UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~October~~July 2, ~~2022~~2023


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

For the transition period from to

Commission file number: 001-38618

ARLO TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


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

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

(408) 890-3900

(Registrant’s telephone number, including area code)

N/A

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

ARLO

New York Stock Exchange

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

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

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

Large Accelerated filer

☐

Accelerated filer

☒

Non-Accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☒

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

☐

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

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was ~~88,471,856~~94,054,943 as of ~~November~~August 4, ~~2022.~~2023.

Table of Contents

~~ARLO TECHNOLOGIES, INC.~~Arlo Technologies, Inc.

Form 10-Q

For the Quarterly Period Ended July 2, 2023

TABLE OF CONTENTS

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1.Financial Statements

ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

As of
October 2,
2022 December 31,
2021
(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 80,773 $ 175,749
Short-term investments 44,499 —
Accounts receivable, net 82,707 79,564
Inventories 73,243 38,390
Prepaid expenses and other current assets 9,871 9,919
Total current assets 291,093 303,622
Property and equipment, net 6,588 9,595
Operating lease right-of-use assets, net 14,161 14,814
Goodwill 11,038 11,038
Restricted cash 4,128 4,107
Other non-current assets 4,208 4,314
Total assets $ 331,216 $ 347,490
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 107,103 $ 84,098
Deferred revenue 11,893 29,442
Accrued liabilities 92,117 97,389
Total current liabilities 211,113 210,929
Non-current operating lease liabilities 20,239 21,470
Other non-current liabilities 2,543 2,439
Total liabilities 233,895 234,838
Commitments and contingencies (Note 7)
Stockholders’ Equity:
Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding — —
Common stock: $0.001 par value; 500,000,000 shares authorized; shares issued and outstanding: 88,410,113 at October 2, 2022 and 84,453,212 at December 31, 2021 88 84
Additional paid-in capital 420,727 401,367
Accumulated other comprehensive income (loss) (224) —
Accumulated deficit (323,270) (288,799)
Total stockholders’ equity 97,321 112,652
Total liabilities and stockholders’ equity $ 331,216 $ 347,490


	As of
	July 2, 2023		December 31, 2022
	(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	61,951	$	84,024
Short-term investments	61,724		29,700
Accounts receivable, net	57,327		65,960
Inventories	39,429		46,554
Prepaid expenses and other current assets	12,318		6,544
Total current assets	232,749		232,782
Property and equipment, net	6,421		7,336
Operating lease right-of-use assets, net	11,089		12,809
Goodwill	11,038		11,038
Restricted cash	4,035		4,155
Other non-current assets	3,689		4,081
Total assets	$	269,021	$	272,201
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	61,221	$	52,132
Deferred revenue	17,639		11,291
Accrued liabilities	88,217		98,855
Total current liabilities	167,077		162,278
Non-current operating lease liabilities	17,141		19,279
Other non-current liabilities	3,047		2,949
Total liabilities	187,265		184,506
Commitments and contingencies (Note 8)
Stockholders’ Equity:
Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding	—		—
Common stock: $0.001 par value; 500,000,000 shares authorized; shares issued and outstanding: 93,653,934 at July 2, 2023 and 88,887,139 at December 31, 2022	94		89
Additional paid-in capital	448,543		433,138
Accumulated other comprehensive income (loss)	152		(107)
Accumulated deficit	(367,033)		(345,425)
Total stockholders’ equity	81,756		87,695
Total liabilities and stockholders’ equity	$	269,021	$	272,201

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

Table of Contents

ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~

~~AND~~ COMPREHENSIVE LOSS


		Three Months Ended				Nine Months Ended					Three Months Ended				Six Months Ended
		October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021			July 2, 2023		July 3, 2022		July 2, 2023		July 3, 2022
		(In thousands, except per share data)									(In thousands, except per share data)
Revenue:	Revenue:									Revenue:
Products	Products	$	92,720	$	84,152	$	273,736	$	217,224	Products	$	64,749	$	86,191	$	131,809	$	181,016

Services	Services	35,437		26,997		98,151		75,052		Services	50,327		32,788		94,271		62,714

Total revenue	Total revenue	128,157		111,149		371,887		292,276		Total revenue	115,076		118,979		226,080		243,730
Cost of revenue:	Cost of revenue:									Cost of revenue:
Products	Products	79,386		75,682		233,992		184,858		Products	60,446		73,829		124,487		154,606

Services	Services	12,021		11,124		33,830		31,099		Services	12,772		11,410		24,518		21,809

Total cost of revenue	Total cost of revenue	91,407		86,806		267,822		215,957		Total cost of revenue	73,218		85,239		149,005		176,415
Gross profit	Gross profit	36,750		24,343		104,065		76,319		Gross profit	41,858		33,740		77,075		67,315

