our Business Startups Act (“JOBS Act”), we are allowed to 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. While we have not made such an irrevocable election, we have not delayed the adoption of any applicable accounting standards.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates.
Interest Rate Risk
We do not use derivative financial instruments in our investment portfolio. We have an investment portfolio of fixed income securities that are classified as available-for-sale securities. These securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. We attempt to limit this exposure by investing primarily in highly rated short-term securities. Our investment policy requires investments to be rated triple-A with the objective of minimizing the potential risk of principal loss. Due to the short duration and conservative nature of our investment portfolio, a hypothetical movement of 10% in interest rates would not have a material impact on our operating results and the total value of the portfolio over the next fiscal year. We monitor our interest rate and credit risks, including our credit exposure to specific rating categories and to individual issuers. There wereThe unrealized loss was immaterial as of December 31, 2023 and there was no impairment chargescharge on our investments during fiscalfor the year 2020.ended December 31, 2023.
Foreign Currency Exchange Rate Risk
We are exposed to risks associated with foreign exchange rate fluctuations due to our international sales and operating activities. We invoice some of our international customers in foreign currencies, including the Australian dollar and Canadian dollar. As the customers that are currently invoiced in local currency become a larger percentage of our business, or to the extent we begin to bill additional customers in foreign currencies, the impact of fluctuations in foreign currency exchange rates could have a more significant impact on our results of operations. For those customers in our international markets that we continue to sell to in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and therefore reduce the demand for our products. Such a decline in the demand for our products could reduce sales and materially and adversely affect our business, results of operations, and financial condition. Certain operating expenses of our foreign operations require payment in local currencies.
We are exposed to risks associated with foreign exchange rate fluctuations due to our international sales and operating activities. These risks may change over time as our business evolves and could negatively impact our operating results and financial condition. As we grow our operations, our exposure to foreign currency risk could become more significant. In the third fiscal quarter of 2018, we established a hedge program to hedge foreign currency exchange risks and currently do not expect to enter into foreign currency exchange contracts for trading or speculative purposes.
As of December 31, 2020,2023, we had net assets in various local currencies. A hypothetical 10% movement in foreign exchange rates would not have an immateriala material impact on our net income (loss) for the period.operating results. Actual future gains and losses associated with our foreign currency exposures and positions may differ materially from the sensitivity analysis performed as of December 31, 20202023 due to the inherent limitations associated with predicting foreign currency exchange rates and our actual exposures and positions. For the years ended December 31, 2020, 20192023 and 2018, 10%, 24.7%2022, 3% and 20.9%3% of our total revenue was denominated in a currencycurrencies other than the U.S. dollar, respectively.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Arlo Technologies, Inc.
OpinionOpinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Arlo Technologies, Inc. and its subsidiaries (the “Company”) as of December 31, 20202023 and December 31, 2019,2022, and the related consolidated statements of operations, of comprehensive income (loss),loss, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2020,2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20202023 and December 31, 2019,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20202023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because a material weakness in internal control over financial reporting existed as of that date as a result of information technology general control (ITGC) deficiencies related to (i) user access and segregation of duty controls that restrict user and privileged access to appropriate personnel; (ii) program change management controls; and (iii) certain computer operations controls.
ChangeA material weakness is a deficiency, or a combination of deficiencies, in Accounting Principle
As discussedinternal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Note2 toManagement's Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and our opinion regarding the Company changedeffectiveness of the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenue from contracts with customers in 2018.Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.
Basis for OpinionOpinions
TheseThe Company’s management is responsible for these consolidatedfinancial statements, are the responsibilityfor maintaining effective internal control over financial reporting, and for its assessment of the Company’s management.effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express an opinionopinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidatedfinancial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding offraud, and whether effective internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accrued Sales Warranty Returns
As described in Note 2 to the consolidated financial statements, the Company’s standard obligation to direct customers for product sales generally provides for a full refund in the event that such product is found to be damaged or defective. At the time revenue is recognized, management records an estimate of sales warranty returns to reduce revenue in the amount of the expected credit or refund to be provided to direct customers. In determining estimates for sales returns, management analyzes certain factors, including historical sales and returns data, channel inventory levels, current economic trends, and changes in customer demand for products. As of December 31, 2023, accrued sales warranty returns were $16.6 million.
The principal considerations for our determination that performing procedures relating to accrued sales warranty returns is a critical audit matter are (i) the significant judgment by management in developing the estimate of accrued sales warranty returns and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s estimate of sales returns considering historical sales and returns data. As described in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section, a material weakness was identified related to the Company’s information technology general controls, which impacted this matter.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) testing management’s process for developing the estimate of accrued sales warranty returns, (ii) evaluating the appropriateness of
the analysis performed by management, (iii) testing the completeness, accuracy, and relevance of data used by management in the analysis, and (iv) evaluating the reasonableness of management’s estimate of sales returns. Evaluating management’s estimate of sales returns involved evaluating whether the estimate was reasonable considering the related historical sales and returns activity.
/s/PricewaterhouseCoopers LLP
San Jose, California
February 26, 202129, 2024
We have served as the Company'sCompany’s auditor since 2018.
ARLO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
| | As of December 31, |
| 2020 | | 2019 |
| (In thousands, except share and per share data) |
| As of December 31, | | | As of December 31, |
| 2023 | | | 2023 | | 2022 |
| (In thousands, except share and per share data) | | | (In thousands, except share and per share data) |
| ASSETS | ASSETS | |
| Current assets: | Current assets: | |
| Current assets: | |
| Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 186,127 | | | $ | 236,680 | |
| Short-term investments (amortized cost of $19,996 and $19,967) | 19,997 | | | 19,990 | |
| Accounts receivable, net (net of allowance for credit losses of $519 and $609) | 77,643 | | | 127,317 | |
| Cash and cash equivalents | |
| Cash and cash equivalents | |
| Short-term investments | |
| Accounts receivable, net | |
| Inventories | Inventories | 64,705 | | | 68,624 | |
| | Prepaid expenses and other current assets | Prepaid expenses and other current assets | 8,076 | | | 16,958 | |
| Total current assets | Total current assets | 356,548 | | | 469,569 | |
| Property and equipment, net | Property and equipment, net | 15,821 | | | 21,352 | |
| Operating lease right-of-use assets, net | Operating lease right-of-use assets, net | 23,998 | | | 31,300 | |
| Intangibles, net | 0 | | | 1,306 | |
| Goodwill | Goodwill | 11,038 | | | 11,038 | |
| Restricted cash | Restricted cash | 4,164 | | | 4,139 | |
| Other non-current assets | Other non-current assets | 2,399 | | | 4,008 | |
| Total assets | Total assets | $ | 413,968 | | | $ | 542,712 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | Current liabilities: | |
| Current liabilities: | |
| Current liabilities: | |
| Accounts payable | |
| Accounts payable | |
| Accounts payable | Accounts payable | $ | 62,171 | | | $ | 111,650 | |
| Deferred revenue | Deferred revenue | 53,142 | | | 50,362 | |
| Accrued liabilities | Accrued liabilities | 121,766 | | | 127,400 | |
| Income tax payable | 267 | | | 4,489 | |
| Total current liabilities | Total current liabilities | 237,346 | | | 293,901 | |
| Non-current deferred revenue | 16,563 | | | 15,736 | |
| Non-current operating lease liabilities | Non-current operating lease liabilities | 25,029 | | | 29,001 | |
| | Non-current income taxes payable | 104 | | | 92 | |
| Other non-current liabilities | Other non-current liabilities | 1,159 | | | 606 | |
| Total liabilities | Total liabilities | 280,201 | | | 339,336 | |
| Commitments and contingencies (Note 11) | 0 | | 0 |
| Commitments and contingencies (Note 8) | | Commitments and contingencies (Note 8) | | | |
| Stockholders’ Equity: | Stockholders’ Equity: | |
| Preferred stock: $0.001 par value; 50,000,000 shares authorized; NaN issued or outstanding | 0 | | | 0 | |
| Common stock: $0.001 par value; 500,000,000 shares authorized; shares issued and outstanding: 79,336,242 at December 31, 2020 and 75,785,952 at December 31, 2019 | 79 | | | 76 | |
| Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding | |
| Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding | |
| 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: 95,380,281 at December 31, 2023 and 88,887,139 at December 31, 2022 | |
| Additional paid-in capital | Additional paid-in capital | 366,455 | | | 334,821 | |
| Accumulated other comprehensive income (loss) | Accumulated other comprehensive income (loss) | 3 | | | (2) | |
| | Accumulated deficit | Accumulated deficit | (232,770) | | | (131,519) | |
| Total stockholders’ equity | Total stockholders’ equity | 133,767 | | | 203,376 | |
| Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 413,968 | | | $ | 542,712 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARLO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONSCOMPREHENSIVE LOSS
| | | | Year Ended December 31, | | Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands, except per share data) |
| 2023 | | | 2023 | | 2022 | | 2021 |
| (In thousands, except per share data) | | | (In thousands, except per share data) |
| Revenue: | Revenue: | |
| Products | |
| Products | |
| Products | Products | $ | 284,868 | | | $ | 323,242 | | | $ | 427,113 | |
| Services | Services | 72,286 | | | 46,765 | | | 37,805 | |
| Total revenue | Total revenue | 357,154 | | | 370,007 | | | 464,918 | |
| Cost of revenue: | Cost of revenue: | | | | | |
| Products | |
| Products | |
| Products | Products | 263,905 | | | 307,348 | | | 354,023 | |
| Services | Services | 37,860 | | | 26,855 | | | 18,820 | |
| Total cost of revenue | Total cost of revenue | 301,765 | | | 334,203 | | | 372,843 | |
| Gross profit | Gross profit | 55,389 | | | 35,804 | | | 92,075 | |
| | Operating expenses: | Operating expenses: | |
| Operating expenses: | |
| Operating expenses: | |
| Research and development | |
| Research and development | |
| Research and development | Research and development | 60,137 | | | 69,384 | | | 58,794 | |
| Sales and marketing | Sales and marketing | 49,064 | | | 56,985 | | | 52,593 | |
| General and administrative | General and administrative | 51,096 | | | 47,624 | | | 28,209 | |
| Separation expense | 248 | | | 1,913 | | | 27,252 | |
| Gain on sale of business | (292) | | | (54,881) | | | 0 | |
| Impairment charges | |
| Others | |
| Total operating expenses | Total operating expenses | 160,253 | | | 121,025 | | | 166,848 | |
| | Loss from operations | Loss from operations | (104,864) | | | (85,221) | | | (74,773) | |
| Loss from operations | |
| Loss from operations | |
| Interest income | Interest income | 802 | | | 2,737 | | | 1,239 | |
| Other income (expense), net | 3,436 | | | 913 | | | (1,177) | |
| Other income, net | |
| Loss before income taxes | Loss before income taxes | (100,626) | | | (81,571) | | | (74,711) | |
| Provision for income taxes | Provision for income taxes | 625 | | | 4,380 | | | 772 | |
| Net loss | Net loss | $ | (101,251) | | | $ | (85,951) | | | $ | (75,483) | |
| | Net loss per share: | Net loss per share: | |
| Basic | $ | (1.30) | | | $ | (1.14) | | | $ | (1.12) | |
| Diluted | $ | (1.30) | | | $ | (1.14) | | | $ | (1.12) | |
| Basic and diluted | |
| Basic and diluted | |
| Basic and diluted | |
| Weighted average shares used to compute net loss per share: | Weighted average shares used to compute net loss per share: | | | | | |
| Basic | 78,084 | | | 75,074 | | | 67,231 | |
| Diluted | 78,084 | | | 75,074 | | | 67,231 | |
| Basic and diluted | |
| Basic and diluted | |
| Basic and diluted | |
| Comprehensive loss: | |
| Net loss | |
| Net loss | |
| Net loss | |
| Other comprehensive income (loss), net of tax | |
| Total comprehensive loss | |
The accompanying notes are an integral part of these consolidated financial statements.
ARLO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (In thousands) |
| Total stockholders' equity, beginning balances | $ | 87,695 | | | $ | 112,652 | | | $ | 133,767 | |
| | | | | |
| Common stock: | | | | | |
| Beginning balances | $ | 89 | | | $ | 84 | | | $ | 79 | |
| Issuance of common stock under stock-based compensation plans | 9 | | | 6 | | | 8 | |
| Issuance of common stock under employee stock purchase plan | — | | | 2 | | | — | |
| Restricted stock unit withholdings | (3) | | | (3) | | | (3) | |
| Ending balances | $ | 95 | | | $ | 89 | | | $ | 84 | |
| Additional paid-in capital: | | | | | |
| Beginning balances | $ | 433,138 | | | $ | 401,367 | | | $ | 366,455 | |
| Stock-based compensation expense | 36,971 | | | 36,985 | | | 24,792 | |
| Settlement of liability classified restricted stock units | 13,480 | | | 8,733 | | | 15,095 | |
| Issuance of common stock under stock-based compensation plans | 7,554 | | | 1,419 | | | 5,261 | |
| Issuance of common stock under employee stock purchase plan | 2,811 | | | 2,833 | | | 2,962 | |
| Restricted stock unit withholdings | (23,632) | | | (18,199) | | | (13,198) | |
| Ending balances | $ | 470,322 | | | $ | 433,138 | | | $ | 401,367 | |
| Accumulated deficit: | | | | | |
| Beginning balances | $ | (345,425) | | | $ | (288,799) | | | $ | (232,770) | |
| Net loss | (22,036) | | | (56,626) | | | (56,029) | |
| Ending balances | $ | (367,461) | | | $ | (345,425) | | | $ | (288,799) | |
| Accumulated other comprehensive income (loss): | | | | | |
| Beginning balances | $ | (107) | | | $ | — | | | $ | 3 | |
| Other comprehensive income (loss), net of tax | 427 | | | (107) | | | (3) | |
| Ending balances | $ | 320 | | | $ | (107) | | | $ | — | |
| | | | | |
| Total stockholders' equity, ending balances | $ | 103,276 | | | $ | 87,695 | | | $ | 112,652 | |
| | | | | |
| Common stock shares: | | | | | |
| Beginning balances | 88,887 | | | 84,453 | | | 79,336 | |
| Issuance of common stock under stock-based compensation plans | 9,390 | | | 6,155 | | | 6,538 | |
| Issuance of common stock under employee stock purchase plan | 621 | | | 609 | | | 602 | |
| Restricted stock unit withholdings | (3,518) | | | (2,330) | | | (2,023) | |
| Ending balances | 95,380 | | | 88,887 | | | 84,453 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARLO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)CASH FLOWS
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands) |
| Net loss | $ | (101,251) | | | $ | (85,951) | | | $ | (75,483) | |
| Other comprehensive income (loss), before and after tax: | | | | | |
| Unrealized gain (loss) on derivative instruments | 27 | | | (27) | | | 2 | |
| Unrealized gain (loss) on available-for-sale securities | (22) | | | 25 | | | (2) | |
| Total other comprehensive income (loss), before tax | 5 | | | (2) | | | 0 | |
| Tax benefit (provision) related to derivative instruments | 0 | | | 0 | | | 0 | |
| Tax benefit (provision) related to available-for-sale securities | 0 | | | 0 | | | 0 | |
| Total other comprehensive income (loss), net of tax | 5 | | | (2) | | | 0 | |
| Comprehensive loss | $ | (101,246) | | | $ | (85,953) | | | $ | (75,483) | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (In thousands) |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (22,036) | | | $ | (56,626) | | | $ | (56,029) | |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | |
| Stock-based compensation expense | 47,948 | | | 48,476 | | | 38,030 | |
| Impairment charges | — | | | — | | | 9,116 | |
| Depreciation and amortization | 4,661 | | | 4,768 | | | 5,975 | |
| Provision for (release of) expected credit losses and inventory reserves | 279 | | | (190) | | | (3,125) | |
| Deferred income taxes | 112 | | | 181 | | | (296) | |
| Discount accretion on investments and other | (2,005) | | | 24 | | | (3) | |
| Changes in assets and liabilities: | | | | | |
| Accounts receivable, net | 690 | | | 13,517 | | | (1,739) | |
| Inventories | 7,777 | | | (7,887) | | | 29,258 | |
| Prepaid expenses and other assets | (1,498) | | | 3,427 | | | (3,463) | |
| Accounts payable | 3,723 | | | (32,520) | | | 22,156 | |
| Deferred revenue | 6,610 | | | (19,281) | | | (38,919) | |
| Accrued and other liabilities | (7,959) | | | 149 | | | (24,158) | |
| Net cash provided by (used in) operating activities | 38,302 | | | (45,962) | | | (23,197) | |
| Cash flows from investing activities: | | | | | |
| Purchases of property and equipment | (2,847) | | | (2,010) | | | (2,268) | |
| Purchases of short-term investments | (149,870) | | | (69,305) | | | — | |
| Proceeds from maturities of short-term investments | 102,031 | | | 39,542 | | | 20,000 | |
| Net cash provided by (used in) investing activities | (50,686) | | | (31,773) | | | 17,732 | |
| Cash flows from financing activities: | | | | | |
| Proceeds related to employee benefit plans | 8,493 | | | 4,260 | | | 8,231 | |
| Restricted stock unit withholdings | (23,635) | | | (18,202) | | | (13,201) | |
| Net cash used in financing activities | (15,142) | | | (13,942) | | | (4,970) | |
| Net decrease in cash, cash equivalents, and restricted cash | (27,526) | | | (91,677) | | | (10,435) | |
| Cash, cash equivalents, and restricted cash, at beginning of period | 88,179 | | | 179,856 | | | 190,291 | |
| Cash, cash equivalents, and restricted cash, at end of period | $ | 60,653 | | | $ | 88,179 | | | $ | 179,856 | |
| Reconciliation of cash, cash equivalents, and restricted cash to Consolidated Balance Sheets | | | | | |
| Cash and cash equivalents | $ | 56,522 | | | $ | 84,024 | | | $ | 175,749 | |
| Restricted cash | 4,131 | | | 4,155 | | | 4,107 | |
| Total cash, cash equivalents, and restricted cash | $ | 60,653 | | | $ | 88,179 | | | $ | 179,856 | |
| Supplemental cash flow information: | | | | | |
| Cash paid for income taxes, net | $ | 1,196 | | | $ | 415 | | | $ | 964 | |
| Non-cash investing activities: | | | | | |
| Purchases of property and equipment included in accounts payable and accrued liabilities | $ | 189 | | | $ | 946 | | | $ | 379 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARLO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | | | | | |
| Shares | | Amount | | Additional Paid-In Capital | | Net Parent Investment | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total |
| (In thousands) |
| Balance as of December 31, 2017 | 0 | | | $ | 0 | | | $ | 0 | | | $ | 125,419 | | | $ | 0 | | | $ | 0 | | | $ | 125,419 | |
| Cumulative impact from adoption of ASC 606, net of tax | — | | | — | | | — | | | (3,061) | | | — | | | — | | | (3,061) | |
| Net loss, prior to the completion of the Contribution | — | | | — | | | — | | | (29,634) | | | — | | | — | | | (29,634) | |
| Net loss, after the completion of the Contribution | — | | | — | | | — | | | — | | | — | | | (45,849) | | | (45,849) | |
| Issuance of common stock from initial public offering | 11,747 | | | 12 | | | 174,725 | | | — | | | — | | | — | | | 174,737 | |
| Initial public offering costs paid by the Company | — | | | — | | | (1,404) | | | — | | | — | | | — | | | (1,404) | |
| Initial public offering costs paid by Parent | — | | | — | | | (3,148) | | | — | | | — | | | — | | | (3,148) | |
| Net transfer from Parent | — | | | — | | | — | | | 43,549 | | | — | | | — | | | 43,549 | |
| Conversion of Net parent investment into common stock | 62,500 | | | 62 | | | 139,030 | | | (139,030) | | | — | | | — | | | 62 | |
| Stock-based compensation expense funded by Parent | — | | | — | | | — | | | 2,757 | | | — | | | — | | | 2,757 | |
| Stock-based compensation expense post-initial public offering | — | | | — | | | 6,074 | | | — | | | — | | | — | | | 6,074 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Change in unrealized gains and losses on available-for-sale securities, net of tax | — | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
| Change in unrealized gains and losses on derivatives, net of tax | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | |
| Balance as of December 31, 2018 | 74,247 | | | 74 | | | 315,277 | | | 0 | | | 0 | | | (45,849) | | | 269,502 | |
| Cumulative-effect adjustment from adoption of ASC 842, net of tax | — | | | — | | | — | | | — | | | — | | | 281 | | | 281 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (85,951) | | | (85,951) | |
| Stock-based compensation expense | — | | | — | | | 19,582 | | | — | | | — | | | — | | | 19,582 | |
| Issuance of common stock under stock-based compensation plans | 1,152 | | | 1 | | | 12 | | | — | | | — | | | — | | | 13 | |
| Issuance of common stock under Employee Stock Purchase Plan | 767 | | | 1 | | | 1,825 | | | — | | | — | | | — | | | 1,826 | |
| Restricted stock unit withholdings | (380) | | | — | | | (1,875) | | | — | | | — | | | — | | | (1,875) | |
| Change in unrealized gains and losses on available-for-sale securities, net of tax | — | | | — | | | — | | | — | | | 25 | | | — | | | 25 | |
| Change in unrealized gains and losses on derivatives, net of tax | — | | | — | | | — | | | — | | | (27) | | | — | | | (27) | |
| Balance as of December 31, 2019 | 75,786 | | | 76 | | | 334,821 | | | 0 | | | (2) | | | (131,519) | | | 203,376 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (101,251) | | | (101,251) | |
| Stock-based compensation expense | — | | | — | | | 27,418 | | | — | | | — | | | — | | | 27,418 | |
| Settlement of liability classified RSUs | — | | | — | | | 4,242 | | | — | | | — | | | — | | | 4,242 | |
| Issuance of common stock under stock-based compensation plans | 3,720 | | | 3 | | | 1,727 | | | — | | | — | | | — | | | 1,730 | |
| Issuance of common stock under Employee Stock Purchase Plan | 1,110 | | | 1 | | | 3,024 | | | — | | | — | | | — | | | 3,025 | |
| Restricted stock unit withholdings | (1,280) | | | (1) | | | (4,777) | | | — | | | — | | | — | | | (4,778) | |
| Change in unrealized gains and losses on available-for-sale securities, net of tax | — | | | — | | | — | | | — | | | (22) | | | — | | | (22) | |
| Change in unrealized gains and losses on derivatives, net of tax | — | | | — | | | — | | | — | | | 27 | | | — | | | 27 | |
| Balance as of December 31, 2020 | 79,336 | | | $ | 79 | | | $ | 366,455 | | | $ | 0 | | | $ | 3 | | | $ | (232,770) | | | $ | 133,767 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARLO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands) |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (101,251) | | | $ | (85,951) | | | $ | (75,483) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
| Depreciation and amortization | 10,206 | | | 10,681 | | | 5,307 | |
| Stock-based compensation expense | 35,247 | | | 22,894 | | | 8,831 | |
| Allowance for (release of) credit losses and inventory reserves | 964 | | | (2,921) | | | 6,739 | |
| Gain on sale of business | (292) | | | (54,881) | | | 0 | |
| Deferred income taxes | 50 | | | (210) | | | (1,108) | |
| Premium amortization (discount accretion) on investments, net | 54 | | | (461) | | | (120) | |
| Changes in assets and liabilities: | | | | | |
| Accounts receivable, net | 49,765 | | | 38,247 | | | (118,778) | |
| | | | | |
| Inventories | 2,862 | | | 53,604 | | | (48,934) | |
| Prepaid expenses and other assets | 10,441 | | | 11,525 | | | (16,592) | |
| Accounts payable | (49,282) | | | 28,791 | | | 87,307 | |
| Deferred revenue | 3,607 | | | 22,567 | | | 11,253 | |
| Accrued liabilities | (8,901) | | | (34,714) | | | 123,892 | |
| | | | | |
| Net cash provided by (used in) operating activities | (46,530) | | | 9,171 | | | (17,686) | |
| Cash flows from investing activities: | | | | | |
| Purchases of property and equipment | (3,892) | | | (6,664) | | | (21,666) | |
| Proceeds from sale of business | 0 | | | 52,694 | | | 0 | |
| Purchases of short-term investments | (50,083) | | | (29,768) | | | (54,619) | |
| Proceeds from maturities of short-term investments | 50,000 | | | 60,000 | | | 5,000 | |
| | | | | |
| Net cash provided by (used in) investing activities | (3,975) | | | 76,262 | | | (71,285) | |
| Cash flows from financing activities: | | | | | |
| Proceeds from initial public offering, net of offering costs | 0 | | | 0 | | | 173,395 | |
| Restricted stock unit withholdings | (4,778) | | | (1,875) | | | 0 | |
| Proceeds related to employee benefit plans | 4,755 | | | 1,837 | | | 0 | |
| Net investment from NETGEAR | 0 | | | 0 | | | 70,892 | |
| Net cash provided by (used in) financing activities | (23) | | | (38) | | | 244,287 | |
| Net increase (decrease) in cash and cash equivalents and restricted cash | (50,528) | | | 85,395 | | | 155,316 | |
| Cash and cash equivalents and restricted cash, at beginning of period | 240,819 | | | 155,424 | | | 108 | |
| Cash and cash equivalents and restricted cash, at end of period | $ | 190,291 | | | $ | 240,819 | | | $ | 155,424 | |
| | | | | |
| Non-cash investing and financing activities: | | | | | |
| Purchases of property and equipment included in accounts payable and accrued liabilities | $ | 564 | | | $ | 1,086 | | | $ | 16,003 | |
| De-recognized fair value of build-to-suit lease | $ | 0 | | | $ | (21,610) | | | $ | 0 | |
| Estimated fair value of a facility under build-to-suit lease including tenant improvements | $ | 0 | | | $ | 0 | | | $ | 28,357 | |
| Supplemental cash flow information: | | | | | |
| Cash paid for income taxes, net | $ | 5,614 | | | $ | 960 | | | $ | 89 | |
The accompanying notes are an integral part of these consolidated financial statements.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The CompanyDescription of Business and Basis of Presentation
The Company
Description of Business
Arlo Technologies, Inc. ("Arlo"(“we” or "the Company"“Arlo”) combines an intelligentis transforming the ways in which people can protect everything that matters to them with advanced home, business, and personal security services that combine a globally scaled cloud infrastructureplatform, advanced monitoring and mobile app withanalytics capabilities, and award-winning app-controlled devices to create a variety of smart connected devices that transform the way people experience the connected lifestyle. The Company'spersonalized security ecosystem. Arlo’s deep expertise in product design,cloud services, cutting-edge AI and computer vision analytics, wireless connectivity cloud infrastructure and cutting-edge AI capabilities focuses on delivering aintuitive user experience design delivers seamless, smart home experiencesecurity for Arlo users that is easy to setup and interactengage with every day. The Company'sOur highly secure, cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection. The Company conductsconnection – all rooted in a commitment to safeguard privacy for our users and their personal data.