Operating expenses:	Operating expenses:									Operating expenses:
Research and development	Research and development	16,471		14,377		50,252		45,419		Research and development	17,618		17,402		35,368		33,781
Sales and marketing	Sales and marketing	22,193		12,779		49,867		36,445		Sales and marketing	16,921		14,506		32,274		27,674
General and administrative	General and administrative	12,253		12,119		38,023		36,905		General and administrative	15,007		13,149		30,629		25,770
Impairment charges		—		—		—		9,116
Separation expense		273		683		377		1,342

Others										Others	341		25		973		104
Total operating expenses	Total operating expenses	51,190		39,958		138,519		129,227		Total operating expenses	49,887		45,082		99,244		87,329

Loss from operations	Loss from operations	(14,440)		(15,615)		(34,454)		(52,908)		Loss from operations	(8,029)		(11,342)		(22,169)		(20,014)
Interest income (expense), net		290		(1)		414		26
Other income, net		19		599		314		4,170
Interest income, net										Interest income, net	835		129		1,561		124
Other income (expense), net										Other income (expense), net	52		(116)		13		295
Loss before income taxes	Loss before income taxes	(14,131)		(15,017)		(33,726)		(48,712)		Loss before income taxes	(7,142)		(11,329)		(20,595)		(19,595)
Provision for income taxes	Provision for income taxes	304		181		745		525		Provision for income taxes	221		228		1,013		441
Net loss	Net loss	$	(14,435)	$	(15,198)	$	(34,471)	$	(49,237)	Net loss	$	(7,363)	$	(11,557)	$	(21,608)	$	(20,036)

Net loss per share:	Net loss per share:									Net loss per share:
Basic		$	(0.16)	$	(0.18)	$	(0.40)	$	(0.60)
Diluted		$	(0.16)	$	(0.18)	$	(0.40)	$	(0.60)
Basic and diluted										Basic and diluted	$	(0.08)	$	(0.13)	$	(0.24)	$	(0.23)

Weighted average shares used to compute net loss per share:	Weighted average shares used to compute net loss per share:									Weighted average shares used to compute net loss per share:
Basic		88,124		83,809		86,677		82,191
Diluted		88,124		83,809		86,677		82,191
Basic and diluted										Basic and diluted	92,337		86,868		90,984		85,966

Comprehensive loss:	Comprehensive loss:									Comprehensive loss:
Net loss	Net loss	$	(14,435)	$	(15,198)	$	(34,471)	$	(49,237)	Net loss	$	(7,363)	$	(11,557)	$	(21,608)	$	(20,036)
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax	(56)		11		(224)		8		Other comprehensive income (loss), net of tax	131		(122)		259		(168)
Total comprehensive loss	Total comprehensive loss	$	(14,491)	$	(15,187)	$	(34,695)	$	(49,229)	Total comprehensive loss	$	(7,232)	$	(11,679)	$	(21,349)	$	(20,204)

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

Table of Contents

ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS'~~STOCKHOLDERS’ EQUITY


		Three Months Ended				Nine Months Ended					Three Months Ended				Six Months Ended
		October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021			July 2, 2023		July 3, 2022		July 2, 2023		July 3, 2022
		(In thousands)									(In thousands)
Total stockholders' equity, beginning balances		$	102,401	$	114,785	$	112,652	$	133,767
Total stockholders’ equity, beginning balances										Total stockholders’ equity, beginning balances	$	86,251	$	112,004	$	87,695	$	112,652

Common stock:	Common stock:									Common stock:
Beginning balances	Beginning balances	$	88	$	83	$	84	$	79	Beginning balances	$	91	$	86	$	89	$	84
Issuance of common stock under stock-based compensation plans	Issuance of common stock under stock-based compensation plans	1		2		6		8		Issuance of common stock under stock-based compensation plans	4		2		7		5

Issuance of common stock under Employee Stock Purchase Plan										Issuance of common stock under Employee Stock Purchase Plan	—		1		—		1
Restricted stock unit withholdings	Restricted stock unit withholdings	(1)		(1)		(2)		(3)		Restricted stock unit withholdings	(1)		(1)		(2)		(2)
Ending balances	Ending balances	$	88	$	84	$	88	$	84	Ending balances	$	94	$	88	$	94	$	88

Additional paid-in capital:	Additional paid-in capital:									Additional paid-in capital:
Beginning balances	Beginning balances	$	411,316	$	381,511	$	401,367	$	366,455	Beginning balances	$	445,809	$	409,242	$	433,138	$	401,367
Stock-based compensation expense	Stock-based compensation expense	9,953		6,688		25,228		18,134		Stock-based compensation expense	9,997		7,093		20,622		15,276
Settlement of liability classified RSUs		3,669		8,525		8,731		15,087
Settlement of liability classified restricted stock units										Settlement of liability classified restricted stock units	—		95		6,739		5,061
Issuance of common stock under stock-based compensation plans	Issuance of common stock under stock-based compensation plans	—		—		1,419		4,433		Issuance of common stock under stock-based compensation plans	2,986		34		2,986		1,419
Issuance of common stock under Employee Stock Purchase Plan	Issuance of common stock under Employee Stock Purchase Plan	—		1,265		1,746		2,962		Issuance of common stock under Employee Stock Purchase Plan	1,617		1,746		1,617		1,746
Restricted stock unit withholdings	Restricted stock unit withholdings	(4,211)		(3,853)		(17,764)		(12,935)		Restricted stock unit withholdings	(11,866)		(6,894)		(16,559)		(13,553)
Ending balances	Ending balances	$	420,727	$	394,136	$	420,727	$	394,136	Ending balances	$	448,543	$	411,316	$	448,543	$	411,316

Accumulated deficit:	Accumulated deficit:									Accumulated deficit:
Beginning balances	Beginning balances	$	(308,835)	$	(266,809)	$	(288,799)	$	(232,770)	Beginning balances	$	(359,670)	$	(297,278)	$	(345,425)	$	(288,799)
Net loss	Net loss	(14,435)		(15,198)		(34,471)		(49,237)		Net loss	(7,363)		(11,557)		(21,608)		(20,036)
Ending balances	Ending balances	$	(323,270)	$	(282,007)	$	(323,270)	$	(282,007)	Ending balances	$	(367,033)	$	(308,835)	$	(367,033)	$	(308,835)

Accumulated other comprehensive income (loss):	Accumulated other comprehensive income (loss):									Accumulated other comprehensive income (loss):
Beginning balances	Beginning balances	$	(168)	$	—	$	—	$	3	Beginning balances	$	21	$	(46)	$	(107)	$	—
Other comprehensive income (loss), net of tax	Other comprehensive income (loss), net of tax	(56)		11		(224)		8		Other comprehensive income (loss), net of tax	131		(122)		259		(168)
Ending balances	Ending balances	$	(224)	$	11	$	(224)	$	11	Ending balances	$	152	$	(168)	$	152	$	(168)

Total stockholders' equity, ending balances		$	97,321	$	112,224	$	97,321	$	112,224
Total stockholders’ equity, ending balances										Total stockholders’ equity, ending balances	$	81,756	$	102,401	$	81,756	$	102,401

Common stock shares:	Common stock shares:									Common stock shares:
Beginning balances	Beginning balances	87,530		82,917		84,453		79,336		Beginning balances	90,785		85,835		88,887		84,453
Issuance of common stock under stock-based compensation plans	Issuance of common stock under stock-based compensation plans	1,464		1,723		5,885		6,321		Issuance of common stock under stock-based compensation plans	3,976		2,294		7,141		4,421
Issuance of common stock under Employee Stock Purchase Plan	Issuance of common stock under Employee Stock Purchase Plan	—		249		304		602		Issuance of common stock under Employee Stock Purchase Plan	460		304		460		304
Restricted stock unit withholdings	Restricted stock unit withholdings	(584)		(622)		(2,232)		(1,992)		Restricted stock unit withholdings	(1,567)		(903)		(2,834)		(1,648)
Ending balances	Ending balances	88,410		84,267		88,410		84,267		Ending balances	93,654		87,530		93,654		87,530

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

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ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended
October 2,
2022 October 3,
2021
(In thousands)
Cash flows from operating activities:
Net loss $ (34,471) $ (49,237)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense 31,787 27,548
Impairment charges — 9,116
Depreciation and amortization 3,653 4,546
Allowance for credit losses and inventory reserves (211) (2,530)
Deferred income taxes 259 (284)
Others 39 54
Changes in assets and liabilities:
Accounts receivable, net (3,171) 7,712
Inventories (34,613) 27,274
Prepaid expenses and other assets (105) (5,166)
Accounts payable 23,229 (27)
Deferred revenue (18,544) (28,019)
Accrued and other liabilities (2,635) (23,643)
Net cash used in operating activities (34,783) (32,656)
Cash flows from investing activities:
Purchases of property and equipment (815) (1,938)
Purchases of short-term investments (69,305) —
Proceeds from maturities of short-term investments 24,542 20,000
Net cash provided by (used in) investing activities (45,578) 18,062
Cash flows from financing activities:
Proceeds related to employee benefit plans 3,172 7,403
Restricted stock unit withholdings (17,766) (12,938)
Net cash used in financing activities (14,594) (5,535)
Net decrease in cash and cash equivalents and restricted cash
(94,955) (20,129)
Cash and cash equivalents and restricted cash, at beginning of period
179,856 190,291
Cash and cash equivalents and restricted cash, at end of period
$ 84,901 $ 170,162
Non-cash investing activities:
Purchases of property and equipment included in accounts payable and accrued liabilities $ 209 $ 423


	