We conduct business across 3three geographic regions -regions—(i) the Americas; (ii) Europe, Middle-East and Africa (“EMEA”); and (iii) Asia Pacific (“APAC”), —and primarily generatesgenerate revenue by selling devices through retail channels, wholesale distribution, wireless carrier channels, security solution providers, and Arlo'sArlo’s direct to consumer store and paid subscription services.
The Company has dualOur corporate headquarters is located in San Jose, California and Carlsbad, California with other satellite offices across North America and also maintains offices to provide sales and customer support at various other global locations.
On February 6, 2018, NETGEAR Inc. (“NETGEAR”) announced that its board of directors had unanimously approved the pursuit of a separation of its Arlo business from NETGEAR (the “Separation”) to be effected through an initial public offering (the “IPO”) of newly issued shares of the common stock of Arlo, then a wholly owned subsidiary of NETGEAR. On July 6, 2018, the Company filed a registration statement (as amended, the "IPO Registration Statement") relating to the IPO of common stock of Arlo with the U.S. Securities and Exchange Commission (the "SEC"). Following a series of restructuring steps prior to the completion of the IPO of Arlo common stock, the Arlo business was transferred from NETGEAR to Arlo (collectively, the “Contribution”).
On August 2, 2018, NETGEAR and Arlo announced the pricing of the IPO of 10,215,000 shares of Arlo’s common stock at a price to the public of $16.00 per share. On August 3, 2018, Arlo’s shares began trading on the New York Stock Exchange under the ticker symbol “ARLO.” On August 7, 2018, the Company completed its IPO of 11,747,250 shares of common stock (including 1,532,250 shares of common stock pursuant to the underwriters’ option to purchase additional shares, which was exercised in full on August 3, 2018), at $16.00 per share, before underwriting discounts and commissions and estimated offering costs. Cash proceeds from the IPO were $173.4 million, net of the portion of the offering cost paid by Arlo, which portion was $1.4 million. The total offering cost was $4.6 million, of which $3.2 million was paid by NETGEAR.
Prior to the completion of the IPO, the Company was a wholly owned subsidiary of NETGEAR and upon the closing of the IPO (including the issuance of additional shares of common stock pursuant to the underwriters’ option to purchase additional shares, which was exercised in full) on August 7, 2018, NETGEAR owned approximately 84.2% of the shares of Arlo’s outstanding common stock.
On November 29, 2018, NETGEAR announced that its board of directors had approved a special stock dividend (the “Distribution”) to NETGEAR stockholders of the 62,500,000 shares of Arlo common stock owned by NETGEAR. The Distribution was made on December 31, 2018 (the “Distribution Date”) to all NETGEAR stockholders of record as of the close of business on December 17, 2018 (the “Record Date”). In the Distribution, each NETGEAR stockholder of record on the Record Date received 1.980295 shares of Arlo common stock for every share of NETGEAR common stock held on the Record Date, subject to cash in lieu of fractional shares. The Distribution was intended to qualify as generally tax free to NETGEAR stockholders for U.S. federal income tax purposes. In connection with the Distribution, 62,500,000 shares of Arlo common stock held by NETGEAR were distributed to its stockholders and NETGEAR is no longer considered a related party to the Company.
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Basis of Presentation
The combined financial statements of Arlo that cover dates prior to the completion of the IPO have been derived and carved out from theWe prepare our consolidated financial statements and accounting records of NETGEAR as if Arlo had operated on a stand-alone basis within the periods presented. In connection with the Separation and IPO, certain assets and liabilities presented have been transferred to Arlo at carry-over (historical cost) basis. Balances contributed by NETGEAR on or before the completion of the IPO were based on the master separation agreement between the Company and NETGEAR and related documents governing the Contribution.
Following the completion of the IPO, the consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All periods presented have been accounted for in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”).
Allocated Expenses from NETGEAR
Prior to The consolidated financial statements include the completionaccounts of the IPO, NETGEAR provided certain corporate services to the Company, which were allocated based on revenue, headcount, or other measures the Company has determined as reasonable through July 1, 2018. The amount of these allocations from NETGEAR reflected within operating expenses in the consolidated statements of operations was $30.6 million for the six months ended July 1, 2018, which included $9.4 million for researchArlo and development, $10.0 million for salesits wholly-owned subsidiaries. All intercompany balances and marketing, and $11.2 million for general and administrative expense. Following July 1, 2018, the Company assumed responsibility for the costs of these functions.transactions have been eliminated.
Fiscal periodsPeriods
The Company’sOur fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. The Company reports itsWe 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 consolidated financial statements.
Use of estimatesEstimates
The preparation of 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 year ended December 31, 20202023 are not necessarily indicative of the results that may be expected for any future period.
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Note 2. Summary of Significant Accounting Policies
Cash and cash equivalentsCash Equivalents
The Company considersWe invest excess cash primarily in government securities and money market funds and consider all highly liquid investments with an original maturity or a remaining maturity at the time of purchase of three months or less to be cash equivalents. The Company depositsWe deposit cash and cash equivalents with high credit quality financial institutions.
Restricted cashCash
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The Company maintainsWe maintain certain cash balances restricted as to withdrawal or use. Restricted cash is comprised primarily of cash used as a collateral for a letter of credit associated with the Company’sour lease agreement for its headquartersoffice space in San Jose, California. The Company depositsWe deposit restricted cash with high credit quality financial institutions.
The following table shows reconciliation of cash and cash equivalents and restricted cash within the consolidated balance sheets to the amounts shown in the statements of cash flows:
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands) |
| Cash and cash equivalents | $ | 186,127 | | | $ | 236,680 | | | $ | 151,290 | |
| Restricted cash | 4,164 | | | 4,139 | | | 4,134 | |
| Total as presented on the consolidated statements of cash flows | $ | 190,291 | | | $ | 240,819 | | | $ | 155,424 | |
Short-term investmentsShort-Term Investments
Short-term investments are comprised of marketable securities that consist of government securities with an original maturity or a remaining maturity at the time of purchase of greater than three months and no more than 12 months. The marketable securities are held in the Company’s name with a high quality financial institution, which acts as the Company’sour custodian and investment manager. These marketable securities are classified as available-for-sale securities in accordance with the provisions of the authoritative guidance for investments and are carried at fair value with unrealized gains and losses are included in accumulated other comprehensive income (loss), net of tax, which is reported as a separate componenton consolidated statements of stockholders’ equity.
Fair value measurementsValue Measurements
The carrying amountsvalues of the Company’s financial instruments, includingcash and cash equivalents, restricted cash, short-term investments, accounts receivable, and accounts payable approximate their fair values due to their short maturities. Foreign currency forward contractsShort-term investments are recordedrecognized or disclosed at fair value basedin the financial statements on observable market data.a recurring basis. The Company determines the fair valuesvalue of its financial instrumentsassets and liabilities is measured based on a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
Derivative financial instruments
The Company’s subsidiaries have had, and will continue to have material future cash flows, including revenue and expenses, which are denominated in currencies other than the Company’s functional currency. The Company and all its subsidiaries designate the U.S. dollar as the functional currency. Changes in exchange rates between the Company’s functional currency and other currencies in which the Company transacts business will cause fluctuations in cash flow expectations and cash flow realized or settled. Accordingly, the Company uses derivatives to mitigate its business exposure to foreign exchange risk. The Company enters into foreign currency forward contracts in Australian dollars and Canadian
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dollars to manage its exposure to foreign exchange risk related to expected future cash flows on certain forecasted revenue, costs of revenue, operating expenses and existing assets and liabilities.
The Company’s foreign currency forward contracts do not contain any credit risk-related contingent features. The Company is exposed to credit losses in the event of nonperformance by the counter-parties of its forward contracts. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any one counter-party. In addition, the derivative contracts typically mature in less than six months and the Company continuously evaluates the credit standing of its counter-party financial institutions. The counter-parties to these arrangements are large highly rated financial institutions and the Company does not consider non-performance a material risk.Trade Accounts Receivable
The Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, materiality, accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign exchange rates. The Company’s accounting policies for these instrumentsWe are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with the authoritative guidance for derivatives and hedging. The Company records all derivatives on the balance sheets at fair value. Cash flow hedge gains and losses are recorded in other comprehensive income (“OCI”) until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in Other income (expense), net in the consolidated statements of operations.
Cash flow hedges
To help manage the exposure of operating margins to fluctuations in foreign currency exchange rates, the Company hedges a portion of its anticipated foreign currency revenue, costs of revenue and certain operating expenses. These hedges are designated at the inception of the hedge relationship as cash flow hedges. The effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) (“AOCI”) in stockholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur within the designated hedge period or if not recognized within 60 days following the end of the hedge period. Deferred gains and losses in AOCI with such derivative instruments are reclassified immediately into earnings through Other income (expense), net. Any subsequent changes in fair value of such derivative instruments also are reflected in current earnings unless they are re-designated as hedges of other transactions.
Non-designated hedges
The Company enters into non-designated hedges under the authoritative guidance for derivatives and hedging to manage the exposure of non-functional currency monetary assets and liabilities held on its financial statements to fluctuations in foreign currency exchange rates, as well as to reduce volatility in other income and expense. The non-designated hedges are generally expected to offset the changes in value of its net non-functional currency asset and liability position resulting from foreign exchange rate fluctuations. Foreign currency denominated accounts receivable and payable are hedged with non-designated hedges when the related anticipated foreign revenue and expenses are recognized in the Company’s financial statements.
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Trade accounts receivable
The Company is exposed to credit losses primarily through sales of products and services. The Company's allowanceAllowance for current estimated credit losses for trade accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers'customers’ trade accounts receivables. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default.
The Company’s monitoringMonitoring activities include timely and regular account reconciliations, dispute resolution, payment confirmation, review of customers'customers’ financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of credit losses was not significantly impacted. Although the Company haswe have historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables.accounts receivable.
ConcentrationConcentrations of credit riskRisk and Other Uncertainties
Financial instruments that potentially subject the Companyus to a concentration of credit risk mainly consist of principallycash equivalents, short-term investments derivative financial instruments, and accounts receivable. The Company believesWe believe that there is minimal credit risk associated with the investmentinvestments of its cash and cash equivalents restricted cash, and short-term investments due to the restrictions placed on the type of investment that can be entered into under the Company’sour investment policy. The Company’sOur cash equivalents and short-term investments primarily consist of investment-gradegovernment securities and the Company’s cash and investmentsmoney market funds which are held and managed by high credit quality financial institutions.
The Company is exposed to credit loss in the event of nonperformance by counterparties to the foreign currency forward contracts used to mitigate the effect of foreign currency exchange rate changes. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any counterparty. The Company’s foreign currency forward contracts do not contain any credit-risk-related contingent features. In addition, the derivative contracts typically mature in less than six months and the Company continuously evaluates the credit standing of its counterparty financial institutions. The counterparties to these arrangements are large highly rated financial institutions and the Company does not consider non-performance a material risk. The Company believes the counterparties for its outstanding contracts are large, financially sound institutions and thus, the Company does not anticipate nonperformance by these counterparties.
The Company’sOur customers are primarily retailers, and wholesale distributors and security solution providers who sell or distribute theour products to a large group of end-users. The CompanyWe regularly performsperform credit evaluations of the Company’sour customers’ financial condition and performance and considersconsider factors such as historical experience, credit quality, age of the accounts receivable balances, geographic or country-specific risks and current economic conditions that may affect our customers’ ability to pay. The Company doesWe do not require collateral from itsour customers. Historically, a substantial portion of the Company’s revenue has been derived from a limited number of retailers and wholesale distribution partners. As of December 31, 2020,2023 and 2022, three customers accounted for 32.7%37.1%, 18.5%15.2%, and 15.3%10.2%, and four customers accounted for 28.4%, 26.8%, 16.6%, and 13.3% of the Company’s total accounts receivable, net. As of December 31, 2019, one customer accounted for 51.3% of the Company’s total accounts receivable, net.net, respectively. No other customercustomers accounted for 10% or greater of the Company’s total accounts receivable, net. During the year ended December 31, 2023, 2022 and 2021, one customer accounted for 33.5%, one customer accounted for 40.1%, and two customers accounted for 30.8% and 13.0% of the total revenue, respectively.
Additionally, we receive certain of our components from a limited number of suppliers and rely on a limited number of third parties to manufacture all of our products. If any of the third-party manufacturers cannot or will not manufacture our products in required volumes, on a cost-effective basis, in a timely manner or at all, we will have to secure additional manufacturing capacity. Any interruption or delay in manufacturing could materially and adversely affect our business, results of operations and financial condition. At the date of issuance of our financial statements, we are not aware of any event which could cause the severe impact in a near term.
Our products are concentrated in the smart security solution industries, which are characterized by rapid technological advances, changes in customer requirements and evolving regulatory requirements and industry standards. Our success depends on management’s ability to anticipate and/or to respond quickly and adequately to such changes. Any significant delays in the development or introduction of products and services could materially and adversely affect our business, results of operations and financial condition.
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Inventories
Inventories consist of finished goods which are valued at the lower of cost or net realizable value, with cost being determined using the first-in, first-out method. The Company writesWe write down its inventories based on estimated excess and obsolete amounts, determined primarily based on demand forecasts, but takestake into account market conditions, product development plans, product life expectancy and other factors. At the point of loss recognition, a new lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase of the newly established cost basis. While management believes the estimates and assumptions underlying its current forecasts are reasonable, there is risk that additional charges may be necessary if current forecasts are greater than actual demand.
Property and equipment, netEquipment, Net
Property and equipment are stated at historical cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
| | | | | | | | |
| Asset Category: | | Range of Useful Lives |
| Computer equipment | | 2 years |
| Furniture and fixtures | | 5 years |
| Software | | 2-5 years |
| Machinery and equipment | | 2-3 years |
| Leasehold improvements | | Shorter of remaining lease term or 7 years |
Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The carrying value of the asset is reviewed on a regular basis for the existence of facts, both internal and external, that may suggest impairment. There was 0 impairment
Operating Leases
Our operating leases comprise of offices, data centers, and other equipment. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, net, accrued liabilities, and non-current operating lease liabilities on the consolidated balance sheets. Leases with an initial term of 12 months or less are expensed as incurred and recorded on the consolidated statements of comprehensive loss. The lease expense for fixed lease payments is recorded on the consolidated statements of comprehensive loss on a straight-line basis over the lease term and variable lease payments are included in the lease expense when the obligation for those payments is incurred.
Operating lease assets represent our right to use an underlying asset over the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, the incremental borrowing rate based on the information available is used at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease asset also includes any lease payments made before the lease commencement date less any lease incentives received. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise the options. The lease agreements with lease and non-lease components are generally accounted as a single component.
In addition, certain lease agreements contain tenant improvement allowances (“TIA”) from the landlords. We record lessee-owned improvements as leasehold improvements within property and equipment, fornet on our consolidated balance sheets and the years ended December 31, 2020, 2019TIA as a reduction to the lease asset with the impact of the decrease recognized prospectively over the
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remaining lease term. We record lessor-owned improvements as prepaid rent within prepaid expenses and 2018.other current assets on our consolidated balance sheets and the TIA as a reduction to prepaid rent.
Sublease income from our sublet office space in San Jose, California is recognized on a straight-line basis over the term of the sublease and is recorded as a reduction of lease expense.
Goodwill
Goodwill pertains to the acquisitions of Avaak, Inc. (“Avaak”) and Placemeter, Inc. (“Placemeter”). Goodwill represents the amount by which the purchase price exceeds estimated fair value of net assets of businesses acquired in a business combination. The Company performsWe perform an annual impairment assessment of goodwill at the reporting unit level on the first day of the fourth fiscal quarter. The Company identifiedWe operate as one operating and reportable segment and identify that it has 1one reporting unit for the purpose of goodwill impairment testing, and the reporting unitwhich is at the same level as itsour operating segment and reportable segment. The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment. Should certain events or indicators of impairment occur between annual impairment tests, the Companywe will perform the impairment test as those events or indicators occur. Examples of such events or circumstances include a significant decline in the Company’s expected future cash flows, a sustained, significant decline in the Company’sour stock price and market capitalization, a significant adverse change in the business climate and slower growth rates.
Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of the reporting unit is less than its carrying amount. The qualitative assessment considers macroeconomic conditions, industry and market considerations, cost factors, overall company financial performance, and events affecting the reporting units, and changes in the Company’sour stock price. If the reporting unit does not pass the qualitative assessment, we estimate the Company estimates its fair value using a discounted cash flow method and comparescompare the fair value with the carrying amount of itsour reporting unit, including goodwill. If the fair value is greater than the carrying amount of itsour reporting unit, no impairment is recorded.
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Goodwill is also tested for impairment by performing a quantitative assessment, which is used to identify both the existence of impairment and the amount of impairment loss. The quantitative assessment compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value is less than the carrying amount, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to thatour reporting unit. The impairment charge, if any, would be recorded to earnings in the consolidated statements of operations. There was 0 impairment loss of goodwill for the years ended December 31, 2020, 2019 and 2018.
Intangibles, net
Intangibles, net pertain to the acquisitions of Avaak and Placemeter. Purchased intangibles with finite lives are amortized using the straight-line method over the estimated economic useful life, which range from three to five years. Finite-lived intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Examples of such events or circumstances include: a significant decrease in the market price of the asset, a significant decline in the Company’s expected future cash flows, significant changes or planned changes in its use of the assets, and a significant adverse change in the business climate. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the carrying amount of the asset exceeds its estimated undiscounted future net cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The carrying amount of the asset is reviewed on a regular basis for the existence of facts, both internal and external, that may suggest impairment. As of December 31, 2020, all finite-lived intangibles were fully amortized. NaN impairment charges were recorded for all periods presented.comprehensive loss.
Revenue recognition
On January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606) (“ASC 606”) and applied this guidance to those contracts which were not completed at the date of adoption using the modified retrospective method. The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to Net parent investment effective January 1, 2018.Recognition
Revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the customers in an amount that reflects the consideration the Company expectswe expect to be entitled to in exchange for those goods or services.
The majority of Our product revenue comes from sales of hardware products to customers (retailers, distributors, security solution providers, service providers, and Arlo's direct to consumer store). Revenue is recognized at a point in time when control of the goods is transferred to the customer, generally occurring upon shipment or delivery, dependent upon the terms of the underlying contract. The amount recognized reflects the consideration the Company expects to be entitled to in exchange for the transferred goods.
The Company sellsOur paid subscription services to its end user customers where it provides customers access to its cloud services. Revenue forare billed in advance of the start of the monthly subscription sales is generallyand revenues are recognized on a ratable basisratably over the contract term, beginning on the date that the service is made available to the customers at the time of registration. The subscription contracts areperiod, generally 30 days or 12 months in length, billed in advance. All such service or support sales are typically recognized using an output measure of progress by looking at the time elapsed, as the contracts generally provide the customer equal benefit throughout the contract period. In addition to selling paid subscriptions, the Company also sells services bundled with hardware products and accounts for these sales in line with the multiple performance obligations guidance.length.
Revenue from all sales types is recognized at the transaction price, which is the amount the Company expectswe expect to be entitled to in exchange for transferring goods or providing services. Transaction price is calculated as selling price net of variable consideration which may include estimates for futuresales returns, sales incentives, and price protection related to current
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period product revenue. The Company’sOur standard obligation to itsour direct customers generally provides for a full refund in the event that such product is not merchantable or is found to be damaged or defective. At the time revenue is recognized, management records an estimate of sales warranty returns to reduce revenue in the amount of the expected credit or refund to be provided to direct customers as a contra revenue. In determining estimates for futuresales returns, management analyzes certain factors, including historical sales and returns data, channel inventory levels, current economic trends, and changes in customer demand for the Company’sour products. Sales incentives and price protection are determined based on a combination of the actual amounts committed and estimated future expenditure based upon historical customary business practice. Typically, variable consideration does not need to be constrained as estimates are based on predictive historical data or future commitments that are plannedwe plan and controlled by the Company.control. However, the Company continueswe continue to assess variable consideration estimates such that it is probable that a significant reversal of revenue will not occur.
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Contracts with multiple performance obligationsMultiple Performance Obligations
Some of the Company’sour contracts with customers contain multiple promised goods or services. Such contracts include hardware products with bundled services, various subscription services, and support. For these contracts, the Company accountswe account for the promises separately as individual performance obligations if they are distinct. Performance obligations are determined to be considered distinct if they are both capable of being distinct and distinctor separately identifiable within the context of the contract. In determining whether performance obligations meet the criteria for being distinct, the Company considerswe consider a number of factors, such as the degree of interrelation and interdependence between obligations, and whether or not the good or service significantly modifies or transforms another good or service in the contract. The embedded software in most of the hardware products is not considered distinct and therefore the combined hardware and incidental software are treated as one performance obligation and recognized at the point in time when control of product transfers to the customer. Services that are included with certain hardware products are considered distinct and therefore the hardware and service are treated as separate performance obligations.
After identifying the separate performance obligations, the transaction price is allocated to the separate performance obligations on a relative stand-alone selling price basis. Stand-alone selling prices are generally determined based on the prices charged to customers or using an adjusted market assessment. Stand-alone selling price of the hardware is directly observable from add-on camera and base station sales. Stand-alone selling price of the premium services are directly observable from direct sales to end users while the service is estimated using an adjusted market approach.
Revenue is then recognized for each distinct performance obligation as control is transferred to the customer. Revenue attributable to hardware is recognized at the time control of the product transfers to the customer. The transaction price allocated to the service is recognized over the specified service period or over the estimated useful life of the hardware, beginning when the customer is expected to activate their account. Useful life of the hardware is determined by industry norms, technical and financial relevance, frequency of new model releases, and user history.
Long-termLong-Term Supply Arrangement - Verisure
The Company hasWe have entered into a Supply Agreement as part of the disposal of the Company's commercial operations in Europe as discussed in Note 4, Disposal of Business,in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K, where Verisure prepays future product purchases with a minimum product purchase commitment also required. The Supply Agreementwhich includes product purchases, paid subscription services, basic services, and an option for Verisure S.à.r.l. (“Verisure”) to acquire development services by submitting a statement of work (“SOW”). Products sold come with a standard twelve months warranty. Verisure assumes responsibilities for all warranty claims, returns of products and certain technical support provided to the end users. The Company providesWe provide technical support for paid subscription services where Verisure cannot resolve the issue. Verisure is responsible for any marketing and promotion of the Company'sour products and services sold in Europe. We concluded that we are acting as the principal in the Supply Agreement and determined that revenue should be presented gross.
Products are priced at a cost plus markup based on markupsas specified in the Supply Agreement and that price varies based on the cost of the product.Agreement. The paid subscription services and basic services pricing isare billed based on the number of usersactive cameras monthly and isare priced at a cost plus markup specified in the Supply Agreement, which varies based on the user and service type. TheAgreement. The transaction price for products and paid subscription services is entirely variable because the consideration is
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dependent on the actual costs. The Company allocates variable consideration specified for products entirely to products, and variable consideration specified for the paid subscription services entirely to the paid subscription services. For development services, no contract exists until an SOW is submitted and approved by both parties. For products, since quantity and product types are not specified in the agreement, contracts are not deemed to exist until the Company receiveswe receive and acceptsaccept the customer purchase order ("PO"(“PO”). Each product with a valid PO is considered a single performance obligation.
The Company recognizes variable consideration for products upon delivery and for services when the monthly service is rendered for paid subscription service and basic service. The non-refundable product prepayments do not relate to future goods or services, as such no further assessment of material rights is required. Further, as the transfer of products is at the discretion of the customer (i.e. when Verisure issues a PO), a significant financing component does not exist as it relates to product prepayments. The Company also expects that the product prepayments will be fully utilized by Verisure within 12 to 18 months, hence, no additional accounting consideration is necessary for breakage. The Company also concluded that it is acting as the principal in the Supply Agreement and determined that revenue should be presented gross.
NRENon-Recurring Engineering (“NRE”) Arrangement - Verisure
The Supply Agreement also provides for certain development services under an SOW to Verisure, ("NRE arrangement") as part of the disposal of the Company's commercial operations in Europe as discussed in Note 4, Disposal of Business,in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K. In the NRE arrangement,which Verisure pays non-refundable installments upon the commencement of agreed-upon milestones. There is a single performance obligation as the distinct goods and services promised under the SOW are highly interdependent or interrelated inputs that produce a single combined output given the nature of such arrangements. The output (or work-in-progress of such output) typically has no alternative use to the Company given the customized nature of the arrangement and the Company has enforceable rights given that the non-refundable milestone payments are prepayments in nature; control for NRE development services therefore transfers over time.
The CompanyWe determined that the most appropriate measure of progress for revenue recognition is the input method based on cost because the Companywe can reasonably estimate the total costs for the NRE, and the costs incurred reasonably reflects the Company’sreflect our efforts to satisfy the performance obligation. The NRE costs include
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labor, material, overhead as well as the use of outside services. The total estimated NRE costs are based on a combination of historical costs together with quotes from vendors for supplying parts or services towards the completion. Adjustments to cost and profit estimates are made periodically due to changes in scope of work, hours to complete and estimated profitability, including those arising from final contract settlements. These changes may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Any losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. If total NRE costs calculated upon completion in the current period are more than the estimated total costs at completion used to calculate revenue in a prior period, then the profits in the current period will be lower than if the estimated costs used in the prior period calculation were equal to the actual total costs upon completion.
Warranties
Sales of hardware products regularly include warranties to end customers that cover bug fixes, minor updates such that the product continues to function according to published specifications in a dynamic environment, and phone support. These standard warranties are assurance type warranties and do not offer any services in addition to the assurance that the product will continue working as specified for one or more years. Therefore, warranties are not considered separate performance obligations in the arrangement. Instead, the expected cost of warranties is accrued as an expense in accordance with authoritative guidance.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sales incentives
The Company accrues forWe recognize sales incentives offered to our customers as a marketing expense if it receiveswe receive an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit received; otherwise, it is recordedrecognized as a reduction to revenues. As a consequence, the Company recordscontra revenue. Consequently, we recognize a substantial portion of itssales incentives as channel marketing costs accounted as a reduction ofcontra revenue.
The Company recordsWe accrue estimated reductions tocontra revenue or marketing expense for sales incentives when the related revenue is recognized or ahead of customer or end customer commitment if customary business practice creates an implied expectation that such activities will occur in the future.
Shipping and handling costsHandling Costs
The Company includesWe include shipping and handling fees billed to customers in Revenue. Shipping and handling costs associated with inbound freight are included in Cost of revenue. In cases where the Company giveswe give a freight allowance to the customer for their own inbound freight costs, such costs are appropriately recorded as a reduction in Revenue. Shipping and handling costs associated with outbound freight are included in Salessales and marketing expenses. The Company hasWe have elected to account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. Shipping and handling costs associated with outbound freight totaled $2.7$5.2 million, $2.3$3.4 million and $3.7$2.9 million for the years ended December 31, 2020, 20192023, 2022 and 2018,2021, respectively.
Contract costsCosts
The Company recognizesWe recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that otherwise would have been recognized is one year or less. These costs are included in operating expenses of sales and marketing and general and administrative expenses.on the consolidated statements of comprehensive loss. If the incremental costs of obtaining a contract, which consist of sales commissions, relate to a service recognized over a period longer than one year, costs are deferred and amortized in line with the related services over the period of benefit. Deferred commissions are classified as non-current based on the original amortization period of over one year. There were 0no deferred commissions as of December 31, 20202023 and 2019.2022.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Contract balancesBalances
The Company recordsContract assets are recorded as accounts receivable, net on the consolidated balance sheets when it haswe have an unconditional right to consideration. Contract liabilities are recorded as deferred revenue on the consolidated balance sheets when cash payments are received or due in advance of performance. Contract liabilities consist of advance payments and deferredcustomer billings in advance of revenue recognition from subscription contracts where the Company haswe have unsatisfied performance obligations. Contract liabilities are classified as Deferred revenue onAdvance payments include prepayments for NRE services under the consolidated balance sheets. Supply Agreement with Verisure. Payment terms vary by customer. The time between invoicing and when payment is due is not significant. For certain products or services and customer types, payment is required before the products or services are delivered to the customer. Refer to Note 3, Deferred Revenue, inPerformance obligations represent the Notes to Consolidated Financial Statements in Item 8transaction price allocated that are unsatisfied or partially unsatisfied as of Part IIthe end of this Annual Report on Form 10-Kfor detailed disclosures regarding changes inthe reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract balances for the years ended December 31, 2020 and 2019.liabilities.
Research and developmentDevelopment
Costs incurred in the research and development of new products are expensed as incurred.
Software Development Costs
We expense software development costs, including costs to develop software products or the software component of products to be sold, leased, or marketed to external users, before technological feasibility is reached. Technological feasibility is typically reached shortly before the release of such products. As a result, development costs that meet the criteria for capitalization were $0.6 million and $1.8 million for the years ended December 31, 2023 and 2022, respectively. There were no capitalized development costs for the year ended 2021.
We capitalize software development costs related to those software applications to be used solely to meet internal needs during the application development stage. Capitalized software development costs are amortized using the straight-line amortization method over the estimated useful life of the applicable software. Costs capitalized for developing such software applications were not material as of December 31, 2023 and 2022.
Advertising costsCosts
Advertising costs are expensed as incurred.when incurred and included in sales and marketing in the consolidated statements of comprehensive loss. Total advertising and promotional expensescosts were $12.7$17.9 million, $12.3$27.1 million and $13.4$9.6 million for the years ended December 31, 2020, 20192023, 2022 and 2018,2021, respectively.
Stock-based compensation
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company’s employees have historically participated in NETGEAR’s stock-based compensation plans. Stock-based compensation expense has been allocated to the Company based on the awards and terms previously granted to the Company’s employees as well as an allocation of NETGEAR’s corporate and shared functional employee expenses. The Company measuresWe measure stock-based compensation at the grant date based on the fair value of the award. The fair value of stock options andis estimated on the shares offered under the employee stock purchase plan is estimatedgrant date using the Black-Scholes option pricing model. Estimated compensation cost relating to restricted stock units ("RSUs") is based on the closing fair market value of NETGEAR’s common stock on the date of grant.
Equity awards granted by the Company under its own stock-based compensation plans on or after the completion of the IPO are comprised of performance-based stock options (the “PSOs”), stock options, RSUs, performance RSUs ("PSUs"), and market-based performance RSUs ("MPSUs"). The Company uses the fair value method of accounting for its equity awards granted to employees and measures the cost of employee services received in exchange for the stock-based awards. The Company recognizes this compensation expense generally on a straight-line basis over the requisite service period of the award. The fair value of restricted stock optionsunits (“RSUs”) and PSOs is estimated on the grant or offering date using the Black-Scholes option pricing model and the forfeitures are recorded as they occur. The fair value of RSUs and PSUsperformance-based restricted stock units is measured on the grant date based on the closing fair market value of the Company’sour common stock. The Company utilizesWe utilize a Monte Carlo pricing model customized to the specific provisions of the 2018 Plan to value the MPSUs awardsmarket-based restricted stock units on the grant date. The fair value determined using the Monte Carlo simulation model varies based on the assumptions used for the expected stock price volatility, the correlation coefficient between the CompanyArlo and Russell 2000 Index, risk-free interest rates, and dividend yield. Forfeitures are accounted for as they occur.
The stock-based compensation cost is recognized ratably over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period, which is generally four years for stock options and three to four years for RSUs. For PSOs and PSUs, stock-based compensation expense associated with individual performance milestones is recognized over the expected performance achievement period when the achievement becomes probable. For MPSUs, stock-based compensation expense is recognized ratably over the performance period subject to achievement of market conditions.
The Company's 2018Our Employee Stock Purchase Plan (“ESPP”) is intended to provide employees with the opportunity to purchase the Company'sour common stock through accumulated payroll deductions at the end of specified purchase period. Eligible employees may contribute up to 15% of compensation, subject to certain income limits, to purchase shares of the Company'sour common stock. The terms of the plan include a look-back feature that enables employees to purchase stock semi-annually at a price equal to 85% of the lesser of the fair market value at the beginning of the offering period or the purchase date. The duration of each purchasing period is generally six months. The Company determines the fair value using the Black-Scholes Model using various inputs, including our estimate of expected volatility, term, dividend yield and risk-free interest rate. The Company recognizes compensation costs for the ESPP on a straight-line basis over the requisite service period of the award.
On the Distribution Date, outstanding equity awards granted to Arlo employees under NETGEAR’s stock-based compensation plans were adjusted into NETGEAR awards and Arlo awards based on the conversion ratio as set forth in the employee matters agreement between Arlo and NETGEAR. The Company did not recognize any incremental expense in connection with the conversion of NETGEAR’s Stock based awards into Arlo awards. Refer to Note 13, Employee Benefit Plans, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for a further discussion on stock-based compensation.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
generally six months. We determine the fair value using the Black-Scholes Model using various inputs, including its estimate of expected volatility, term, dividend yield and risk-free interest rate. The risk-free interest rate of the purchase rights granted under the ESPP is based on the implied yield currently available on U.S. Treasury securities, with a remaining term commensurate with the estimated expected term. Expected volatility of the purchase rights granted under the ESPP is based on historical volatility over the most recent period commensurate with the estimated expected term.
Leases
Effective January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of the first fiscal quarter of 2019.
The Company determines if an arrangement is a lease at inception. Under the new standard, operating leases are included in operating lease right-of-use (“ROU”) assets, accrued liabilities,We recognize compensation costs for RSUs, stock options, and non-current operating lease liabilities in the consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Fixed lease expense for lease payments are recognized in the consolidated statements of operationsESPP on a straight-line basis over the lease term and variable lease payments in therequisite service period in which the obligation for those payments is incurred.
ROU assets represent the Company’s right to use an underlying asset over the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate,award, usually the incremental borrowing rate based on the information available was used at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made before the lease commencement date less any lease incentives received. The lease terms may include options to extend or terminate the lease when itvesting period, which is reasonably certain that the Company will exercise the options. The lease agreements with lease and non-lease components are generally accounted as a single component.
Net income (loss) per share
Basic net income (loss) per share is computed by dividing the net income (loss)four years for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. Potentially dilutive common shares include common shares issuable upon exercise of stock options and vestingthree to five years for RSUs. For performance-based RSUs, compensation costs associated with individual performance milestones is recognized over the period when the performance conditions achievement become probable. In addition, we evaluate the probability of restricted stock awards, which are reflected in diluted net income (loss) per share by application ofachieving the treasury stock method. Potentially dilutive common shares are excluded from the computation of diluted net income (loss) per share when their effect is anti-dilutive.
Segment Information
The Company operates as 1 operating and reportable segment. The Company has identified its CEO as the Chief Operating Decision Maker (“CODM”). The CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Comprehensive income (loss)
Comprehensive income consists of net income (loss) and other gains and losses affecting stockholders’ equity that the Company excluded from net income (loss), including unrealized gains and losses related to fair value of short-term investments and the effective portion of cash flow hedges that were outstandingperformance conditions at the end of each reporting period and record the year.related stock-based compensation expense based on performance to date over the service period. For market-based RSUs, stock-based compensation expense is recognized ratably over the performance period subject to achievement of market conditions.
Foreign currency translation and re-measurementCurrency
The Company’sOur functional currency is the U.S. dollar. Foreign currency transactions of international subsidiaries are re-measured into U.S. dollars at the end-of-period exchange rates for monetary assets and liabilities, and at historical exchange rates for non-monetary assets and liabilities. Revenue is re-measured at average exchange rates in effect during each period. Expenses are re-measured at average exchange rates in effect during each period, except for expenses related to non-monetary assets and liabilities, which are re-measured at historical exchange rates. Gains and losses arising from foreign currency transactions are included in Otherother income, (expense), net on the consolidated statements comprehensive loss.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of operations.common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. Potentially dilutive common shares include common shares issuable upon exercise of stock options, vesting of restricted stock awards and performance shares, and issuances of shares under the ESPP, which are reflected in diluted net loss per share by application of the treasury stock method. Potentially dilutive common shares are excluded from the computation of diluted net loss per share when their effect is anti-dilutive.
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.
Income taxesTaxes
We record ourthe provision for income taxes in ourthe consolidated financial statements using the asset and liability method. Under this method, we recognize income tax liabilities or receivablereceivables for the current year. We also recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. Our assessment considers the recognition of deferred tax assets on a jurisdictional basis. Accordingly, in assessing ourthe future taxable income on a jurisdictional basis, we consider the effect of itsthe transfer pricing policies on that income. We have placedrecorded a valuation allowance against U.S. federal and state
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
deferred tax assets and certain foreign tax attribute carryforwards since we do not anticipate to realizerealizing the benefits of these deferred tax assets.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. As we expand internationally, we will face increased complexity in determining the appropriate tax jurisdictions for revenue and expense items. Our policy is to adjust these unrecognized tax benefits in the period when facts and circumstances change, such as the closing of a tax audit, the expiration of statute of limitation for a relevant taxing authority to examine a tax position, or when additional information becomes available. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on ourthe financial condition and operating results. The provision for income taxes includes the effects of any accruals that we believe are appropriate, as well as the related interest and penalties.
TheLegislation enacted in 2017, informally titled the Tax Cuts and Jobs Act introduced the GILTIglobal intangible low-taxed income (“GILTI”) provisions effective in 2018, which generally impose a tax on the net income earned by foreign subsidiaries of a U.S company in excess of a deemed return on their tangible assets. We recognize the tax on GILTI as a period cost when the tax is incurred.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
There were no accounting pronouncements adopted during the year ended December 31, 2023.
Accounting Pronouncements Not Yet Effective
In October 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative,which modifies the disclosure or presentation requirements of a variety of Topics in the Codification. Among the various codification amendments, Topic 470 Debt is applicable to Arlo which requires the disclosure of amounts, terms and weighted-average interest rates of unused lines of credit. The effective date is either the date on which the SEC’s removal of the related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, or on June 30, 2027, if the SEC has not removed the requirement by that date, with early adoption prohibited. The adoption of this new standard will not have a material impact on our consolidated financial statements.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting: Improvements to Reportable Segment Disclosures, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. This guidance is effective for annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the impact of this guidance may have on our financial statements and related disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes: Improvements to Income Tax Disclosures,which requires on an annual basis to (1) disclose specific categories in the rate reconciliation, (2) provide additional information for reconciling items that meet a quantitative threshold, and (3) income taxes paid disaggregated by jurisdiction. This guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact of this guidance may have on our financial statements and related disclosures.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 3. Revenue
Certain risks and uncertaintiesContract Balances
The Company’s products are concentratedfollowing table reflects the changes in contract balances for the years ended December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contract Balances | Balance Sheet Location | | December 31, 2023 | | December 31, 2022 | |
$ change | |
% change |
| | | (In thousands) | | |
| Accounts receivable, net | Accounts receivable, net | | $ | 65,360 | | | $ | 65,960 | | | $ | (600) | | | (0.9) | % |
| Contract liabilities current | Deferred revenue | | $ | 18,041 | | | $ | 11,291 | | | $ | 6,750 | | | 59.8 | % |
| Contract liabilities non-current | Other non-current liabilities | | $ | 73 | | | $ | 212 | | | $ | (139) | | | (65.6) | % |
For the year ended December 31, 2023, compared to the previous year, deferred revenue increased, primarily due to deferred service revenue increase, driven by the increases in cumulative paid accounts and rates of subscriptions.
For the years ended December 31, 2023 and 2022, $11.3 million and $29.4 million, respectively, of the recognized revenue was included in the connected lifestyle solution industries, which are characterized by rapid technological advances,contract liability balance at the beginning of the periods. There were no significant changes in customer requirements and evolving regulatory requirements and industry standards. The success ofestimates during the Company depends on management’s ability to anticipate and/or to respond quickly and adequately to such changes. Any significant delays in the development or introduction of products and services could materially adverselyperiods that would affect the Company’s business, resultscontract balances. Refer to Note 4, Balance Sheet Components for further details of operations and financial condition.accounts receivable, net.
Performance Obligations
The Company relies ontotal estimated service revenue expected to be recognized in the future related to performance obligations that are unsatisfied and partially unsatisfied as of December 31, 2023 was $18.8 million, with $18.7 million related to a limited number of third partiesperformance obligation classified as less than one year. The performance obligation classified as greater than one year pertains to manufacture all of its products. If any of the Company’s third-party manufacturers cannot or will not manufacture its products in required volumes, on a cost-effective basis, in a timely manner or at all, the Company will have to secure additional manufacturing capacity. Any interruption or delay in manufacturing could materially adversely affect the Company’s business, results of operations and financial condition.revenue deferral from prepaid services.
Recent accounting pronouncements
Emerging Growth Company Status
During the five-year period that commenced on January 1, 2020, Verisure Sàrl (“Verisure”) has an aggregate purchase commitment of $500.0 million. 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 an emerging growth company (“EGC”),of December 31, 2023, $469.8 million of the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoptionpurchase commitment has been fulfilled. As of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless the Company otherwise irrevocably elects not to avail itselfDecember 31, 2023, we had a backlog of this exemption. The Company did not make such an irrevocable election and has not delayed the adoption of any applicable accounting standards.
Accounting Pronouncements Recently Adopted
ASU 2016-13 - Measurement of Credit Losses on Financial Instruments
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326),$52.3 million which replaces the incurred-loss impairment methodology and requires immediate recognition of estimated credit losses expected to occur for most financial assets, including trade receivables. Credit losses on available-for-sale debt securities with unrealized lossesrepresents performance obligations that will be recognized as allowances for credit losses, limitedrevenue once fulfilled, which is expected to occur over the amount by which fair value is below amortized cost. The Company adopted Topic 326 on January 1, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. There was no cumulative-effect adjustment recorded on January 1, 2020.next twelve months.
ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income TaxesDisaggregation of Revenue
In December 2019,We disaggregate our revenue into three geographic regions: the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740Americas, EMEA, and clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning January 1, 2022 (or January 1, 2021 should the Company cease to be classified as an EGC), with early adoption permitted.APAC, where we conduct our business. The Company early adopted ASU 2019-12 on January 1, 2020. There was no material impact from the adoption of ASU 2019-12 on the Company's financial statements.following table presents revenue disaggregated by geographic region.
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| (In thousands) |
| Americas | $ | 301,418 | | | $ | 273,981 | | | $ | 271,182 | |
| EMEA | 164,750 | | | 196,465 | | | 134,232 | |
| APAC | 25,008 | | | 19,968 | | | 29,723 | |
| Total | $ | 491,176 | | | $ | 490,414 | | | $ | 435,137 | |
Accounting Pronouncements Not Yet Effective
In March 2020, the FASB issued ASU 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting". The accounting standards update is intended to provide temporary optional expedients and exceptions to the U.S.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This guidance may be applied prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its financial statements and related disclosures.
With the exception of the new standards discussed above, there have been no other new accounting pronouncements that have significance, or potential significance, to the Company’s financial position, results of operations, or cash flows.
Note 3. Deferred Revenue
Deferred revenue consists of advance payments and deferred revenue, where the Company has unsatisfied performance obligations. Deferred revenue consists of prepaid services and customer billings in advance of revenues being recognized from the Company's subscription contracts. Advance payments include prepayments for products and NRE services under the Supply Agreement with Verisure. Refer to Note 4, Disposal of Business,in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-Kfor a complete discussion of the Verisure transaction.
Transaction Price Allocated to the Remaining Performance Obligations
Remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities, in-transit orders with destination terms, and non-cancellable backlog. Non-cancellable backlog includes goods and services for which customer purchase orders have been accepted and that are scheduled or in the process of being scheduled for shipment.
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 1 year | | 2 years | | Greater than 2 years | | Total |
| | (In thousands) |
| Performance obligations | | $ | 63,111 | | | $ | 15,788 | | | $ | 871 | | | $ | 79,770 | |
The performance obligation greater than one year pertains to revenue deferral from prepaid services.
Contract Balances
The following table reflects the changes in contract balances for the year ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2020 | | 2020 |
| Balance Sheet Location | | December 31, 2020 | | December 31, 2019 | |
$ change | |
% change |
| | | (In thousands) | | |
| Accounts receivable, net | Accounts receivable, net | | $ | 77,643 | | | $ | 127,317 | | | $ | (49,674) | | | (39.0) | % |
| Contract liabilities - current | Deferred revenue | | $ | 53,142 | | | $ | 50,362 | | | $ | 2,780 | | | 5.5 | % |
| Contract liabilities - non-current | Non-current deferred revenue | | $ | 16,563 | | | $ | 15,736 | | | $ | 827 | | | 5.3 | % |
For the year ended December 31, 2020, compared to the previous year, Accounts receivable, net decreased, primarily driven by customer mix, lower product shipments, the sale of our commercial operations in Europe to Verisure, and growth in sales from Arlo's direct to consumer store; current portion of deferred revenue increased, primarily due to $29.4 million Verisure prepayment for product purchases, which is expected to be utilized in fiscal 2021, $5.0 million Verisure NRE installment payments, and $7.9 million deferred service revenue, offset by $7.9 million service revenue recognized
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
under the NRE arrangement with Verisure, application of $20.0 million 2019 Verisure prepayment for product purchases in fiscal 2020 against Accounts receivable, and $11.6 million service revenue recognition; and Non-current deferred revenue increased due to $9.8 million deferred service revenue and $10.6 million Verisure prepayment for product purchases, which is expected to be utilized in fiscal 2022.
For the years ended December 31, 2020 and 2019, $90.9 million and $71.6 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue and Verisure prepayments for product purchases, and $67.3 million and $47.4 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. $26.2 million and $26.4 million of this recognized revenue was included in the contract liability balance at the beginning of the period. There were no significant changes in estimates during the period that would affect the contract balances.
Disaggregation of Revenue
The Company conducts business across 3 geographic regions: Americas, EMEA, and APAC. Sales and usage-based taxes are excluded from revenue. Refer to Note 15, Segment and Geographic Information, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for revenue by geography.
Note 4. Disposal of Business
On November 4, 2019, the Company and Verisure concurrently entered into an Asset Purchase Agreement (the “Purchase Agreement”) and Supply Agreement (the “Supply Agreement” and together with the Purchase Agreement, the “Verisure Agreements”). The Verisure Agreements created a strategic partnership that leverages both the Company and Verisure’s capabilities to create incremental scale to address the ever-growing demand for residential and commercial security. The strategic partnership will combine the Company’s innovative connected cameras and cloud services platform with Verisure’s professionally monitored security solutions to provide a new level of smart security for European customers. The Purchase Agreement provided that, upon the terms and subject to the conditions set forth in the Purchase Agreement, the Company transferred, sold and assigned to Verisure certain assets (the "Assets") related to the Company’s commercial operations in Europe (the "Business") to Verisure for $50.0 million in cash plus additional cash for certain inventory. The Purchase Agreement contains customary representations and warranties regarding Verisure, the Business and the Assets, indemnification provisions, termination rights and other customary provisions. The Company has agreed not to engage in any business that competes with the Business for a period of three years.
The transaction closed on December 30, 2019 pursuant to which the Company received $52.7 million including working capital adjustments, which resulted in a pretax gain of $54.9 million in the fourth fiscal quarter of 2019. In the first fiscal quarter of 2020, the Company recorded an additional gain of $292 thousand that was recorded in Gain on sale of business in the Company's unaudited condensed consolidated statements of operations as a result of the final working capital adjustment. As part of the transaction, certain employees were transferred to Verisure. These employees hold Company RSU awards, and the terms of the RSU awards were modified such that the RSU awards will continue to vest and settle after closing of the transaction in accordance with the original terms and conditions of RSU awards. Refer to Note.13 Employee Benefit Plans, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for further detail relating to this modification.
The assets and liabilities sold and assigned to Verisure were determined to have met the criteria to be classified as held for sale as of November 4, 2019, the execution date of the Purchase Agreement. The transaction contemplated by the Purchase Agreement did not meet the criteria for discontinued operations as the Company is expected to have continued involvement in Europe through manufacturing and shipping of products to the region through sales to Verisure as part of the Supply Agreement and therefore no significant change in revenue from the region is expected; it was determined the transaction did not represent a strategic shift. The Company also assessed whether a loss is needed to be recorded upon initial classification of the assets and liabilities as held for sale to adjust its carrying amount to the fair value less cost to sell. As the carrying amount of the assets and liabilities was lower than fair value less cost to sell, no adjustment was necessary. As of the
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
closing date of December 30, 2019, the Company concluded that no impairment exists for the assets and no adjustment was necessary for the liabilities. Further, the Company reassessed the fair value and cost to sell, and noted that they did not change since the initial classification of the assets and liabilities as held for sale. Given such, no loss adjustment was necessary.
The Supply Agreement provides that Verisure will become the exclusive distributor of Company products in Europe for all channels, and will non-exclusively distribute the Company's products through its direct channels globally for an initial terms of five years. During the five-year period commencing January 1, 2020, Verisure has an aggregate purchase commitment of $500.0 million. As of December 31, 2020, $47.3 million of the purchase commitment has been fulfilled. In 2019 and 2020, Verisure prepaid the Company $20.0 million for product purchases in fiscal 2020 and $40.0 million for product purchases in fiscal 2021 and fiscal 2022, respectively.
The Supply Agreement also provides certain NRE service to Verisure, including developing certain custom products specified by Verisure in exchange for an aggregate of $10.0 million, payable in installments upon meeting certain development milestones. In the second fiscal quarter of 2020, an additional $3.5 million was added to the contract price as a result of a modification to Verisure's specification for the Outdoor Custom Camera. As of December 31, 2020, Verisure has paid $7.5 million for this NRE service. For the year ended December 31, 2020, the Company has recognized service revenue of $7.9 million for this NRE service.
As part of the Purchase Agreement, the Company also entered into a Transition Services Agreement with Verisure (“Verisure TSA”) to assist Verisure with the transition of the Company’s European commercial operations. These transition services primarily include IT support and other services, including sales and marketing, operations and supply chain, finance, legal, and human resources. As compensation for these transition services, the Company will be reimbursed by Verisure based on actual direct costs plus allocation of overhead. For the year ended December 31, 2020, the Company charged Verisure $4.0 million for Verisure TSA services which was recorded as Other income, given such services are not related to the primary business in which the Company operates. The related Verisure TSA expenses in the same amount were recognized as incurred and reported under their natural expense classification.
Note 5.4. Balance Sheet Components
Available-for-sale short-term investments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 | | As of December 31, 2019 |
| | Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value | | Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
| (In thousands) |
| U.S. treasuries | $ | 19,996 | | | $ | 1 | | | $ | 0 | | | $ | 19,997 | | | $ | 19,967 | | | $ | 23 | | | $ | 0 | | | $ | 19,990 | |
The Company’s short-term investments are classified as available-for-sale and consist of government securities with an original maturity or remaining maturity at the time of purchase of greater than three months and no more than twelve months. Accordingly, none of the available-for-sale securities have unrealized losses greater than twelve months. The Company did not recognize any other-than-temporary impairment losses related to available-for-sale short-term investment for the years ended December 31, 2019 and 2018. During the year ended December 31, 2020, with the adoption of ASU 2016-13, the Company did not recognize any allowance for credit losses related to available-for-sale short-term investment for the year ended . | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 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 | $ | 79,654 | | | $ | 320 | | | $ | — | | | $ | 79,974 | | | $ | 29,849 | | | $ | — | | | $ | (149) | | | $ | 29,700 | |
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounts receivable, net
| | As of December 31, |
| 2020 | | 2019 |
| (In thousands) |
| As of December 31, | | | As of December 31, |
| 2023 | | | 2023 | | 2022 |
| (In thousands) | | | (In thousands) |
| Gross accounts receivable | Gross accounts receivable | $ | 78,162 | | | $ | 127,926 | |
| Allowance for credit losses | Allowance for credit losses | (519) | | | (609) | |
| Total accounts receivable, net | $ | 77,643 | | | $ | 127,317 | |
| Total | |
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.
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands) |
| Balance at the beginning of the period | $ | 609 | | | $ | 127 | | | $ | 207 | |
| Adoption of ASU 2016-13, cumulative-effect adjustment to retained earnings | 0 | | | 0 | | | 0 | |
| Provision for expected credit losses | 186 | | | 482 | | | 0 | |
| Amount recovered due to collection | (276) | | | 0 | | | (80) | |
| Balance at the end of the period | $ | 519 | | | $ | 609 | | | $ | 127 | |
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (In thousands) |
| Balance at the beginning of the period | $ | 423 | | | $ | 337 | | | $ | 519 | |
| Provision for (release of) expected credit losses | (90) | | | 86 | | | (182) | |
| Balance at the end of the period | $ | 333 | | | $ | 423 | | | $ | 337 | |
Property and equipment, net
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| (In thousands) |
| Machinery and equipment | $ | 14,397 | | | $ | 13,402 | |
| Software | 13,192 | | | 11,945 | |
| Computer equipment | 4,083 | | | 4,047 | |
| Leasehold improvements | 8,023 | | | 8,087 | |
| Furniture and fixtures | 4,048 | | | 4,075 | |
| | | |
| Total property and equipment, gross | 43,743 | | | 41,556 | |
| Accumulated depreciation | (27,922) | | | (20,204) | |
| Total property and equipment, net | $ | 15,821 | | | $ | 21,352 | |
Depreciation expense pertaining to property and equipment was $8.8 million, $9.2 million and $3.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. Allocated depreciation expense from NETGEAR was $1.2 million for the year ended December 31, 2018. For the periods prior to the completion of the IPO, the consolidated statements of operations include both the depreciation expense directly identifiable as Arlo’s and allocated depreciation expense from NETGEAR. Refer to Allocated Expenses from NETGEAR as discussed in Note 1, The Company and Basis of Presentation, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for detailed disclosures regarding the methodology used for allocated expenses from NETGEAR.
Intangibles, net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 | | As of December 31, 2019 |
| | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| (In thousands) |
| Technology | $ | 9,800 | | | $ | (9,800) | | | $ | 0 | | | 9,800 | | | $ | (8,540) | | | $ | 1,260 | |
| Other | 500 | | | (500) | | | 0 | | | 500 | | | (454) | | | 46 | |
| Total intangibles, net | $ | 10,300 | | | $ | (10,300) | | | $ | 0 | | | $ | 10,300 | | | $ | (8,994) | | | $ | 1,306 | |
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment, Net
AsThe components of property and equipment are as follows:
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| (In thousands) |
| Machinery and equipment | $ | 14,148 | | | $ | 12,696 | |
| Software | 15,639 | | | 15,606 | |
| Computer equipment | 1,438 | | | 3,992 | |
| Leasehold improvements | 4,661 | | | 4,657 | |
| Furniture and fixtures | 2,544 | | | 2,554 | |
| Total property and equipment, gross | 38,430 | | | 39,505 | |
| Accumulated depreciation | (33,669) | | | (32,169) | |
Total property and equipment, net (1) | $ | 4,761 | | | $ | 7,336 | |
_________________________
(1) $1.0 million and $1.7 million property and equipment, net was included in the sublease arrangement for the San Jose office building as of December 31, 2020, all finite-lived intangibles were fully amortized. Amortization2023 and 2022, respectively.
Depreciation expense of finite-lived intangiblespertaining to property and equipment was $1.3$4.7 million, $1.5$4.8 million and $1.5$5.9 million for the years ended December 31, 2020, 20192023, 2022 and 2018,2021, respectively. NaN impairment charges were recorded for all periods presented.
Goodwill
There was 0 change in the carrying amount of goodwillWe have determined that no event occurred or circumstances changed during the year ended December 31, 2020, and the goodwill as of December 31, 2020 and December 31, 2019 was $11.0 million.
On December 30, 2019, the Company derecognized $4.6 million goodwill associated with the Company's commercial operations in Europe, which was incorporated in the calculation of the gain on the sale of business to Verisure.
Goodwill Impairment
The Company performs an annual assessment of goodwill at the reporting unit level on the first day of the fourth fiscal quarter and during interim periods if there are triggering events to reassess goodwill. The Company operates as 1 operating and reportable segment.
In the first fiscal quarter of 2020, the uncertainty brought about by the COVID-19 pandemic adversely impacted the Company's stock price. The resulting impact to the Company’s market capitalization is a qualitative factor to consider when evaluating whether events or changes in circumstances indicate that it is more likely than not that a potential goodwill impairment exists. The Company concluded that the decline in the price of its common stock as a result of the COVID-19 impact was an indicator that the Company’s goodwill might be impaired. As a result, in the first fiscal quarter of 2020, the Company performed a quantitative assessment using the discounted cash flow model ("DCF model") as of March 29, 2020. The Company estimated the fair value of the business using the DCF model, as management believes forecasted operating cash flows are the best indicator of current fair value. The assumptions used in the DCF model include weighted-average cost of capital, projected revenue based on projected revenue growth rate, projected operating expenses, income taxes as well as capital expenditures and change in working capital. Estimating the fair value of the business was a subjective process involving the use of estimates and judgments, particularly related to future cash flows, which are inherently uncertain. Based on the results of the quantitative assessment using the DCF model, as of March 29, 2020, the respective fair value was substantially in excess of the carrying amount by $94.1 million, or 53%.
On the first day of the fourth quarter of 2020, the Company performed a qualitative assessment in consideration of macroeconomic conditions, industry and market conditions, cost factors, overall company financial performance, and changes in the Company's stock price. The Company did not believe it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The Company also performed a quantitative assessment by utilizing its market capitalization as a proxy for fair value of the business and comparing it to the carrying amount as of October 1, 2020. Based on the results of the quantitative assessment, the respective fair value was substantially in excess of the carrying amount by $276.2 million, or 195%.
As fair value was greater than carrying amount, goodwill was not impaired as of December 31, 2020. If there are events occurred or circumstances changed (i.e. a decline in the Company’s stock price based on market conditions and deterioration of the Company’s business)2023 that would more likely than not reduce the fair value of goodwill below the Company below its carrying amount, the Company may have to record a charge to its earnings for the associatedamount. No goodwill impairment of up to was recognized in the years ended December 31, 2023, 2022 and 2021.
Accrued Liabilities
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| (In thousands) |
| Sales incentives | $ | 28,187 | | | $ | 36,271 | |
Sales returns | 17,058 | | | 18,656 | |
| Compensation | 13,278 | | | 15,556 | |
| Cloud and other costs | 10,985 | | | 11,154 | |
| Other | 18,701 | | | 17,218 | |
| Total | $ | 88,209 | | | $ | 98,855 | |
$11.0 million.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other non-current assets
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| (In thousands) |
| Non-current deferred income taxes | $ | 1,269 | | | $ | 1,318 | |
| Deposits | 122 | | | 764 | |
| Other | 1,008 | | | 1,926 | |
| Total other non-current assets | $ | 2,399 | | | $ | 4,008 | |
Accrued liabilities
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| (In thousands) |
| Sales and marketing | $ | 38,577 | | | 53,974 | |
Sales returns | 37,689 | | | 28,817 | |
| Accrued employee compensation | 15,089 | | | 11,795 | |
| Operating lease liabilities | 4,400 | | | 3,912 | |
| Freight | 3,558 | | | 2,690 | |
| | | |
| Warranty obligation | 2,451 | | | 3,169 | |
| Other | 20,002 | | | 23,043 | |
| Total accrued liabilities | $ | 121,766 | | | $ | 127,400 | |
Note 6.5. Fair Value Measurements
The following tables summarizetable summarizes assets and liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019:basis:
| | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Total | | Quoted market
prices in active
markets
(Level 1) | | Significant
other
observable
inputs
(Level 2) | | |
| (In thousands) |
| Assets: | | | | | | | |
| Cash equivalents: money-market funds (<90 days) | $ | 1,934 | | | $ | 1,934 | | | $ | 0 | | | |
Available-for-sale securities: U.S. treasuries (1) | 19,997 | | | 19,997 | | | 0 | | | |
Foreign currency forward contracts (2) | 24 | | | 0 | | | 24 | | | |
| Total assets measured at fair value | $ | 21,955 | | | $ | 21,931 | | | $ | 24 | | | |
| Liabilities: | | | | | | | |
Foreign currency forward contracts (3) | $ | 199 | | | $ | 0 | | | $ | 199 | | | |
| Total liabilities measured at fair value | $ | 199 | | | $ | 0 | | | $ | 199 | | | |
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Total | | Quoted market
prices in active
markets
(Level 1) | | Significant
other
observable
inputs
(Level 2) | | |
| (In thousands) |
| Assets: | | | | | | | |
| Cash equivalents: U.S. treasuries (<90 days) | $ | 31,472 | | | $ | 31,472 | | | $ | 0 | | | |
Available-for-sale securities: U.S. treasuries (1) | 19,990 | | | 19,990 | | | 0 | | | |
Foreign currency forward contracts (2) | 27 | | | 0 | | | 27 | | | |
| Total assets measured at fair value | $ | 51,489 | | | $ | 51,462 | | | $ | 27 | | | |
| Liabilities: | | | | | | | |
Foreign currency forward contracts (3) | $ | 375 | | | $ | 0 | | | $ | 375 | | | |
| Total liabilities measured at fair value | $ | 375 | | | $ | 0 | | | $ | 375 | | | |
| | | | | | | | | | | | | |
| As of December 31 |
| 2023 | | 2022 | | |
| (In thousands) |
| Cash equivalents: money-market funds (<90 days) | $ | 5,782 | | | $ | 12,614 | | | |
| Cash equivalents: U.S. Treasuries (<90 days) | 520 | | | 20,274 | | | |
Available-for-sale securities: U.S. Treasuries (1) | 79,974 | | | 29,700 | | | |
| Total | $ | 86,276 | | | $ | 62,588 | | | |
_________________________
(1)Included in Short-termshort-term investments on the Company’s consolidated balance sheets.
(2)Included in Prepaid expenses and other current assets on the Company’s consolidated balance sheets.
(3)Included in Accrued liabilities on the Company’s consolidated balance sheets.
The Company’sOur investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company enters into foreign currency forward contracts with only those counterparties that have long-term credit ratings of A-/A3 or higher. The Company’s foreign currency forward contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that take into account the contract terms as well as currency rates and counterparty credit rates. The Company verifies the reasonableness of these pricing models using observable market data for related inputs into such models. Additionally, the Company includes an adjustment for non-performance risk in the recognized measure of fair value of derivative instruments.
As of December 31, 2020, the adjustment for non-performance risk did not have a material impact on the fair value of the Company’s foreign currency forward contracts. The carrying value of non-financial2023 and 2022, assets and liabilities measured atas Level 2 fair value in the financial statements on a recurring basis, including accounts receivablewere not material and accounts payable, approximate fair value due to their short maturities. As of December 31, 2020, the Company has 0there were no Level 3 fair value assets or liabilities.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 December 31, 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 the consolidated balance sheets. The restructuring charges are included in others in the consolidated statements of comprehensive loss. Restructuring activities for the year ended December 31, 2023 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Severance Expense | | Office Exit Expense | | Other Exit Expense |
| (In thousands) |
| Balance as of December 31, 2021 | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Restructuring charges | 1,805 | | | 798 | | | 928 | | | 79 | |
| Cash payments | (588) | | | (579) | | | — | | | (9) | |
| Non-cash and other adjustments | 48 | | | — | | | 63 | | | (15) | |
| Balance as of December 31, 2022 | $ | 1,265 | | | $ | 219 | | | $ | 991 | | | $ | 55 | |
| Restructuring charges | 692 | | | 564 | | | 117 | | | 11 | |
| Cash payments | (1,479) | | | (694) | | | (745) | | | (40) | |
| Non-cash and other adjustments | (26) | | | — | | | — | | | (26) | |
| Balance as of December 31, 2023 | $ | 452 | | | $ | 89 | | | $ | 363 | | | $ | — | |
| Total costs incurred inception to date | $ | 2,746 | | | $ | 1,609 | | | $ | 1,073 | | | $ | 64 | |
Note 7. Derivative Financial InstrumentsRevolving Credit Facility
Fair valueOn October 27, 2021, we entered into a Loan and Security Agreement (the “Credit Agreement”) with Bank of derivative instruments
The fair values of the Company’s derivative instruments and the line items on the consolidated balance sheets to which they were recordedAmerica, N.A., a national banking association, as of December 31, 2020 and 2019 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, | | | | December 31, |
| Derivative Assets | | Balance Sheet
Location | | 2020 | | 2019 | | Balance Sheet
Location | | 2020 | | 2019 |
| | | | (In thousands) | | | | (In thousands) |
| Derivative assets not designated as hedging instruments | | Prepaid expenses and other current assets | | $ | 22 | | | $ | 27 | | | Other accrued liabilities | | $ | 199 | | | $ | 347 | |
| Derivative assets designated as hedging instruments | | Prepaid expenses and other current assets | | 2 | | | 0 | | | Other accrued liabilities | | 0 | | | 28 | |
| Total | | | | $ | 24 | | | $ | 27 | | | | | $ | 199 | | | $ | 375 | |
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Refer to Note 6, Fair Value Measurements, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-Kfor detailed disclosures regarding fair value measurements in accordance with the authoritative guidance for fair value measurements and disclosures.
Gross amounts offsetting of derivative instruments
The Company has entered into master netting arrangements which allow net settlements under certain conditions. Although netting is permitted, it is currently the Company’s policy and practice to record all derivative assets and liabilities on a gross basis in the consolidated balance sheets.
The following tables set forth the offsetting of derivative assets and liabilities as of December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
| Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts Of Assets Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
| | (In thousands) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Wells Fargo Bank | | $ | 24 | | | $ | 0 | | | $ | 24 | | | $ | (24) | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
| Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts Of Liabilities Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
| | (In thousands) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Wells Fargo Bank | | $ | 199 | | | $ | 0 | | | $ | 199 | | | $ | (24) | | | $ | 0 | | | $ | 175 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2019 | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
| Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts Of Assets Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
| | (In thousands) |
| HSBC | | $ | 6 | | | $ | 0 | | | $ | 6 | | | $ | (6) | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | |
| Wells Fargo Bank | | 21 | | | 0 | | | 21 | | | (21) | | | 0 | | | 0 | |
| Total | | $ | 27 | | | $ | 0 | | | $ | 27 | | | $ | (27) | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2019 | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
| Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts Of Assets Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
| | (In thousands) |
| HSBC | | $ | 83 | | | $ | 0 | | | $ | 83 | | | $ | (6) | | | $ | 0 | | | $ | 77 | |
| | | | | | | | | | | | |
| Wells Fargo Bank | | 292 | | | 0 | | | 292 | | | (21) | | | 0 | | | 271 | |
| Total | | $ | 375 | | | $ | 0 | | | $ | 375 | | | $ | (27) | | | $ | 0 | | | $ | 348 | |
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash flow hedges
The Company typically hedges portions of its anticipated foreign currency exposure which generally are less than six months. The Company entered into 6 forward contracts related to its cash flow hedging program for the year ended December 31, 2020 with an average size of $1.4 million equivalent related to its cash flow hedging program.
The effects of the Company’s cash flow hedges on the consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges |
| Year Ended December 31, 2020 | | Revenue | | Cost of revenue | | Research and development | | Sales and marketing | | General and administrative |
| | (In thousands) |
| Statements of operations | | $ | 357,154 | | | $ | 301,765 | | | $ | 60,137 | | | $ | 49,064 | | | $ | 51,096 | |
| Gains (losses) on cash flow hedge | | $ | (32) | | | $ | 0 | | | $ | 5 | | | $ | 4 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges |
| Year Ended December 31, 2019 | | Revenue | | Cost of revenue | | Research and development | | Sales and marketing | | General and administrative |
| | (In thousands) |
| Statements of operations | | $ | 370,007 | | | $ | 334,203 | | | $ | 69,384 | | | $ | 56,985 | | | $ | 47,624 | |
| Gains (losses) on cash flow hedge | | $ | 390 | | | $ | (3) | | | $ | (28) | | | $ | (44) | | | $ | (13) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges |
| Year Ended December 31, 2018 | | Revenue | | Cost of revenue | | Research and development | | Sales and marketing | | General and administrative |
| | (In thousands) |
| Statements of operations | | $ | 464,918 | | | $ | 372,843 | | | $ | 58,794 | | | $ | 52,593 | | | $ | 28,209 | |
| Gains (losses) on cash flow hedge | | $ | 315 | | | $ | 0 | | | $ | (2) | | | $ | (28) | | | $ | (11) | |
The Company expects to reclassify to earnings all of the amounts recorded in AOCI associated with its cash flow hedges over the next twelve months. For information on the unrealized gains or losses on derivatives reclassified out of AOCI into the consolidated statements of operations, refer to Note 8, Accumulative Other Comprehensive Income (Loss), in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.
Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur within the designated hedge period or if not recognized within 60 days following the end of the hedge period. The Company did not recognize any material net gains or losses related to the loss of hedge designation as there were no discontinued cash flow hedges during the year ended December 31, 2020, 2019 and 2018.
Non-designated hedges
The Company adjusts its non-designated hedges monthly and enters into about 8 non-designated derivative per quarter with an average size of $2.4 million USD equivalent. The hedges range typically from 1 to 3 months in duration. The effects of the Company’s non-designated hedge included in Other income (expense), net on the consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, |
Derivatives Not Designated as
Hedging Instruments | | Location of Gains (Losses)
Recognized in Income on Derivative | | 2020 | | 2019 | | 2018 |
| | | | (In thousands) |
| Foreign currency forward contracts | | Other income (expense), net | | $ | (95) | | | $ | (24) | | | $ | 589 | |
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8. Accumulated Other Comprehensive Income (Loss)
The following table sets forth the changes in AOCI by component for the years ended December 31, 2020, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gains (losses) on available-for-sale securities | | Unrealized gains (losses) on derivatives | | Estimated tax benefit (provision) | | Total |
| (In thousands) |
| Balance as of December 31, 2017 | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Other comprehensive income (loss) before reclassifications | (2) | | | 276 | | | 0 | | | 274 | |
| Less: Amount reclassified from accumulated other comprehensive income (loss) | 0 | | | 274 | | | 0 | | | 274 | |
| Net current period other comprehensive income (loss) | (2) | | | 2 | | | 0 | | | 0 | |
| Balance as of December 31, 2018 | (2) | | | 2 | | | 0 | | | 0 | |
| Other comprehensive income (loss) before reclassifications | 25 | | | 275 | | | 0 | | | 300 | |
| Less: Amount reclassified from accumulated other comprehensive income (loss) | 0 | | | 302 | | | 0 | | | 302 | |
| Net current period other comprehensive income (loss) | 25 | | | (27) | | | 0 | | | (2) | |
| Balance as of December 31, 2019 | 23 | | | (25) | | | 0 | | | (2) | |
| Other comprehensive income (loss) before reclassifications | (22) | | | 4 | | | 0 | | | (18) | |
| Less: Amount reclassified from accumulated other comprehensive income (loss) | 0 | | | (23) | | | 0 | | | (23) | |
| Net current period other comprehensive income (loss) | (22) | | | 27 | | | 0 | | | 5 | |
| Balance as of December 31, 2020 | $ | 1 | | | $ | 2 | | | $ | 0 | | | $ | 3 | |
The following tables provide details about significant amounts reclassified out of each component of AOCI for the years ended December 31, 2020, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 | | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | |
| | Gains (Losses) Recognized in OCI - Effective Portion | | Gains (Losses) Reclassified from OCI to Income - Effective Portion | | Gains (Losses) Recognized in OCI - Effective Portion | | Gains (Losses) Reclassified from OCI to Income - Effective Portion | | Gains (Losses) Recognized in OCI - Effective Portion | | Gains (Losses) Reclassified from OCI to Income - Effective Portion | | Affected Line Item in the Statements of Operations |
| | (In thousands) | | |
| Gains (losses) on cash flow hedge: | | | | | | | | | | | | | | |
| Foreign currency contracts | | $ | 4 | | | $ | (32) | | | $ | 275 | | | $ | 390 | | | $ | 276 | | | $ | 315 | | | Revenue |
| Foreign currency contracts | | 0 | | | $ | 0 | | | 0 | | | (3) | | | 0 | | | 0 | | | Cost of revenue |
| Foreign currency contracts | | 0 | | | $ | 5 | | | 0 | | | (28) | | | 0 | | | (2) | | | Research and development |
| Foreign currency contracts | | 0 | | | $ | 4 | | | 0 | | | (44) | | | 0 | | | (28) | | | Sales and marketing |
| Foreign currency contracts | | 0 | | | $ | 0 | | | 0 | | | (13) | | | 0 | | | (11) | | | General and administrative |
| | $ | 4 | | | $ | (23) | | | $ | 275 | | | $ | 302 | | | $ | 276 | | | $ | 274 | | | Total * |
_________________________
* There is no tax impact on all hedging gains and losses from derivative contracts due to the Company’s full valuation allowance of its deferred tax assets.
Note 9. Income Taxes
Income (loss) before provision for income taxes consisted of the following:
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands) |
| United States | $ | (104,551) | | | $ | (103,836) | | | $ | (79,581) | |
| International | 3,925 | | | 22,265 | | | 4,870 | |
| Total | $ | (100,626) | | | $ | (81,571) | | | $ | (74,711) | |
Provision for income taxes consisted of the following:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands) |
| Current: | | | | | |
| U.S. Federal | $ | 0 | | | $ | 0 | | | $ | 0 | |
| State | 84 | | | 58 | | | 16 | |
| Foreign | 438 | | | 4,524 | | | 1,425 | |
| 522 | | | 4,582 | | | 1,441 | |
| Deferred: | | | | | |
| U.S. Federal | 0 | | | 0 | | | 0 | |
| State | 0 | | | 0 | | | 0 | |
| Foreign | 103 | | | (202) | | | (669) | |
| 103 | | | (202) | | | (669) | |
| Total | $ | 625 | | | $ | 4,380 | | | $ | 772 | |
Net deferred tax assets consisted of the following:
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| (In thousands) |
| Deferred Tax Assets: | | | |
| Accruals and allowances | $ | 14,389 | | | $ | 11,334 | |
| Net operating loss carryforwards | 22,216 | | | 14,355 | |
| Stock-based compensation | 3,731 | | | 3,228 | |
| Lease liabilities | 7,063 | | | 8,212 | |
| Deferred revenue | 3,673 | | | 4,417 | |
| Tax credit carryforwards | 6,311 | | | 3,262 | |
| Depreciation and amortization | 2,810 | | | 1,030 | |
| Capitalized research and development expenses | 17,376 | | | 6,847 | |
| | | |
| Total deferred tax assets | 77,569 | | | 52,685 | |
| Deferred Tax Liabilities: | | | |
| | | |
| Lease assets | (5,804) | | | (7,450) | |
| Total deferred tax liabilities | (5,804) | | | (7,450) | |
| Valuation Allowance | (70,496) | | | (43,917) | |
| Net deferred tax assets | $ | 1,269 | | | $ | 1,318 | |
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Changes in allowance for deferred tax assets were as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| (In thousands) |
| Balance at the beginning of the period | $ | 43,917 | | | $ | 24,477 | | | $ | 15,611 | |
| Additions | 31,890 | | | 38,336 | | | 13,760 | |
| Deductions | (5,311) | | | (18,896) | | | (4,894) | |
| Balance at the end of the period | $ | 70,496 | | | $ | 43,917 | | | $ | 24,477 | |
Realization of the Company’s deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. The Company does not anticipate to realize the net U.S. federal and state deferred tax assets and certain foreign tax attributes, which have been fully offset by a valuation allowance. As of December 31, 2020 and 2019, the valuation allowance was $70.5 million and $43.9 million, respectively. The valuation allowance increased by $26.6 million during 2020 mainly due to the increases in tax attribute carryforwards, capitalized expenditures for income tax purposes, and accruals and allowances.
The utilization of our net operating loss and credit carryforwards may be subject to annual limitation due to the ownership changes provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of portions of the net operating loss and tax credit carryforwards before utilization.
As of December 31, 2020, net operating loss carryforwards consisted of the following:
| | | | | | | | | | | | | | |
| | Amount | | Beginning Year of Expiration |
| | (in thousands) | | |
U.S. Federal (1) | | $ | 14,028 | | | 2031 |
| U.S. Federal | | 79,073 | | | Indefinite |
| California (tax effected, net of federal benefit) | | 981 | | | 2040 |
| Other State (tax effected, net of federal benefit) | | 1,646 | | | 2024 |
_________________________
(1)All of the losses are subject to annual usage limitations under Internal Revenue Code Section 382.
As of December 31, 2020, tax credit carryforwards consisted of the following:
| | | | | | | | | | | | | | |
| | Amount | | Beginning Year of Expiration |
| | (in thousands) | | |
| U.S. Federal | | $ | 3,688 | | | 2040 |
| California | | 2,565 | | | Indefinite |
| Foreign | | 1,309 | | | 2031 |
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effective tax rate differs from the applicable U.S. statutory federal rate as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| Tax at federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State, net of federal benefit | 4.4 | % | | 3.0 | % | | 5.9 | % |
| Impact of international operations | 0.8 | % | | 1.4 | % | | 0.4 | % |
| U.S. Taxes on Foreign Entities | 2.5 | % | | (3.6) | % | | (1.8) | % |
| Stock-based compensation | (4.2) | % | | (2.6) | % | | (0.1) | % |
| Tax credits | 1.6 | % | | 1.6 | % | | 1.5 | % |
| Change in valuation allowance | (26.4) | % | | (23.8) | % | | (25.2) | % |
| | | | | |
| Non-deductible transaction costs | (0.1) | % | | (0.7) | % | | (2.6) | % |
| Goodwill derecognition | 0 | % | | (1.2) | % | | 0 | % |
| Others | (0.2) | % | | (0.5) | % | | (0.1) | % |
| Provision for income taxes | (0.6) | % | | (5.4) | % | | (1.0) | % |
The decrease in provision for income taxes for the year ended December 31, 2020 compared to the prior year was primarily due to lower foreign earnings in 2020, resulting from the sale of our commercial operations in Europe during the fourth quarter of 2019. Furthermore, 2019 included the gain on sale of certain assets related to the Company's commercial operations in Europe during the fourth quarter of 2019. Losses incurred predominantly in the U.S. continue to be subject to a full valuation allowance.
The decrease in provision for income taxes for the year ended December 31, 2019 compared to the prior year was primarily due to higher foreign earnings in 2019 and the gain on sale of certain assets related to the Company's commercial operations in Europe during the fourth quarter of 2019. Losses incurred predominantly in the U.S. continue to be subject to a full valuation allowance.
As of December 31, 2020, withholding taxes and state income taxes expected to be incurred on the foreign subsidiaries’ earnings that are not indefinitely reinvested are immaterial.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) is as follows:
| | | | | |
| Federal, State, and Foreign Tax |
| (In thousands) |
Balance as of December 31, 2017 | $ | 1,022 | |
Additions based on tax positions related to the current year | 338 | |
Adjustments to Net parent investments | (1,338) | |
| |
Balance as of December 31, 2018 | 22 | |
Additions based on tax positions related to the current year | 674 | |
| |
| |
Additions for tax positions of prior years | 8 | |
Balance as of December 31, 2019 | 704 | |
Additions based on tax positions related to the current year | 503 | |
Additions for tax positions of prior years | 148 | |
| |
| |
Balance as of December 31, 2020 | $ | 1,355 | |
The total amount of unrecognized tax benefits, including interest and penalties, was $1.4 million and $0.7 million as of December 31, 2020 and 2019 respectively. The Company recognizes interest and penalties accrued related to unrecognized tax benefits as part of the provision for income taxes.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company files income tax returns in the U.S. and numerous foreign jurisdictions. The Company is subject to income tax examinations by taxing authorities globally for years ending or after December 31, 2018. As a result of the spin-off of Arlo from NETGEAR in 2018, Arlo filed the consolidated U.S federal and various combined state income tax returns with NETGEAR for the calendar year ended December 31, 2018. The IRS is currently examining NETGEAR’s U.S federal income tax return for the calendar year of 2018. During calendar year 2020, the California Franchise Tax Board began an examination of NETGEAR’s 2018 tax year. The Company's estimate of the potential outcome of any uncertain tax positions is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. The Company believes that the estimate has adequately reflected these matters. However, the Company's future results may include adjustments to estimates in the period the audits will be resolved, which may impact the Company's effective tax rate. The Company does not expect a significant change in unrecognized tax benefits within the next twelve months.
Note 10. Debt
Revolving Credit Facility
On November 5, 2019, the Company entered into a Business Financing Agreement (the “Credit Agreement”) with Western Alliance Bank, an Arizona corporation, as lender (the “Lender”).
The Credit Agreement provides for a two-yearthree-year revolving credit facility (the “Credit Facility”) that matures on November 5, 2021 and that may, by its terms, be extended by mutual written agreement between the Company and the Lender.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 60%the sum of the Company’s(i) 90% of investment grade eligible receivables and (ii) 85% of non-investment grade eligible accounts, receivable, less suchapplicable reserves asestablished by the Lender may deem proper and necessary from time to time. The Lender is not required to make any advance under the Credit Facility during the period beginning on January 1st and continuing through June 30th, except for advances made against eligible receivables first invoiced between July 1 and December 31, 2019.Lender. The Credit Agreement also includes sublimitsa $5.0 million sublimit for the issuance by the Lender of letters of credit, credit card indebtedness and foreign exchange forward contract. Repayment of the borrowings undercredit. In addition, the Credit Facility are due upon collectionAgreement 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 eligible receivables.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 December 31, 2023, we had unused borrowing capacity of $13.9 million.
TheOur obligations of the Company 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 Company’s domestic personal property, excluding intellectual property assets and more than 65% of the shares of votingextent related to such working capital stock of any of the Company’s foreign subsidiaries.assets.
BorrowingsAt our option, borrowings under the Credit Agreement generallywill bear interest at a floating rates based uponrate equal to: (i) the primeBloomberg Short-Term Bank Yield Index rate subject to a floorplus the applicable rate of five percent (5%)2.0% to 2.5% determined based on our average daily availability for the prior fiscal quarter, or (ii) the base rate plus two and one-quarter percentage points (2.25%), plus an additional five percentage points (5.0%) during any period that an eventthe applicable rate of default has occurred and is continuing.1.0% to 1.5% based on our average daily availability for the prior fiscal quarter. Among other fees, the Company iswe are required to pay an annual facilitya monthly unused fee equal to 0.25% of 0.2% per annum on the limitamount by which the Lender’s aggregate commitment under the Credit Facility due upon entry intoexceeds 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 andAgreement) is in effect, maintain a fixed charge coverage ratio, tested quarterly on each anniversary thereof. The annual facility fee is capitalized and being amortized as interest expense over a 12-month period. The Company incurred debt issuance costs fortrailing twelve month basis, of at least 1.00 to 1.00 at any time. As of December 31, 2023, we were in compliance with all the Credit Agreement, which are recorded in prepaid expenses and other current assets in the Company's Consolidated Balance Sheets and are being amortized as interest expense over the contractual termcovenants of the Credit Agreement.
The Credit Agreement contains customary events of default and other restrictions, including a financial covenant that requires the Company to maintain $20.0 million of domestic cash and certain restrictions on the Company’s ability to incur additional indebtedness, consolidate or merge, enter into acquisitions, pay any dividend or distribution on the Company’s capital stock, redeem, retire or purchase shares of the Company’s capital stock, make investments or pledge or transfer assets, in each case subject to limited exceptions. If an event of default under the Credit Agreement occurs, then the Lender may cease making advances under the Credit Agreement and declare any outstanding obligations under the Credit Agreement to be immediately due and payable. In addition, if the Company fileswe file a bankruptcy petition, a bankruptcy petition is filed against the Companyus and is not dismissed or stayed within forty-fivethirty days or the Company makeswe make a general
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. As of December 31, 2020, the Company is in compliance with all the covenants of the Credit Agreement.
NaNNo amounts had been drawn under the Credit Facility as of December 31, 2020.2023.
Note 11.8. Commitments and Contingencies
Operating Leases
The Company primarily leases office space,Our operating lease obligations mostly include offices, equipment, data centers, and distribution centers, with various expiration dates through June 2029. Some of the leasesCertain lease agreements include options to extend such leases for uprenew or terminate the lease, which are not reasonably certain to five years,be exercised and some include options to terminate such leases within one year.therefore are not factored into our determination of lease payments. The terms of certain of the Company’s leases provide for rental payments on a graduated scale. The Company recognizesGross lease expense on a straight-line basis over the lease term. For the six months ended July 1, 2018, lease expense reflected allocations from NETGEAR and may not be indicative of the Company’s results. Lease expense was $7.0$5.9 million, $7.0$7.1 million, and $1.4$7.0 million for the years ended December 31, 2020, 20192023, 2022 and 2018,2021, respectively. The lease expense was recorded within Cost of revenue, Research and development, and General and administrative on the Company's consolidated statements of operations. Short-term and variable lease costs were included in the lease expense and they were immaterial.
In connectionOn June 29, 2021, we entered into a sublease agreement with the leasesVocera Communications, Inc. for the Company's officesapproximately 78,000 rentable square feet of office space located at 3030 Orchard Parkway in San Jose, California and Richmond, Canada, the Company received tenant improvement allowances ("TIA") of $3.5 million and $450 thousand, respectively, in the second fiscal quarter of 2020 from lessors for certain improvements the Company made to the leased properties.California. The improvement made to the leased property in San Jose, California is considered as lessee-owned, and the Company recorded the improvement as a leasehold improvement within property and equipment, net and the TIA as a reduction to the ROU asset with the impactinitial term of the decrease recognized prospectively over the remaining lease term. The improvement made to the leased property in Richmond, Canada is considered as lessor-owned, and the Company recorded the improvement as a prepaid rent within prepaid expenses and other current assets and the TIA as a reduction to prepaid rent.
Supplemental cash flow information related to operating leases was as follows:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 |
| | (in thousands) |
| Cash paid for amounts included in the measurement of lease liabilities | | | | |
| Operating cash flows from operating leases | | $ | 5,991 | | | $ | 4,888 | |
| Right-of-use assets obtained in exchange for lease liabilities | | | | |
| Operating leases | | $ | 461 | | | $ | 21,742 | |
| Other non-cash increases in operating right of use assets | | $ | 0 | | | $ | 788 | |
Weighted average remaining lease term and weighted average discount rate related to operating leases were as follows:
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2020 | | 2019 |
| Weighted average remaining lease term | | 6.9 years | | 7.7 years |
| Weighted average discount rate | | 5.69 | % | | 5.67 | % |
The maturity of lease liabilities related to operating leases for each of the next five years and thereafter as of December 31, 2020 was as follows (in thousands):
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| | | | | |
| 2021 | $ | 5,931 | |
| 2022 | 5,770 | |
| 2023 | 4,977 | |
| 2024 | 4,459 | |
| 2025 | 3,186 | |
| Thereafter | 11,498 | |
| Total lease payments | 35,821 | |
Less: interest (1) | (6,392) | |
| Total | $ | 29,429 | |
| |
| Accrued liabilities | $ | 4,400 | |
| Non-current operating lease liabilities | 25,029 | |
| Total | $ | 29,429 | |
________________________
(1) Leases thatsublease commenced before November 5, 2019 were calculated usingon February 1, 2022, and will expire on June 30, 2029, unless earlier terminated in accordance with the Company’s incremental borrowing rate onsublease. The sublease income was $2.0 million, $2.0 million, and $0.5 million which is recorded as a collateralized basis plus LIBOR rate that closely matches contractual termreduction of most leases. Leases that commenced after November 5, 2019 were calculated usinglease expense for the Company's borrowing rate defined in the Credit Agreement with Western Alliance Bank.years ended December 31, 2023, 2022, and 2021, respectively.
As of December 31, 2019, maturity of lease liabilitiesSupplemental cash flow information related to operating leases is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | (in thousands) |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
| Operating cash flows from operating leases | | $ | 6,756 | | | $ | 6,375 | | | $ | 6,497 | |
| Right-of-use assets obtained in exchange for lease liabilities | | | | | | |
| Operating leases | | $ | 1,873 | | | $ | 3,470 | | | $ | 1,646 | |
Weighted average remaining lease term and weighted average discount rate related to operating leases were as follows:
| | | | | | | | | | | | | | |
| | As of December 31, |
| | 2023 | | 2022 |
| Weighted average remaining lease term | | 5.0 years | | 5.1 years |
| Weighted average discount rate | | 5.74 | % | | 5.69 | % |
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 December 31, 2023 were as follows (in thousands):
| | | | | |
| 2020 | $ | 5,660 | |
| 2021 | 5,735 | |
| 2022 | 5,589 | |
| 2023 | 4,908 | |
| 2024 | 4,450 | |
| Thereafter | 14,669 | |
| Total lease payments | 41,011 | |
Less: interest (1) | (8,098) | |
| Total | $ | 32,913 | |
| |
| Accrued liabilities | $ | 3,912 | |
| Non-current operating lease liabilities | 29,001 | |
| Total | $ | 32,913 | |
________________________follows:
(1)
Calculated using the Company’s incremental borrowing rate on a collateralized basis plus LIBOR rate that closely matches contractual term of most leases.
| | | | | | | | | | | | | | | | | |
| Operating Lease Payments | | Sublease Payments | | Net |
| (In thousands) |
| 2024 | $ | 5,301 | | | $ | (1,947) | | | $ | 3,354 | |
| 2025 | 4,492 | | | (2,006) | | | 2,486 | |
| 2026 | 4,637 | | | (2,066) | | | 2,571 | |
| 2027 | 4,598 | | | (2,322) | | | 2,276 | |
| 2028 | 3,663 | | | (2,392) | | | 1,271 | |
| Thereafter | 1,751 | | | (1,228) | | | 523 | |
| Total future lease payments | $ | 24,442 | | | $ | (11,961) | | | $ | 12,481 | |
| Less: interest | (3,210) | | | | | |
| Present value of future minimum lease payments | $ | 21,232 | | | | | |
| | | | | |
| Accrued liabilities | $ | 4,211 | | | | | |
| Non-current operating lease liabilities | 17,021 | | | | | |
| Total lease liabilities | $ | 21,232 | | | | | |
Letters of Credit
In connection with the build-to-suit lease agreement for the headquartersour office space located in San Jose, California, the Companywe executed a letter of credit with the landlord as the beneficiary. As of December 31, 2020, the Company2023, 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.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Purchase Obligations
The Company hasWe have entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders are cancelable by giving anotice 46 to 60 days notice prior to the expected shipment date and 25% of orders are cancelable by giving anotice 31 to 45 days notice prior to the expected shipment date. Orders are non-cancelable within 30 days prior to the expected shipment date. As of December 31, 2020, the Company2023, we had approximately $19.5$40.2 million in non-cancelable purchase commitments with suppliers, respectively. The Company establishes a loss liability for all products it does not expect to sell for which it has committed purchases from suppliers.
As of December 31, 2020,2023, an additional $31.4 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 December 31, 2023, the loss liability from committed purchases was $1.2 million. From time to time the Company’s suppliers procure unique complex components on the Company’s behalf. If these components do not meet specified technical criteria or are defective, the Company should not be obligated to purchase the materials.material.
Warranty Obligations
Changes in the Company’s warranty liability,obligations, which isare included in Accruedaccrued liabilities in the consolidated balance sheets, were as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| (In thousands) |
| Balance at the beginning of the period | $ | 3,169 | | | $ | 3,712 | | | $ | 31,756 | |
Reclassified to sales returns upon adoption of ASC 606 (1) | 0 | | | 0 | | | (28,713) | |
| Provision for warranty obligation made during the period | 0 | | | 260 | | | 1,477 | |
| Settlements made during the period | (718) | | | (803) | | | (808) | |
| Balance at the end of the period | $ | 2,451 | | | $ | 3,169 | | | $ | 3,712 | |
________________________
(1) Upon adoption of ASC 606 on January 1, 2018, warranty reserve balances totaling $28.7 million were reclassified to sales returns as these liabilities are payable to the Company’s customers and settled in cash or by credit on account. Under ASC 606, these amounts are to be accounted for as sales with right of return. | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| (In thousands) |
| Balance at the beginning of the period | $ | 1,174 | | | $ | 1,330 | | | $ | 2,451 | |
| Provision for (release of) warranty obligations | 286 | | | 145 | | | (655) | |
| Settlements | (267) | | | (301) | | | (466) | |
| Balance at the end of the period | $ | 1,193 | | | $ | 1,174 | | | $ | 1,330 | |
Litigation and Other Legal Matters
Securities Class Action Lawsuits and Derivative Suit
The Company isWe 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, the Company evaluateswe 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, the Company accrueswe accrue for the amount or, if a range, the Company accrueswe 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. The Company monitorsgeneral and administrative expenses. We monitor developments in these legal matters that could affect the estimate the Companywe had previously accrued. In relation to such matters, the Companywe currently believesbelieve that there are no existing claims or proceedings that are likely to have a material adverse effect on itsour financial position within the next 12 months, or the outcome of these matters is currently not determinable. There are many uncertainties associated with any litigation, and these actions or other third-party claims against the Companyus may cause the Companyus to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any intellectual property litigation may require the Companyus to make royalty payments, which could have an adverse effect in future periods. If any of those events were to occur, the Company'sour business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from the Company'sour estimates, which could result in the need to adjust the liability and record additional expenses.
Beginning on December 11, 2018, purported stockholders of Arlo Technologies, Inc. filed 6 putative securities class action complaints in the Superior Court of California, County of Santa Clara, and one complaint in the U.S. District
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Securities Class Action Lawsuits and Derivative Suit
Court forOn December 11, 2018, purported stockholders of Arlo filed six putative securities class action complaints in the Northern DistrictSuperior Court of California, County of Santa Clara (the “State Action”), against the Companyus and certain of itsour executives and directors. Some of these actions also name as defendants the underwriters in the Company’s initial public offering ("IPO") and NETGEAR, Inc. ("NETGEAR"). The actions pending in state court are Aversa v. Arlo Technologies, Inc., et al., No. 18CV339231, filed Dec. 11, 2018; Pham v. Arlo Technologies, Inc. et al., No. 19CV340741, filed January 9, 2019; Patel v. Arlo Technologies, Inc., No. 19CV340758, filed January 10, 2019; Perros v. NetGear, Inc., No. 19CV342071, filed February 1, 2019; Vardanian v. Arlo Technologies, Inc., No. 19CV342318, filed February 8, 2019; and Hill v. Arlo Technologies, Inc. et al., No. 19CV343033, filed February 22, 2019. On April 26, 2019, the state court consolidated these actions as In re Arlo Technologies, Inc. Shareholder Litigation, No. 18CV339231 (the “State Action"). The action pending in federal court is Wong v. Arlo Technologies, Inc. et al., No. 19-CV-00372 (the “Federal Action”).
The plaintiffs in the State Action filed a consolidated complaint on May 1, 2019. The plaintiffs allegealleged that the Companywe failed to adequately disclose quality control problems and adverse sales trends ahead of its IPO,our initial public offering (the “IPO”), violating the Securities Act of 1933, as amended.amended (the “Securities Act”). The complaint seekssought unspecified monetary damages and other relief on behalf of investors who purchased Company common stock issued pursuant and/or traceable to the IPO. On May 5, 2021, the court instructed plaintiffs Perros, Patel, and Pham (“Plaintiffs”) 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.
On June 21, 2019,2021, the court stayed the State Action pending resolution of the Federal Action, given the substantial overlap between the claims. The court has set a case management conference for May 5, 2021, so the parties can provide an update regarding the Federal Action.
In the Federal Action, the court appointed a shareholder named Matis Nayman as lead plaintiff. On June 7, 2019, plaintiff filed an amended complaint. Plaintiff alleges violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, based on alleged materially false and misleading statements about the Company’s sales trends and products. In the amended complaint, plaintiff sought to represent a class of persons who purchased or otherwise acquired the Company’s common stock (i) during the period between August 3, 2018 through December 3, 2018 and/or (ii) pursuant to or traceable to the IPO. Plaintiff seeks class certification, an award of unspecified damages, an award of costs and expenses, including attorneys’ fees, and other further relief as the court may deem just and proper.
On August 6, 2019,Arlo defendants filed a motion to dismiss. The court granted that motion, and plaintiff filed a second amended complaint. On June 12, 2020, plaintiff filed an unopposed motion for preliminary approval of a class action settlement for $1.25 million, which was also the amount that the Company had accrued for loss contingency. The settlement remains subject to further court approval. On September 24, 2020, the court entered an order preliminarily approving the settlement. On February 5, 2021, plaintiff filed a motion for final approval of the settlement. The final approval hearing is scheduled for March 11, 2021.
In October 2020, the Company made a $1.25 million payment an escrow account administered by the court and plaintiff’s counsel (the “Settlement Fund”). The Settlement Fund shall be deemed to be in the custody of the court and shall remain subject to the jurisdiction of the court until such time as the Settlement Fund is distributed pursuant to the settlement agreement and/or further order of the court.
In addition, todismiss the State Action and the Federal Action, a purported stockholder named Leonard Pinto filed a tagalong derivative action on June 13, 2019 (the “Derivative Action”) in the U.S. District Court for the Northern District of California. The action is brought on behalf of the Company against the majority of the Company’s current directors. The complaint is(for forum non conveniens) based on the same alleged misconduct asfederal forum provision in Arlo’s certificate of incorporation. On September 9, 2021, the securities class actions but asserts claims for breachcourt 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 fiduciary duty, wasteAppeal. The appeal occurred before the California Court of corporate assets, and violationAppeal, Sixth Appellate District. On May 5, 2023, the Court of Appeal affirmed the trial court’s dismissal of the Securities Exchange ActState Action. On June 14, 2023, Plaintiffs filed a petition for review in the Supreme Court of 1934, as amended.California. On August 20, 2019,July 19, 2023, the court stayedSupreme Court of California denied Plaintiffs’ petition for review and closed the Derivative Action in deferencecase. The deadline for Plaintiffs to file a petition for writ of certiorari to the Federal Action.
David W. Foster v. Arlo Technologies, Inc.
On April 15, 2020, a purported stockholder named David W. Foster filed a lawsuit under 8 Del. C. § 220 in the DelawareSupreme Court of Chancery. Plaintiff seeks inspectionthe United States appealing the dismissal of corporate books and records to investigate the allegations underlying the State ActionsAction was October 17, 2023. To our knowledge, no such petition was filed, and Federal Action. Plaintiff also seeks an order directing the Company to pay his costs and
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses. On June 30, 2020, the parties filed a stipulation to stay the case so that they could attempt to reach a negotiated resolution. On July 1, 2020, the court approved the stipulation. The parties have reached an agreement in principle to resolve the action and are working to resolve the remaining issues. The impact on the Company's financial statements is expected to be immaterial.
Skybell Technologies, Inc. v. Arlo Technologies, Inc.
On December 18, 2020, Skybell Technologies, Inc., SB IP Holdings, LLC, and Eyetalk365, LLC (collectively, “Complainants” or “Skybell”) filed a Section 337 complaint against the Company, Vivint Smart Home, Inc. (“Vivint”), and SimpliSafe, Inc. (“SimpliSafe”) at the U.S. International Trade Commission (“ITC”). The action alleges that the Company’s cameras and video doorbell cameras infringe seven patents: 10,097,796 (“the ’796 patent”), 10,200,660 (“the ’660 patent”), 10,523,906 (“the ’906 patent”), 10,097,797 (“the ’797 patent”), 9,485,478 (“the ’478 patent”), 10,674,120 (“the ’120 patent”), and 9,432,638 (“the ’638 patent”) (collectively, “the Asserted Patents”). The Asserted Patents are all from the same family and generally directed to detecting a person at a camera and communicating video and audio from the camera to a cell phone along with various other features. The case was instituted on January 25, 2021 as Investigation No. 337-TA-1242. At December 31, 2020, it is too early to reasonably estimate any financial impact to the Company from this matter.
Indemnification of Directors and Officers
The Company, as permitted under Delaware law and in accordance with its bylaws,State Action has agreed to indemnify its officers and directors for certain events or occurrences, subject to certain conditions, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that will enable it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the fair value of each indemnification agreement will be minimal. The Company had 0 liabilities recorded for these agreements as of December 31, 2020 and 2019.terminated.
Indemnifications
PriorIn the ordinary course of business, we may provide indemnification of varying scope and terms to the completioncustomers, distributors, resellers, vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising from breach of the IPO, the Company historically participated in NETGEAR’s sales agreements.such agreements or from intellectual property infringement claims made by third parties. In its salesaddition, we have entered into indemnification agreements NETGEAR typically agreeswith members of our board of directors and certain of our executive officers that require us, among other things, to indemnify its direct customers, distributors and resellers (the “Indemnified Parties”) for any expensesthem against certain liabilities that may arise by reason of their status or liability resulting from claimed infringements by NETGEAR’s productsservice as directors or officers. The maximum potential amount of patents, trademarks or copyrights of third parties that are asserted against the Indemnified Parties, subjectfuture payments we could be required to customary carve-outs. The terms ofmake under these indemnification agreements are generally perpetual after execution of the agreement. The maximum amount of potential future indemnification is, generallyin many cases, unlimited. From time to time, the Company receives requests for indemnity and may choose to assume the defense of such litigation asserted against the Indemnified Parties. The Company had 0 liabilities recorded for these agreements asAs of December 31, 20202023 and 2019. In connection with the Separation, and after July 1, 2018, certain sales agreements were transferred to the Company, and the Company has replaced certain shared contracts, which include similar indemnification terms.
In addition, pursuant to the master separation agreement and certain other agreements entered into with NETGEAR in connection with the Separation and the IPO, NETGEAR has agreed to indemnify the Company for certain liabilities. The master separation agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of its business with the Company and financial responsibility for the obligations and liabilities of NETGEAR’s business with NETGEAR. Under the intellectual property rights cross-license agreement entered into between the Company and NETGEAR, each party, in its capacity as a licensee, indemnifies the other party, in its capacity as a licensor, and its directors, officers, agents, successors and subsidiaries against2022, we have not incurred any losses suffered by such indemnified partymaterial costs as a result of the indemnifying party’s practice of the intellectual property licensed to such indemnifying party under the intellectual property rights cross-license agreement. Also, under the tax matters agreement entered into between the Companyindemnifications and NETGEAR, each party is liable for, and indemnifies the other party and its subsidiaries from and against any liability for, taxes thatwe are allocated to the indemnifying party under the tax matters agreement. In addition, the Company has agreed in the
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
tax matters agreement that each party will generally be responsible for any taxes and related amounts imposed on it or NETGEAR as a result of the failure of the Distribution, together with certain related transactions, to qualify as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) and certain other relevant provisions of the Code, to the extent that the failure to so qualify is attributable to actions, events or transactions relating to such party’s respective stock, assets or business, or a breach of the relevant representations or covenants made by that party in the tax matters agreement. The transition services agreement generally provides that the applicable service recipient indemnifies the applicable service provider for liabilities that such service provider incurs arising from the provision of services other than liabilities arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement, and that the applicable service provider indemnifies the applicable service recipient for liabilities that such service recipient incurs arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement. Pursuant to the registration rights agreement, the Company has agreed to indemnify NETGEAR and its subsidiaries that hold registrable securities (and their directors, officers, agents and, if applicable, each other person who controls such holder under Section 15 of the Securities Act) registering shares pursuant to the registration rights agreement against certain losses, expenses and liabilities under the Securities Act, common law or otherwise. NETGEAR and its subsidiaries that hold registrable securities similarly indemnify the Company but such indemnification will be limited to an amount equal to the net proceeds received by such holder under the sale of registrable securities giving rise to the indemnification obligation.
Refer to Note 1, The Company and Basis of Presentation, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for details relating to the Company’s IPO and related transactions.
Change in Control and Severance Agreements
The Company has entered into change in control and severance agreements with certain of its executive officers (the “Severance Agreements”). Pursuant to the Severance Agreements, upon a termination without cause or resignation with good reason, the individual would be entitled to (1) cash severance equal to (a) the individual’s annual base salary and an additional amount equal to his or her target annual bonus (for the Chief Executive Officer) or (b) the individual’s annual base salary (for other executive officers), (2) 12 months of health benefits continuation, and (3) accelerated vestingnot currently aware of any unvested time-based equity awards that would have vested during the 12 months following the termination date. Upon a termination without cause or resignation with good reason that occurs during the one month prior to or 12 months following a change in control, the individual would be entitled to (1) (a) cash severance equal to a multiple (2 times for the Chief Executive Officer and 1 times for other executive officers) of the sum of the individual’s annual base salary and target annual bonus, (2) a number of months of health benefits continuation (24 months for the Chief Executive Officer and 12 months for other executive officers) and (3) vesting of all outstanding, unvested equity awards (for the Chief Executive Officer) and the vesting of all outstanding, unvested time-based equity awards (for other executive officers). Severance will be conditioned upon the execution and non-revocation of a release ofindemnification claims. The Company had 0 liabilities recorded for these agreements as of December 31, 2020.
On June 15, 2020 (the “Retirement Date”), Christine Gorjanc retired as the Chief Financial Officer, principal financial officer and principal accounting officer of the Company. In connection with her retirement, the Company, NETGEAR and Ms. Gorjanc entered into a Separation Agreement and Release (the “Separation Agreement”) pursuant to which Ms. Gorjanc received a $15,000 cash payment and accelerated vesting of (i) 8,749 shares subject to Company stock options, (ii) 43,216 shares subject to Company restricted stock units, (iii) 2,897 shares subject to NETGEAR stock options and (iv) 15,000 shares subject to NETGEAR restricted stock units. The Board of Directors of the Company appointed Gordon Mattingly as the Company's Chief Financial Officer, principal financial officer and principal accounting officer, effective as of the Retirement Date. In connection with his appointment as the Company’s Chief Financial Officer, the Company entered into a confirmatory employment letter (the “Employment Agreement”) with Mr. Mattingly. Pursuant to the Employment Agreement, Mr. Mattingly receives an annual base salary of $383,000 and is eligible to receive an annual target bonus of 70% of his annual base salary. Mr. Mattingly will also continue to be eligible to participate in the Company’s equity compensation plans and employee benefit plans available to other employees of the Company. The Company also entered
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
into an updated change in control and severance agreement consistent with Mr. Mattingly’s new role of Chief Financial Officer.
On May 2, 2019, the Company and Patrick J. Collins III, the Company’s Senior Vice President of Products, entered into a Separation and Release Agreement (the “Separation Agreement”) regarding Mr. Collins’ separation from the Company, effective May 1, 2019. Pursuant to the Separation Agreement, Mr. Collins received cash severance equal to his annual base salary, 12 months of health benefits continuation and accelerated vesting of any of his unvested equity awards that would have vested during the 12 months following the termination date.
Environmental Regulation
The Company is required to comply and is currently in compliance with the European Union (“EU”) and other Directives on the Restrictions of the use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”), Waste Electrical and Electronic Equipment (“WEEE”) requirements, Energy Using Product (“EuP”) requirements, the REACH Regulation, Packaging Directive and the Battery Directive.
The Company is subject to various federal, state, local, and foreign environmental laws and regulations, including those governing the use, discharge, and disposal of hazardous substances in the ordinary course of its manufacturing process. The Company believes that its current manufacturing and other operations comply in all material respects with applicable environmental laws and regulations; however, it is possible that future environmental legislation may be enacted or current environmental legislation may be interpreted to create an environmental liability with respect to its facilities, operations, or products.
Note 12. Restructuring Related Charges
On November 7, 2019, the Company announced a restructuring plan that includes, but is not limited to, reducing outside services, headcount, marketing and capital expenditures to manage the Company's operating expenses. As a result, the Company recorded restructuring charges of $44 thousand and $631 thousand for the years ended December 31, 2020 and 2019, respectively, which were primarily associated with headcount-related charges under the restructuring plan. The restructuring was completed in the first quarter of 2020. The following table represents the severance expense recorded in the Company's Consolidated Statements of Operations:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 |
| | (In thousands) |
| Cost of revenue | | $ | 23 | | | $ | 69 | |
| Research and development | | 0 | | | 262 | |
| Sales and marketing | | 0 | | | 198 | |
| General and administrative | | 21 | | | 102 | |
| Total | | $ | 44 | | | $ | 631 | |
Accrued restructuring and other charges are classified within Accrued liabilities on the Company's Consolidated Balance Sheets. The following table provides a summary of accrued restructuring and other charges activity:
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 |
| | (In thousands) |
| Balance at the beginning of the period | | $ | 120 | | | $ | 0 | |
| Additions | | 44 | | | 631 | |
| Cash payments | | (164) | | | (511) | |
| | | | |
| Balance at the end of the period | | $ | 0 | | | $ | 120 | |
Note 13.9. Employee Benefit Plans
The Company grantsWe grant options and RSUsrestricted stock units (“RSUs”) under the 2018 Equity Incentive Plan (the "2018 Plan"“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 this planthe 2018 Plan are generally three to four years. As of December 31, 2023, 3.5 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.
The Company’s employees have historically participated in NETGEAR’s various stock-based plans, which are described below and representDuring the portion of NETGEAR’s stock-based plans in which Arlo employees participated as ofyear ended December 31, 2020. The Company’s consolidated statements2022, the Compensation and Human Capital Committee of operations reflect compensation expense for these stock-based plans associated with the portionBoard of NETGEAR’s plans in which Arlo employees participated.
The following table sets forth the available shares for future grants underDirectors (the “Committee”) unanimously approved amendments to the 2018 Plan to, among other things, reserve an additional 3,000,000 shares of our common stock to be used exclusively for grants of awards to individuals who were not previously employees or non-employee directors (or following a bona fide period of non-employment), as an inducement material to the individual’s entry into employment with us within the meaning of December 31, 2020 and December 31, 2019:
| | | | | |
| Number of Shares |
| (In thousands) |
Shares reserved as of December 31, 2018 | 3,969 | |
Additional authorized shares | 2,970 | |
Granted (1)
| (6,700) | |
Forfeited/ cancelled (2)
| 2,011 | |
| |
Shares traded for taxes | 380 | |
Shares available for grants as of December 31, 2019 | 2,630 | |
Additional authorized shares | 3,031 | |
Granted (3)
| (7,396) | |
Forfeited/ cancelled (4)
| 3,569 | |
| |
Shares traded for taxes | 1,279 | |
Shares available for grants as of December 31, 2020 | 3,113 | |
_________________________
(1) Includes 0.8 million shares consisting of RSUs (50%Rule 303A.08 of the grant), PSUs (25% ofNew York Stock Exchange (the “NYSE”) Listed Company Manual (“Rule 303A.08”). The 2018 Plan was amended by the grant) and MPSUs (25% of the grant) grantedCommittee without stockholder approval pursuant to the Company's Named Executive Officers ("NEOs") during the fiscal quarter ended September 29, 2019. The shares subject to the MPSUs that were granted to Ms. Gorjanc were cancelled in connection with her separation from the Company during the fiscal quarter ended June 28, 2020. This also includes 0.2 million shares as a result of modification for the employees transferred in the Verisure transaction.
(2) Includes 0.3 million shares subject to awards that were cancelled in connection with Mr. Collins’ separation from the Company, 0.5 million shares subject to the options granted to the CEO in connection with the IPO ("IPO Options") that were cancelled as the performance metrics for Tranches 4 and 5 of the IPO Options were not achieved, 59 thousand shares subject to the IPO Options issued to Mrs. Gorjanc that were cancelled as the performance metrics for such options were not achieved, and 0.2 million shares as a result of modification for the employees transferred in the Verisure transaction.Rule 303A.08.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) Includes 2.0 million shares consisting of RSUs (50% of the grant), PSUs (25% of the grant), and MPSUs (25% of the grant) granted to the Company's NEOs during the fiscal quarter ended June 28, 2020. Also includes 1.1 million immediately vested shares granted to employees for annual bonus in RSU form.
(4) Includes (a) 1.4 million IPO options that were voluntarily cancelled by the Company's CEO in January 2020 with no replacement award, (b) 0.1 million IPO Options granted to Ms. Gorjanc that were cancelled for not achieving performance milestones, (c) 0.2 million shares subject to the PSUs granted to the Company's NEOs that were cancelled as the performance milestone was not achieved, and (d) awards that were cancelled in connection with Ms. Gorjanc's separation from the Company (0.3 million IPO Options and 54 thousand shares subject to the MPSUs).
On March 3, 2020, the CompanyJanuary 19, 2024, we registered an aggregate of up to 3,788,7564,759,901 shares of the Company’s common stock on a Registration Statement on Form S-8, including 3,031,0053,807,921 shares issuable pursuant to the Company's 2018 Plan that were automatically added to the shares authorized for issuance under the 2018 Plan on January 1, 2020 pursuant to an “evergreen” provision contained in the 2018 Plan and 757,751951,980 shares issuable pursuant to the Company’s 2018 ESPPEmployee Stock Purchase Plan (“ESPP”) that were automatically added to the shares authorized for issuance under the 2018 ESPP on January 1, 20202024, both pursuant to an “evergreen” provision contained in the 2018 ESPP.respective plans.
The following table sets forth the available shares for grants as of December 31, 2023:
| | | | | |
| Number of Shares |
| (In thousands) |
| Shares available for grants at the beginning of the period | 4,213 | |
| Additional authorized shares | 3,555 | |
| Granted | (8,381) | |
| Forfeited / cancelled | 611 | |
| Shares traded for taxes | 3,518 | |
| Shares available for grants at the end of the period | 3,516 | |
Employee Stock Purchase Plan
The Company sponsors an Employee Stock Purchase Plan ("ESPP"), pursuantWe sponsor the ESPP to which eligible employees may contribute up to 15% of compensation, subject to certain income limits, to purchase shares of Arlo’s common stock. The terms of the plan include a look-back feature that enables employees to purchase stock semi-annually at a price equal to 85% of the lesser of the fair market value at the beginning of the offering period or the purchase date. The duration of each offering period is generally six months, with the first offering period having commenced on February 15, 2019 and ended on August 14, 2019.employees. As of December 31, 2020, approximately 1.12023, 1.8 million shares were available for issuance under the ESPP.
The Company’s employees have historically participated in NETGEAR’sfollowing table sets forth the weighted average assumptions used to estimate the fair value of purchase rights granted under the ESPP. For the year ended December 31, 2018, the Company recognized ESPP compensation expense of $0.2 million. For the year ended December 31, 2018, employees specifically identifiable to Arlo purchased approximately 37,000 shares of NETGEAR’s common stock at an average exercise price of $45.06.
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2023 | | 2022 | | 2021 |
| Expected life (in years) | | 0.5 | | 0.5 | | 0.5 |
| Risk-free interest rate | | 4.97 | % | | 3.29 | % | | 0.07 | % |
| Expected volatility | | 64.0 | % | | 69.2 | % | | 63.8 | % |
Option Activity
The Company’s stock option activity during the year ended of December 31, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value (1) |
| (In thousands) | | (In dollars) | | (In years) | | (In thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Outstanding as of December 31, 2019 (2) | 6,040 | | | $ | 11.56 | | | | | |
| Granted | 0 | | | 0 | | | | | |
| Exercised | (247) | | | 6.98 | | | | | |
Forfeited/ Cancelled (3) | (2,359) | | | 14.72 | | | | | |
| Expired | 0 | | | 0 | | | | | |
| Outstanding as of December 31, 2020 | 3,434 | | | $ | 9.72 | | | 4.80 | | $ | 1,595 | |
| Vested and expected to vest as of December 31, 2020 | 3,434 | | | $ | 9.72 | | | 4.80 | | $ | 1,595 | |
| Exercisable Options as of December 31, 2020 | 2,998 | | | $ | 9.10 | | | 4.44 | | $ | 1,569 | |
_________________________
(1) Representing the total pre-tax intrinsic values (the difference between the Company’s closing stock price on the last trading day of 2020 and the exercise price, multiplied by the number of shares underlying the in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2020. This amount changes based on the fair market value of the Company’s stock.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) Includes IPO Options of 2.8 million shares. Tranches 1 to 5 granted to Mr. Collins were cancelled in connection with his separation from the Company in May 2019. Tranches 4 and 5 granted to the CEO were cancelled in 2019 as the performance milestones for those tranches were not achieved, Tranches 1, 2 and 3 granted to the CEO were voluntarily forfeited in January 2020 with no replacement award. The performance milestones for Tranches 4 and 5 that were granted to Ms. Gorjanc were not met, hence, Tranche 4 was cancelled in 2019 and Tranche 5 was cancelled in June 2020. Tranches 1 to 3 granted to Ms. Gorjanc were cancelled in connection with her separation from the Company in June 2020.
(3) Includes 1.4 million shares subject to the IPO Options that were voluntarily cancelled by the CEO in January 2020 with no replacement award, 0.1 million IPO Options granted to Ms. Gorjanc that were cancelled as the performance milestone was not achieved, and 0.3 million IPO Options that were cancelled in connection with Ms. Gorjanc's separation from the Company.Option Activity
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| (In millions, except per share data) |
| Total intrinsic value of options exercised | $ | 0.20 | | | $ | 0 | | | $ | 0 | |
| Total fair value of options vested | $ | 1.00 | | | $ | 3.10 | | | $ | 0 | |
| Weighted-average grant date fair value per share of options granted | NA | | $ | 2.59 | | | $ | 7.02 | |
The following table summarizes significant ranges of outstanding the Company’s stockWe granted no options as of December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options Outstanding | | Options Exercisable |
| Range of Exercise Prices | Shares Outstanding | | Weighted- Average Remaining Contractual Life | | Weighted- Average Exercise Price Per Share | | Shares Exercisable | | Weighted- Average Exercise Price Per Share |
| (In thousands) | | (In years) | | (In dollars) | | (In thousands) | | (In dollars) |
| 3.90 - 6.67 | 778 | | | 3.26 | | $ | 6.47 | | | 772 | | | $ | 6.49 | |
| 6.68 - 7.83 | 688 | | | 1.25 | | 6.97 | | | 688 | | | 6.97 | |
| 8.11 - 8.76 | 892 | | | 5.85 | | 8.46 | | | 830 | | | 8.43 | |
| 10.09 - 14.39 | 596 | | | 7.10 | | 13.98 | | | 428 | | | 13.98 | |
| 16.00 - 16.00 | 480 | | | 7.59 | | 16.00 | | | 280 | | | 16.00 | |
| 3.90 - 16.00 | 3,434 | | | 4.80 | | 9.72 | | | 2,998 | | | 9.10 | |
The following table sets forth the weighted average assumptions used to estimate the fair value of the Company’s stock options granted using Black-Scholes option pricing model during the years ended December 31, 2020, 20192023, 2022, and 2018 and purchase rights granted under the Company's ESPP2021. Stock option activity during the yearsyear ended of December 31, 2020 and 2019:2023 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stock Options | | ESPP |
| | 2020 | | 2019 | | 2018 | | 2020 | | 2019 |
| Expected life (in years) | | NA | | 6.3 | | 6.3 | | 0.5 | | 0.5 |
| Risk-free interest rate | | NA | | 2.28 | % | | 2.86 | % | | 0.84 | % | | 2.49 | % |
| Expected volatility | | NA | | 73.0 | % | | 40.0 | % | | 102.0 | % | | 97.6 | % |
| Dividend yield | | NA | | 0 | | | 0 | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Exercise Price Per Share | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value |
| (In thousands) | | (In dollars) | | (In years) | | (In thousands) |
| Outstanding as of December 31, 2022 | 2,082 | | | $ | 10.24 | | | | | |
| Granted | — | | | — | | | | | |
| Exercised | (974) | | | 7.76 | | | | | |
| Forfeited/ cancelled | — | | | — | | | | | |
| Expired | (12) | | | 7.55 | | | | | |
| Outstanding as of December 31, 2023 | 1,096 | | | $ | 12.48 | | | 3.48 | | $ | 483 | |
| Vested and expected to vest as of December 31, 2023 | 1,096 | | | $ | 12.48 | | | 3.48 | | $ | 483 | |
| Exercisable Options as of December 31, 2023 | 1,096 | | | $ | 12.48 | | | 3.48 | | $ | 483 | |
The Company’s common stock did not have sufficient history of being publicly traded at grant date, hence, the estimated term of the Company’s stock options granted was determined by a combination of using a simplified method, which is an average of the contractual term and vesting period of the stock options and using management best estimate of the expected term. The risk-free interest rate of stock options granted was based on the implied yield currently available on U.S. Treasury securities, with a remaining term commensurate with the estimated expected term. The estimated volatility assumption was calculated based on a compensation peer group analysis of stock price volatility on the grant date. | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (In millions) |
| Total intrinsic value of options exercised | $ | 1.8 | | | $ | 0.9 | | | $ | 2.2 | |
| Total fair value of options vested | $ | — | | | $ | 2.3 | | | $ | 2.6 | |
RSU Activity
RSU activity, excluding PSU activity, during the year ended of December 31, 2023 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value Per Share | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value |
| (In thousands) | | (In dollars) | | (In years) | | (In thousands) |
| Outstanding as of December 31, 2022 | 9,487 | | | $ | 6.36 | | | | | |
| Granted | 6,331 | | | 5.28 | | | | | |
| Vested | (6,179) | | | 5.58 | | | | | |
| Forfeited | (596) | | | 6.22 | | | | | |
| Outstanding as of December 31, 2023 | 9,043 | | | $ | 6.15 | | | 1.37 | | $ | 86,085 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (In millions, except per share data) |
| Total intrinsic value of RSUs vested (the release date fair value) | $ | 38.9 | | | $ | 41.4 | | | $ | 36.4 | |
| Total fair value of RSUs vested (the grant date fair value) | $ | 34.4 | | | $ | 34.0 | | | $ | 31.3 | |
| RSU granted weighted-average fair value per share | $ | 5.28 | | | $ | 7.23 | | | $ | 7.32 | |
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PSU Activity
Our executive officers and other senior employees have been granted performance-based awards with vesting occurring at the end of a three or five-year period if performance conditions or market conditions are met. The risk-free interest ratenumber of the purchase rights granted under the Company's ESPP isunits earned and eligible to vest are determined based on the implied yield currently available on U.S. Treasury securities, with a remaining term commensurate withachievement of various performance conditions or market conditions, including the estimated expected term. Expected volatilitycumulative 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 purchase rights granted underprobability of achieving the Company’s ESPP isperformance or market conditions and record the related stock-based compensation expense based on historical volatilitythe achievement over the most recent period commensurate with the estimated expected term.service period.
NETGEAR’s stock optionPSU activity for Company employees during the year ended of December 31, 20202023 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Exercise Price Per Share | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value |
| (In thousands) | | (In dollars) | | (In years) | | (In thousands) |
| Outstanding as of December 31, 2019 | 205 | | | $ | 25.94 | | | | | |
| Exercised | (142) | | | $ | 22.74 | | | | | |
| Forfeited/cancelled | (47) | | | $ | 36.73 | | | | | |
| Expired | 0 | | | $ | 0 | | | | | |
| Outstanding as of December 31, 2020 | 16 | | | $ | 22.49 | | | 3.00 | | $ | 288 | |
| Vested and expected to vest as of December 31, 2020 | 16 | | | $ | 22.49 | | | 3.00 | | $ | 288 | |
| Exercisable options as of December 31, 2020 | 12 | | | $ | 20.11 | | | 1.66 | | $ | 241 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value Per Share | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value |
| (In thousands) | | (In dollars) | | (In years) | | (In thousands) |
| Outstanding as of December 31, 2022 | 4,041 | | | $ | 6.22 | | | | | |
| Granted | 2,050 | | | 4.56 | | | | | |
| Vested | (2,237) | | | 5.55 | | | | | |
| Forfeited | (3) | | | 8.28 | | | | | |
| Outstanding as of December 31, 2023 | 3,851 | | | $ | 5.72 | | | 1.00 | | $ | 36,661 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In millions, except per share data) |
| Total intrinsic value of options exercised | $ | 0.6 | | | $ | 0.6 | | | $ | 0.6 | |
| Total fair value of options vested | $ | 0 | | | $ | 0.8 | | | $ | 1.1 | |
| Weighted-average grant date fair value per share of NETGEAR’s stock options granted to employees specifically identifiable to Arlo | NA | | $ | 0 | | | $ | 20.63 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (In millions, except per share data) |
| Total intrinsic value of PSUs vested (the release date fair value) | $ | 17.7 | | | $ | 4.8 | | | $ | 1.4 | |
| Total fair value of PSUs vested (the grant date fair value) | $ | 12.4 | | | $ | 2.7 | | | $ | 0.6 | |
| PSU granted weighted-average fair value per share | $ | 4.56 | | | $ | 6.52 | | | $ | 6.74 | |
Stock-Based Compensation Expense
The following table summarizes significant rangessets forth the stock-based compensation expense included in our consolidated statements of comprehensive loss:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (In thousands) |
| Cost of revenue | $ | 3,533 | | | $ | 4,841 | | | $ | 3,917 | |
| Research and development | 12,700 | | | 12,317 | | | 10,865 | |
| Sales and marketing | 5,899 | | | 6,290 | | | 5,392 | |
| General and administrative | 25,816 | | | 25,028 | | | 17,856 | |
| Total | $ | 47,948 | | | $ | 48,476 | | | $ | 38,030 | |
As of December 31, 2023, all outstanding NETGEAR’soptions were fully vested, therefore, there was no unrecognized compensation cost related to stock optionsoptions. Approximately $58.6 million of unrecognized compensation cost related to unvested RSUs and PSUs is expected to be recognized over a weighted-average period of 1.7 years as of December 31, 2020.2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options Outstanding | | Options Exercisable |
| Range of Exercise Prices | Shares Outstanding | | Weighted- Average Remaining Contractual Life | | Weighted- Average Exercise Price Per Share | | Shares Exercisable | | Weighted- Average Exercise Price Per Share |
| (In thousands) | | (In years) | | (In dollars) | | (In thousands) | | (In dollars) |
| 19.19 - 19.19 | 7 | | | 1.56 | | $ | 19.19 | | | 7 | | | $ | 19.19 | |
| 20.10 - 20.10 | 2 | | | 1.30 | | 20.10 | | | 2 | | | 20.10 | |
| 21.86 - 21.86 | 3 | | | 2.10 | | 21.86 | | | 3 | | | 21.86 | |
| | | | | | | | | |
| 29.23 - 29.23 | 4 | | | 6.80 | | 29.23 | | | 0 | | | 0 | |
| 19.19 - 29.23 | 16 | | | 3.00 | | 22.49 | | | 12 | | | 20.11 | |
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the years ended December 31, 2023, 2022, and 2021, we settled executive and employee bonuses by granting and issuing restricted stock units (non-cash financing activities) that vested immediately amounting to $13.5 million, $8.7 million, and $15.1 million, respectively.
The following table sets forth401(K) Plan
We have a 401(K) Plan that qualifies as a deferred salary arrangement under Section 401(k) of the weighted average assumptions usedInternal Revenue Code. We match 50% of contributions for employees up to estimatea maximum of $2,000 in employee contributions per fiscal year. During the fair value of NETGEAR’s stock options granted and purchase rights granted under the NETGEAR’s ESPP for Company employees during the yearyears ended December 31, 2018:
| | | | | | | | | | | |
| Stock Options | | ESPP (1) |
| Expected life (in years) | 4.4 | | 0.5 |
| Risk-free interest rate | 2.32 | % | | 1.81 | % |
| Expected volatility | 30.9 | % | | 37.1 | % |
| Dividend yield | 0 | | | 0 | |
_________________________
(1)Company employees have completed their participation into NETGEAR’s ESPP by the end2023, 2022 and 2021, we recognized expense of the second quarter of fiscal 2018. As of December 31, 2018, 0 shares had been purchased under the 2018 ESPP by Company employees, as the program was suspended until the completion of the Distribution.approximately $1.1 million, $1.1 million and $1.1 million, respectively.
The estimated expected term of NETGEAR’s options granted to Company employees under NETGEAR’s plans is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk-free interest rate of options granted and the purchase rights granted under NETGEAR’s ESPP is based on the implied yield currently available on U.S. Treasury securities, with a remaining term commensurate with the estimated expected term. Expected volatility of NETGEAR’s options granted and the purchase rights granted under NETGEAR’s ESPP is based on historical volatility over the most recent period commensurate with the estimated expected term.
Note 10. Income Taxes
RSU ActivityIncome (loss) before provision for income taxes consisted of the following:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (In thousands) |
| United States | $ | (26,266) | | | $ | (60,374) | | | $ | (59,370) | |
| International | 5,405 | | | 4,723 | | | 4,018 | |
| Total | $ | (20,861) | | | $ | (55,651) | | | $ | (55,352) | |
Arlo’s RSU activity duringProvision for income taxes consisted of the year ended of December 31, 2020 was as follows:following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value Per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| (In thousands) | | (In dollars) | | (In years) | | (In thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Outstanding as of December 31, 2019 (1) | 7,851 | | | $ | 6.50 | | | | | |
Granted (2) | 7,396 | | | 3.03 | | | | | |
Vested (3) | (3,474) | | | 6.38 | | | | | |
Forfeited (4) | (1,210) | | | 4.63 | | | | | |
| Outstanding as of December 31, 2020 | 10,563 | | | $ | 4.33 | | | 1.43 | | $ | 82,287 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (In thousands) |
| Current: | | | | | |
| U.S. Federal | $ | 88 | | | $ | 166 | | | $ | — | |
| State | 273 | | | 87 | | | 21 | |
| Foreign | 697 | | | 601 | | | 989 | |
| 1,058 | | | 854 | | | 1,010 | |
| Deferred: | | | | | |
| U.S. Federal | — | | | — | | | — | |
| State | — | | | — | | | — | |
| Foreign | 117 | | | 121 | | | (333) | |
| 117 | | | 121 | | | (333) | |
| Total | $ | 1,175 | | | $ | 975 | | | $ | 677 | |
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effective tax rate differed from the U.S. federal income tax rate as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Tax benefit at U.S. federal income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State tax benefit, net of federal benefit | (1.0) | % | | 1.9 | % | | 2.9 | % |
| Impact of international operations | 3.1 | % | | 1.3 | % | | 1.3 | % |
| FDII deduction | 1.8 | % | | — | % | | — | % |
| U.S. taxes on foreign entities | — | % | | — | % | | (3.9) | % |
| Stock-based compensation | (22.5) | % | | (7.3) | % | | (3.0) | % |
| U.S. federal tax credits | 13.8 | % | | 3.7 | % | | 1.6 | % |
| Change in valuation allowance | (21.7) | % | | (21.8) | % | | (20.3) | % |
| Non-deductible transaction costs | (0.6) | % | | (0.1) | % | | (0.6) | % |
| Other | 0.5 | % | | (0.5) | % | | (0.2) | % |
| Provision for income taxes | (5.6) | % | | (1.8) | % | | (1.2) | % |
_________________________
(1) Includes 0.8 million shares consistingThe significant components of RSUs (50%net deferred tax assets consisted of the grant), PSUs (25% of the grant) and MPSUs (25% of the grant) granted to the Company's NEOs during the fiscal quarter ended September 29, 2019. The RSUs will vest in 3 equal annual installments during the period that begins on the RSU grant date. The shares subject to PSUs that were granted to the Company's NEOs were cancelled as the revenue milestone was not achieved for the year ended December 31, 2019. The MPSUs will vest at the end of the three-year period that begins on the MPSU grant date based on performance of the Company's common stock relative to the Benchmark during the three-year period from the grant date. A positive 3.3x or negative 2.5x multiplier will be applied to the total shareholder returns (“TSR”), such that the number of shares vested will increase by 3.3% or decrease by 2.5% of the target numbers, for each 1% of positive or negative TSR relative to the Benchmark. In the event the Company's common stock performance is below negative 30% relative to the Benchmark, no shares will be vested. In no event will the number of shares vested exceed 200% of the target for that tranche. As of December 31, 2020, 200% of the outstanding MPSUs are expected to vest.following:
(2) Includes 2.0 million shares consisting of RSUs (50% of the grant), PSUs (25% of the grant), and MPSUs (25% of the grant) granted to the Company's NEOs during the fiscal quarter ended June 28, 2020. The RSUs will vest in 3 equal annual installments during the period that begins on the RSU grant date. The PSUs will vest in 3 equal annual installments during the period that begins on the PSU grant date based on the extent to which a cash balance milestone as of December 31, 2020 is achieved. The maximum number of shares that NEOs can earn is 120% of the target number of the PSUs. The minimum number of shares that NEOs can earn is 75% of the target number of the PSUs. As of December 31, 2020, 120% of the outstanding PSUs are expected to vest. The MPSUs will vest at the end of the three-year period that begins on the MPSU grant date based on performance of the Company's common stock relative to the Benchmark during the three-year period from the grant date. A positive 3.3x or negative 2.5x multiplier will be applied to the total shareholder returns (“TSR”), such that the number of shares vested will increase by 3.3% or decrease by 2.5% of the target numbers, for each 1% of positive or negative TSR relative to the Benchmark. In the event the Company's common stock performance is below negative 30% relative to the Benchmark, no shares will be vested. In no event will the number of shares vested exceed 200% of the target for that tranche. As of December 31, 2020, 200% of the outstanding MPSUs are expected to vest.
Also includes 1.1 million immediately vested shares granted to employees for annual bonus in RSU form.
(3) Includes 43 thousand shares subject to the RSUs that were accelerated in connection with Ms. Gorjanc's separation from the Company. Also includes 1.1 million immediately vested shares granted to employees for annual bonus in RSU form.
(4) Includes 0.2 million shares subject to the PSUs granted to the Company's NEOs that were cancelled as the performance milestone was not achieved and 54 thousand shares subject to the MPSUs granted to Ms. Gorjanc that were cancelled in connection with her separation from the Company.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In millions, except per share data) |
| Total intrinsic value of RSUs vested (the release date fair value) | $ | 13.02 | | | $ | 5.51 | | | $ | 0.04 | |
| Total fair value of RSUs vested (the grant date fair value) | $ | 22.15 | | | $ | 12.90 | | | $ | 0.04 | |
| RSU granted weighted-average fair value per share | $ | 3.03 | | | $ | 4.77 | | | $ | 14.46 | |
| | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| (In thousands) |
| Deferred Tax Assets: | | | |
| Accruals and allowances | $ | 9,377 | | | $ | 11,330 | |
| Net operating loss carryforwards | 18,940 | | | 22,622 | |
| Stock-based compensation | 3,165 | | | 3,527 | |
| Lease liabilities | 4,965 | | | 5,706 | |
| Deferred revenue | 100 | | | 409 | |
| Tax credit carryforwards | 15,775 | | | 11,510 | |
| Depreciation and amortization | 3,231 | | | 3,307 | |
| Capitalized research and development expenses | 50,519 | | | 40,016 | |
| Total deferred tax assets | 106,072 | | | 98,427 | |
| Deferred Tax Liabilities: | | | |
| Operating lease right-of-use assets | (2,823) | | | (3,174) | |
| Total deferred tax liabilities | (2,823) | | | (3,174) | |
| Valuation Allowance | (101,977) | | | (93,869) | |
| Net deferred tax assets | $ | 1,272 | | | $ | 1,384 | |
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company determined the fair value of the PSUs using the closing price of the Company's common stock as of the grant date. For PSUs, stock-based compensation expense of performance milestone is recognized over the expected performance achievement period when the achievement becomes probable.
The Company utilized a Monte Carlo pricing model customized to the specific provisions of the 2018 Plan to value the MPSUs awards on the grant date. The fair value of the MPSUs granted during the three months ended June 28, 2020 and September 29, 2019 was $4.11 and $4.14 per share, respectively. The assumptions usedChanges in this model to estimate fair value at the grant date arevaluation allowance for deferred tax assets were as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Expected life | 3.0 | | 3.0 |
| Risk-free interest rate | 0.24 | % | | 1.52 | % |
| Expected volatility | 69.3 | % | | 65.1 | % |
| Dividend yield | 0 | | | 0 | |
| Stock Beta | 0.48 | | | 0.30 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| (In thousands) |
| Balance at the beginning of the period | $ | 93,869 | | | $ | 81,742 | | | $ | 70,496 | |
Additions (1) | 13,892 | | | 16,798 | | | 11,246 | |
Deductions (2) | (5,784) | | | (4,671) | | | — | |
| Balance at the end of the period | $ | 101,977 | | | $ | 93,869 | | | $ | 81,742 | |
________________________
(1) Additions are primarily increases in tax attribute carryforwards and capitalized expenditures for income tax purposes.
NETGEAR’s RSU activity for Company employees during(2) Deductions present the year endedutilization of U.S. federal and state net operating losses and tax credit attributes.
Realization of the deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. We do not anticipate to realize the net U.S. federal and state deferred tax assets and certain foreign tax attributes, which have been fully offset by a valuation allowance. As of December 31, 20202023 and 2022, the valuation allowance was as follows:$102.0 million and $93.9 million, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value Per Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| (In thousands) | | (In dollars) | | (In years) | | (In thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Outstanding as of December 31, 2019 | 278 | | | $ | 36.14 | | | | | |
| | | | | | | |
Vested (1) | (129) | | | 34.53 | | | | | |
| Forfeited | (22) | | | 36.08 | | | | | |
| Outstanding as of December 31, 2020 | 127 | | | 37.81 | | | 0.66 | | $ | 5,147 | |
The utilization of net operating loss and credit carryforwards may be subject to annual limitation due to the ownership changes provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of portions of the net operating loss and tax credit carryforwards before utilization.
As of December 31, 2023, net operating loss carryforwards consisted of the following:
| | | | | | | | | | | | | | |
| | Amount | | Beginning Year of Expiration |
| | (in thousands) | | |
U.S. federal (1) | | $ | 7,736 | | | 2031 |
U.S. federal (1)(2) | | 62,798 | | | Indefinite |
| California | | 36,888 | | | 2028 |
| Other states | | 35,489 | | | 2024 |
_________________________
(1) Includes 15 thousand sharesAll of the losses are subject to the RSUs that were accelerated in connection with Ms. Gorjanc's separation from the Company.annual usage limitations under Internal Revenue Code Section 382.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In millions, except per share data) |
Total intrinsic value of RSUs vested (the release date fair value) | $ | 3.2 | | | $ | 5.8 | | | $ | 6.9 | |
| Total fair value of RSUs vested (the grant date fair value) | $ | 4.5 | | | $ | 5.6 | | | $ | 5.0 | |
| RSU granted weighted-average fair value per share | NA | | NA | | $ | 67.24 | |
As of December 31, 2023, tax credit carryforwards consisted of the following:
| | | | | | | | | | | | | | |
| | Amount | | Beginning Year of Expiration |
| | (in thousands) | | |
| U.S. federal | | $ | 9,249 | | | 2039 |
| California | | 8,662 | | | Indefinite |
| Foreign | | 2,766 | | | 2041 |
As of December 31, 2023, withholding taxes and state income taxes expected to be incurred on the foreign subsidiaries’ earnings that are not indefinitely reinvested are immaterial.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-Based Compensation Expense | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (In thousands) |
| Balance at the beginning of the period | $ | 2,763 | | | $ | 1,736 | | | $ | 1,355 | |
| Additions for tax positions taken during the current year | 679 | | | 765 | | | 444 | |
| Additions (reductions) for tax positions taken during a prior year | 133 | | | 275 | | | (58) | |
| Reductions as a result of a lapse of the applicable statute of limitations | (21) | | | (13) | | | (5) | |
| Balance at the end of the period | $ | 3,554 | | | $ | 2,763 | | | $ | 1,736 | |
The Company's employees have historically participated in NETGEAR's various stock-based plans, which are described belowtotal amount of unrecognized tax benefits, including immaterial interest and represent the portionpenalties, was $3.6 million and $2.8 million as of NETGEAR's stock-based plans in which Company employees participated. The Company's consolidated statements of income reflect compensation expense for these stock-based plans associated with the portion of NETGEAR's plans in which Company employees participated. The stock-based compensation expense for Company employees consist of Company RSUs, PSUs, MPSUsDecember 31, 2023 and stock options2022, respectively. We recognize interest and NETGEAR RSUs and stock options grantedpenalties accrued related to Company employees, employees' annual bonus in RSU form, allocated charges deemed attributable to Company operations resulting from NETGEAR’s in 2018, and the purchase rights under the NETGEAR’s ESPP in 2018. The following table sets forth the stock-based compensation expense included in the Company’s consolidated statements of operations during the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| | Total | | Total | | Direct (1) | | Indirect | | Total |
| (In thousands) |
| Cost of revenue | $ | 2,961 | | | $ | 2,013 | | | $ | 608 | | | $ | 583 | | | $ | 1,191 | |
| Research and development | 9,055 | | | 6,868 | | | 3,078 | | | 396 | | | 3,474 | |
| Sales and marketing | 4,106 | | | 3,859 | | | 1,992 | | | 969 | | | 2,961 | |
| General and administrative | 19,125 | | | 10,154 | | | 3,153 | | | 2,100 | | | 5,253 | |
Total stock-based compensation expense (2) | $ | 35,247 | | | $ | 22,894 | | | $ | 8,831 | | | $ | 4,048 | | | $ | 12,879 | |
_________________________
(1)Reflecting expenses for those legacy NETGEAR stock-based plans that have converted to equivalent Arlo stock-based plans upon the spin-off transaction.
(2)There was nounrecognized tax benefitbenefits as a resultpart of the Company's net operating loss position.provision for income taxes.
The Company recognizes these compensation expenses generally on a straight-line basis overWe file income tax returns in the requisite service periodU.S. and numerous foreign jurisdictions. We are subject to income tax examinations by taxing authorities globally for years ending or after December 31, 2018. IRS audit of the award.consolidated returns of NETGEAR for which Arlo was a part of in 2018, had been closed with no findings, while the 2018 California Franchise Tax Board and 2016-2018 Texas Franchise tax audits are still in progress. Our estimate of the potential outcome of any uncertain tax positions is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. We believe that the estimate has adequately reflected these matters. However, the future results may include adjustments to estimates in the period the audits will be resolved, which may impact the effective tax rate. We don't expect a significant change in unrecognized tax benefits within the next twelve months.
As part of the Verisure transaction in 2019, certain employees who held Company RSU awards granted under the 2018 Plan, were transferred to Verisure. Such RSU awards continued to vest and settle after the closing of the transaction in accordance with the terms and conditions under the original award’s plan. Management determined that the modification of the RSUs awards was a Type III modification (improbable-to-probable) under ASC 718, under which any compensation expense previously recognized was reversed and the total fair value of the modified awards was recognized as a liability in the Company’s consolidated balance sheets on the closing date. Accordingly, the modification of the awards resulted in a liability of $859 thousand and total compensation expense of $623 thousand on the closing date in 2019.
Note 11. Net Loss Per Share
In January 2020, the IPO Options granted to the CEO were voluntarily forfeited with no replacement award. The cancellation was treated as a settlement for no consideration and all remaining unrecognized compensation cost of $7.4 million was accelerated and recognized as stock-based compensation expense for the three months ended March 29, 2020. | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (In thousands, except for per share data) |
| Numerator: | | | | | |
| Net loss | $ | (22,036) | | | $ | (56,626) | | | $ | (56,029) | |
| Denominator: | | | | | |
| Weighted average common shares - basic and diluted | 92,754 | | | 87,173 | | | 82,688 | |
| Basic and diluted net loss per share | $ | (0.24) | | | $ | (0.65) | | | $ | (0.68) | |
| | | | | |
| Anti-dilutive employee stock-based awards, excluded | 1,776 | | | 5,451 | | | 5,041 | |
In the second fiscal quarter of 2020, $1.2 million of previously recognized compensation expense was reversed as a result of cancellation of unvested shares upon Ms. Gorjanc's separation from the Company. In addition, $0.4 million of compensation expense was recognized for Ms. Gorjanc's accelerated vested shares upon her separation from the Company.
As of December 31, 2020, $1.4 million of unrecognized compensation cost related to Arlo’s stock options was expected to be recognized over a weighted-average period of 1.2 years. $27.4 million of unrecognized compensation cost related to unvested Arlo’s RSUs, PSUs and MPSUs was expected to be recognized over a weighted-average period of 2.3 years.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 2020, $31 thousand of unrecognized compensation cost related to NETGEAR’s stock options for Arlo employees was expected to be recognized over a weighted-average period of 0.8 years. $2.8 million of unrecognized compensation cost related to unvested NETGEAR’s RSUs for Arlo employees was expected to be recognized over a weighted-average period of 1.1 years.
401(k) Plan
In January 2019, the Company adopted the Arlo 401(k) Plan to which employees may contribute up to 100% of salary subject to the legal maximum. In the fourth quarter of fiscal year 2018, the Company began matching 50% of contributions for employees that remain active with the Company through the end of the fiscal year, up to a maximum of $8,000 before fiscal 2020 and $4,000 starting fiscal 2020 in employee contributions per fiscal year. During the years ended December 31, 2020 and 2019, the Company recognized $0.9 million and $1.5 million in expenses for Arlo employees related to Arlo 401(k) Plan match, respectively.
The Company’s employees historically participated in NETGEAR’s 401(k) Plan, which was adopted in April 2000. Under NETGEAR’s 401(k) Plan, employees were able to contribute up to 100% of salary subject to the legal maximum while NETGEAR matched 50% of contributions for employees that remain active with NETGEAR or its subsidiaries through the end of the fiscal year, up to a maximum of $6,000 in employee contributions per fiscal year. During the year ended December 31, 2018, the Company recognized $0.5 million in expenses for employees specifically identifiable to Arlo related to NETGEAR 401(k) Plan match.
Note 14. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. The weighted average number of shares outstanding for the basic and diluted net income (loss) per share for the periods prior to the completion of the IPO is based on the number of shares of Arlo common stock outstanding on August 2, 2018, the effective date of the registration statement relating to the IPO (the “IPO Registration Statement”). On that date, the Company issued 62,499,000 shares of common stock to the Company’s sole stockholder of record, NETGEAR (after which NETGEAR held 62,500,000 shares of common stock, which represented all of the then issued and outstanding common stock). Potentially dilutive common shares, such as common shares issuable upon exercise of stock options and vesting of restricted stock awards are typically reflected in the computation of diluted net income (loss) per share by application of the treasury stock method. For certain periods presented, due to the net losses reported, these potentially dilutive securities were excluded from the computation of diluted net loss per share, since their effect would be anti-dilutive.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net loss per share for the years ended December 31, 2020, 2019 and 2018 were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (In thousands, except for per share data) |
| Numerator: | | | | | |
| Net loss | $ | (101,251) | | | $ | (85,951) | | | $ | (75,483) | |
| Denominator: | | | | | |
| Weighted average common shares - basic | 78,084 | | | 75,074 | | | 67,231 | |
| Potentially dilutive common shares | 0 | | | 0 | | | 0 | |
Stock option and RSU conversion (1) | 0 | | | 0 | | | 0 | |
| Weighted average common shares - dilutive | 78,084 | | | 75,074 | | | 67,231 | |
| | | | | |
| Basic net loss per share | $ | (1.30) | | | $ | (1.14) | | | $ | (1.12) | |
| Diluted net loss per share | $ | (1.30) | | | $ | (1.14) | | | $ | (1.12) | |
| | | | | |
| Anti-dilutive employee stock-based awards, excluded | 5,623 | | | 9,692 | | | 1,109 | |
_________________________
(1)On December 31, 2018, 6.8 million shares subject to stock options and RSUs were added to the Company’s equity awards as issued and outstanding resulting from the adjustment of NETGEAR’s equity awards that were granted to both NETGEAR and Arlo employees and non-employee directors, a portion of which were converted as Arlo awards. The dilutive effect of these converted stock options and RSUs is reflected above per share by application of the treasury stock method and none are potentially dilutive.
Note 15.12. Segment and Geographic Information
Segment Information
The Company operatesWe operate as 1one operating and reportable segment. The Company hasOur Chief Executive Officer (“CEO”) is identified its CEO as the Chief Operating Decision Maker (“CODM”). The CODM, who reviews financial information presented on a combinedconsolidated basis for purposes of allocating resources and evaluating financial performance.
Geographic Information for Revenue
The Company conducts business across 3 geographic regions: Americas, EMEA and APAC. Revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates, net changes in deferred revenue, and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, net changes in deferred revenue,guidance. Sales and gains or lossesusage-based taxes are excluded from hedging.revenue. For reporting purposes, revenue by geographygeographic area is generally based upon the ship-tobill-to location of the customer for device sales and device location for service sales.customer. The following table presents revenue by geographic area.
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| (In thousands) |
| United States | $ | 299,360 | | | $ | 268,435 | | | $ | 265,844 | |
| Spain | 113,826 | | | 135,896 | | | 83,779 | |
| Ireland | 20,148 | | | 44,287 | | | 40,877 | |
| Other countries | 57,842 | | | 41,796 | | | 44,637 | |
| Total | $ | 491,176 | | | $ | 490,414 | | | $ | 435,137 | |
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 shows revenuepresents long-lived assets by geography for the periods indicated:geographic area.
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2019 | | 2018 |
| (In thousands) |
| Americas | | | | | |
| United States (“U.S.”) | $ | 255,599 | | | $ | 271,502 | | | $ | 359,936 | |
| Americas (excluding U.S.) | 13,796 | | | 17,658 | | | 16,869 | |
| EMEA | 61,832 | | | 57,232 | | | 65,462 | |
| APAC | 25,927 | | | 23,615 | | | 22,651 | |
| Total revenue | $ | 357,154 | | | $ | 370,007 | | | $ | 464,918 | |
126 | | | | | | | | | | | |
| As of December 31, |
| 2023 | | 2022 |
| (In thousands) |
| United States | $ | 13,372 | | | $ | 17,762 | |
| Other countries | 2,839 | | | 2,383 | |
| Total | $ | 16,211 | | | $ | 20,145 | |
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company’s Property and equipment, net are located in the following geographic locations:
| | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 |
| (In thousands) |
| Americas | | | |
| United States (“U.S.”) | $ | 12,644 | | | $ | 17,100 | |
| Americas (excluding U.S.) | 629 | | | 904 | |
| EMEA | 234 | | | 316 | |
| APAC | | | |
| China | 1,821 | | | 2,089 | |
| APAC (excluding China) | 493 | | | 943 | |
| Total property and equipment, net | $ | 15,821 | | | $ | 21,352 | |
Significant Customers
NaN customers accounted for 20.6%, 17.3%, 14.6% and 12.2% of revenue for the year ended December 31, 2020. NaN customers accounted for 32.3% and 10.1% of revenue for the year ended December 31, 2019. NaN customers accounted for 24.4%, 17.5%, and 16.6% of revenue for the year ended December 31, 2018.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
QUARTERLY UNAUDITED FINANCIAL DATA
The following table presents unaudited quarterly financial information for the years ended December 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31,
2020 | | September 27,
2020 | | June 28,
2020 | | March 29,
2020 |
| (In thousands, except per share amounts) |
| Revenue | $ | 114,836 | | | $ | 110,236 | | | $ | 66,632 | | | $ | 65,450 | |
| Gross profit | $ | 24,538 | | | $ | 21,409 | | | $ | 5,489 | | | $ | 3,953 | |
| Provision for (benefit from) income taxes | $ | 182 | | | $ | 115 | | | $ | 183 | | | $ | 145 | |
| Net income (loss) | $ | (15,210) | | | $ | (17,459) | | | $ | (29,256) | | | $ | (39,326) | |
Net income (loss) per share—basic (1) | $ | (0.19) | | | $ | (0.22) | | | $ | (0.38) | | | $ | (0.51) | |
Net income (loss) per share—diluted | $ | (0.19) | | | $ | (0.22) | | | $ | (0.38) | | | $ | (0.51) | |
| | | | | | | |
| December 31, 2019 (2) | | September 29,
2019 | | June 30,
2019 | | March 31,
2019 |
| (In thousands, except per share amounts) |
| Revenue | $ | 122,413 | | | $ | 106,116 | | | $ | 83,598 | | | $ | 57,880 | |
| Gross profit | $ | 13,706 | | | $ | 10,503 | | | $ | 9,650 | | | $ | 1,945 | |
| Provision for income taxes | $ | 3,525 | | | $ | 286 | | | $ | 349 | | | $ | 220 | |
| Net loss | $ | 19,615 | | | $ | (30,590) | | | $ | (33,692) | | | $ | (41,284) | |
Net loss per share—basic (1) | $ | 0.26 | | | $ | (0.41) | | | $ | (0.45) | | | $ | (0.55) | |
| Net loss per share—diluted | $ | 0.26 | | | $ | (0.41) | | | $ | (0.45) | | | $ | (0.55) | |
_________________________
(1)Net loss per share basic and diluted are computed independently for each quarter presented based on the weighted-average basic and fully diluted shares outstanding for each quarter. As a result, the sum of quarterly Net loss per share basic and diluted information may not equal annual Net loss per share basic and diluted.
(2)The Company disposed its commercial operations in Europe in the fourth quarter of 2019. Refer to Note 4, Disposal of Business, in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for a complete discussion of the disposal.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our periodic and currentthe reports that we file withor submit to the SEC under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness ofhas evaluated our disclosure controls and procedures as of December 31, 2020. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), were effectiveamended) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation and in reference only to the matter described below, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2023, our disclosure controls and procedures are not effective at a reasonable assurance level due to ensurea material weakness in internal control over financial reporting.
Our management has performed additional analyses, reconciliations, and other post-closing procedures as well as assessed all key non-IT related internal control over financial reporting noting no deficiencies were identified; and therefore, we have concluded that, information wenotwithstanding the matter described below, the consolidated financial statements are required to disclosefairly presented, in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (ii) accumulated and communicated to management,all material respects. Management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.believe that the consolidated financial statements contained in this Form 10-K fairly present, in all material respects, the financial condition, results of operations and cash flows for all periods presented in accordance with U.S. Generally Accepted Accounting Principles.
Management’s Report on Internal Control Overover Financial Reporting
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in RuleRules 13a-15(f) and 15d-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 20202023 based on the criteria set forth in “Internal Control-Integrated Framework” (2013) Internal Control - Integrated Framework (“2013 Framework”) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has(“COSO”) and concluded that our internal control over financial reporting was not effective as of December 31, 2020 based2023 as a result of the material weakness described below.
In connection with our assessment of the effectiveness of internal control over financial reporting, management identified certain control deficiencies in the area of our Information Technology General Control (“ITGC”) related to (i) user access and segregation of duty controls that restrict user and privileged access to appropriate personnel; (ii) program change management controls; and (iii) certain computer operations controls that, when aggregated, arise to a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on those criteria.a timely basis.
This material weakness did not result in any material misstatements in our consolidated financial statements or disclosures in any of the fiscal years ended December 31, 2023, 2022 or 2021. However, a material weakness could result in misstatements potentially impacting our account balances or disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.
The effectiveness of our internal control over financial reporting as of December 31, 2023, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included in Item 8 of this Annual Report on Form 10-K does10-K.
Remediation Plans for the Material Weakness
Management is committed to remediating the material weakness in a timely manner. Our remediation process includes, but is not include an attestation reportlimited to: (i) increasing timely reviews of IT system changes made; (ii) rationalizing access privileges for developer system users; (iii) implementing or modifying controls related to program change management and certain computer operations; and (iv) training of relevant personnel on the Company’s registered public accounting firm duedesign and operation of any new or modified ITGCs.
These steps are subject to ongoing management review, as well as oversight by the Company's EGC statusaudit committee of our board of directors. Additional or modified measures may also be required to remediate the material weakness. We will not be able to conclude that we have completely remediated the material weakness until the applicable controls are fully implemented and is exempted fromhave operated for a sufficient period of time and management has concluded, through formal testing, that the auditor attestation requirementremediated controls are operating effectively. We will continue to monitor the design and effectiveness of Section 404(b) of the Sarbanes-Oxley Act.these and other processes, procedures, and controls and make any further changes management deems appropriate.
Changes in Internal Control over Financial Reporting
There have beenwere no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 20202023 that have materially affected, or are reasonably likely to materially effect,affect, our internal control over financial reporting. We have not experienced any significant impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. The design of our processes
and controls allow for remote execution with accessibility to secure data. We are continually monitoring and assessing the COVID-19 situation to minimize the impact, if any, on the design and operating effectiveness on our internal controls.
Inherent Limitations on Effectiveness of Disclosure Controls and Procedures
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.
Item 9B. Other Information
(a) None.
(b) Trading Arrangements
During the quarter ended December 31, 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 | | Action Date | | Rule 10b5-1 (1) | | Non-Rule 10b5-1 (2) | | Total Shares to be Sold | | Expiration Date |
Matthew McRae, Chief Executive Officer | | Adoption | | November 30, 2023 (3) | | X | | | | 525,594 | | March 7, 2025 |
Kurtis Binder, Chief Financial Officer | | Adoption | | November 29, 2023 (3) | | X | | | | 131,213 | | December 13, 2024 |
Brian Busse, General Counsel | | Adoption | | November 16, 2023 (3) | | X | | | | 99,134 | | November 15, 2024 |
_________________________
(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.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item and not set forth below will be set forth inis incorporated by reference to our definitive proxy statement for our 20212024 Annual Meeting of Stockholders (the “2021 Proxy“Proxy Statement”) to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2020,2023, under the sections headed “Election of Directors,” “Continuing Directors,” “Information Regarding the Board of Directors and is incorporated herein by reference.Corporate Governance,” and “Information About Our Executive Officers.”.
We have adopted a Code of Ethics that applies to our Chief Executive Officer and senior financial officers, including our Chief Financial Officer, as required by the SEC. The current version of our Code of Ethics can be found on our Internet site at http://www.arlo.com. Additional information required by this Item regarding our Code of Ethics is incorporated by reference to the information contained in the section captioned “Corporate Governance Policies“Code of Business Conduct and Practices”Ethics” in our 2021 Proxy Statement.
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Ethics by posting such information on our website at http://www.arlo.com within four business days following the date of such amendment or waiver.
Item 11. Executive Compensation
The information required by this item will be set forth in theis incorporated by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2023, under the sections headed “Compensation and is incorporated herein.Human Capital Committee” and “Executive Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be set forth in theis incorporated by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2023, under the section headed “Security Ownership of Certain Beneficial Owners and is incorporated herein.Management.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be set forth in theis incorporated by reference to our Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2023, under the sections headed “Certain Relationships and is incorporated herein.Related Transactions” and “Information Regarding the Board of Directors and Corporate Governance.”
Item 14. Principal AccountingAccountant Fees and Services
The information required by this item will be set forth in theis incorporated by reference to our Proxy Statement and is incorporated herein.to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2023, under the section headed “Ratification of Appointment of Independent Registered Public Accounting Firm.”
PART IV
Item 15. ExhibitsExhibit and Financial Statement Schedules
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements.
The following consolidated financial statements of Arlo Technologies, Inc. are filed as part of this Annual Report on Form 10-K in Item 8, Financial Statements and Supplementary Data.
| | | | | |
| Page |
| Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP; San Jose, California; PCAOB ID: 238) | |
Consolidated Balance Sheets as of December 31, 20202023 and 20192022 | |
Consolidated Statements of OperationsComprehensive Loss for the three years ended December 31, 2020, 20192023, 2022 and 20182021 | |
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2020, 2019 and 2018 | |
Consolidated Statements of Stockholders’ Equity for the three years ended December 31, 2020, 20192023, 2022 and 20182021 | |
Consolidated Statements of Cash Flows for the three years ended December 31, 2020, 20192023, 2022 and 20182021 | |
| Notes to Consolidated Financial Statements | |
Quarterly Financial Data (unaudited) | |
(2) Financial Statement Schedules.
All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable or because the information required is already included in the consolidated financial statements or the notes to those consolidated financial statements.
(3) Exhibits.
(3) Exhibits.
INDEX TO EXHIBITS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 |
| | | | 8-K | | 8/7/2018 | | 10.1 | | |
| | | | 8-K | | 8/7/2018 | | 10.2 | | |
| | | | 8-K | | 8/7/2018 | | 10.3 | | |
| | | | 8-K | | 8/7/2018 | | 10.4 | | |
| | | | 8-K | | 8/7/2018 | | 10.5 | | |
| | | | 8-K | | 8/7/2018 | | 10.6 | | |
| | | | S-1 | | 7/6/2018 | | 10.7 | | |
| | | | 8-K | | 8/7/2018 | | 10.7 | | |
| | | | 8-K | | 8/7/2018 | | 10.8 | | |
| | | | 8-K | | 8/7/2018 | | 10.9 | | |
| | | | 8-K | | 8/7/2018 | | 10.10 | | |
| | | | 8-K | | 8/7/2018 | | 10.11 | | |
| | | | 8-K | | 8/7/2018 | | 10.12 | | |
| | | | 10-K | | 2/22/2019 | | 10.14 | | |
| | | | 8-K | | 8/7/2018 | | 10.14 | | |
| | | | S-1/A | | 7/23/2018 | | 10.16 | | |
| | | | 10-Q | | 8/27/2018 | | 10.17 | | |
| | | | 8-K | | 5/1/2019 | | 10.1 | | |
| | | | 10-Q | | 8/6/2019 | | 10.2 | | |
| | | | 10-Q | | 11/8/2019 | | 10.1 | | |
| | | | 10-Q | | 11/8/2019 | | 10.2 | | |
| | | | 10-Q | | 11/8/2019 | | 10.3 | | |
| | | | 10-K | | 2/28/2020 | | 10.23 | | |
| | | | 10-K | | 2/28/2020 | | 10.24 | | |
| | | | 10-K | | 2/28/2020 | | 10.25 | | |
| | | | 10-Q | | 8/6/2020 | | 10.1 | | |
| | | | 10-Q | | 8/6/2020 | | 10.2 | | |
| | | | 10-Q | | 8/6/2020 | | 10.3 | | |
| | | | 10-Q | | 8/6/2020 | | 10.4 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 | | |
| | | | 10-K | | 2/26/2021 | | 4.2 | | |
| | | | 8-K | | 8/7/2018 | | 10.1 | | |
| | | | 8-K | | 8/7/2018 | | 10.2 | | |
| | | | 8-K | | 8/7/2018 | | 10.3 | | |
| | | | 8-K | | 8/7/2018 | | 10.4 | | |
| | | | 8-K | | 8/7/2018 | | 10.5 | | |
| | | | 8-K | | 8/7/2018 | | 10.6 | | |
| | | | S-1 | | 7/6/2018 | | 10.7 | | |
| | | | 8-K | | 8/7/2018 | | 10.7 | | |
| | | | 8-K | | 8/7/2018 | | 10.8 | | |
| | | | 8-K | | 8/7/2018 | | 10.9 | | |
| | | | 8-K | | 8/7/2018 | | 10.10 | | |
| | | | 8-K | | 8/7/2018 | | 10.11 | | |
| | | | 10-K | | 2/22/2019 | | 10.14 | | |
| | | | S-1/A | | 7/23/2018 | | 10.16 | | |
| | | | 8-K | | 5/1/2019 | | 10.1 | | |
| | | | 10-K | | 2/28/2020 | | 10.23 | | |
| | | | 10-K | | 3/2/2022 | | 10.23 | | |
| | | | 10-Q | | 8/6/2020 | | 10.2 | | |
| | | | 10-Q | | 8/6/2020 | | 10.3 | | |
| | | | 10-K | | 2/26/2021 | | 10.30 | | |
| | | | 10-Q | | 8/5/2021 | | 10.1 | | |
| | | | 10-Q | | 11/10/2021 | | 10.2 | | |
| | | | 10-K | | 3/2/2022 | | 10.31 | | |
| | | | 10-Q | | 5/11/2022 | | 10.1 | | |
| | | | 10-Q | | 5/11/2022 | | 10.2 | | |
| | | | 10-Q | | 5/11/2022 | | 10.3 | | |
| | | | 10-Q | | 11/9/2022 | | 10.1 | | |
| | | | 10-Q | | 11/9/2022 | | 10.2 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 10-Q | | 11/9/2022 | | 10.3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 10-Q | | 11/9/2022 | | 10.4 | | |
| | | | 10-Q | | 11/9/2022 | | X10.5 | | |
| | | | 10-Q | | 11/9/2022 | | 10.6 | | |
| | | | 10-Q | | 11/9/2022 | | 10.7 | | |
| | | | 8-K | | 8/26/2022 | | 10.1 | | |
| | | | 8-K | | 8/26/2022 | | 10.2 | | |
| | | | 10-Q | | 11/9/2022 | | 10.10 | | |
| | | | 10-Q | | 11/9/2022 | | 10.11 | | |
| | | | 10-Q | | 11/9/2022 | | 10.12 | | |
| | | | 10-Q | | 11/9/2022 | | 10.13 | | |
| | | | | | | | | | X |
| | | | | | | | | | X |
| | | | | | | | | | X |
| | | | | | | | | | X |
| | | | | | | | | | X |
| | | | | | | | | | X |
| | | | | | | | | | X |
| | | | | | | | | | 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 | | 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | X |
| * | | Indicates management contract or compensatory plan or arrangement. | | | | | | | | |
| † | | CertainPursuant to Item 601(b)(10) of Regulation S-K, certain portions of this exhibit (indicated by "[***]") have been omitted asby means of marking such portions with asterisks because the Registrant has determined (i)that the omitted information is both not material and (ii)is the omitted information would likely cause harm totype that the Registrant if publicly disclosed.treats as private or confidential. | | | | | | | | |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-Kreport to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on the 26th day of February 2021.authorized.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| ARLO TECHNOLOGIES, INC. |
| | Registrant |
| |
| |
| /s/ MATTHEW MCRAE |
| Matthew McRae |
| Chief Executive Officer |
| (Principal Executive Officer) |
| |
| |
| /s/ GORDON MATTINGLYKURTIS BINDER |
| Gordon MattinglyKurtis Binder |
| Chief Financial Officer |
| (Principal Financial and Accounting Officer) |
| |
| |
Date: February 26, 202129, 2024
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Matthew McRae and Gordon Mattingly,Kurtis Binder, and each of them, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ MATTHEW MCRAE | | Chief Executive Officer | | February 26, 202129, 2024 |
| Matthew McRae | | (Principal Executive Officer) | | |
| | | | |
/s/ GORDON MATTINGLYKURTIS BINDER | | Chief Financial Officer | | February 26, 202129, 2024 |
Gordon MattinglyKurtis Binder | | (Principal Financial and Accounting Officer) | | |
| | | | |
| /s/ PRASHANT AGGARWAL | | Director | | February 26, 202129, 2024 |
| Prashant Aggarwal | | | | |
| | | | |
| /s/ JOCELYN E. CARTER-MILLER | | Director | | February 26, 202129, 2024 |
| Jocelyn E. Carter-Miller | | | | |
| | | | |
| /s/ RALPH E. FAISON | | Director | | February 26, 202129, 2024 |
| Ralph E. Faison | | | | |
| | | | |
/s/ MICHAEL W. POPECATRIONA FALLON | | Director | | February 26, 202129, 2024 |
Michael W. PopeCatriona Fallon | | | | |
| | | | |
| /s/ AMY ROTHSTEIN | | Director | | February 26, 202129, 2024 |
| Amy Rothstein | | | | |
| | | | |
| /s/ GRADY K. SUMMERS | | Director | | February 26, 202129, 2024 |
| Grady K. Summers | | | | |
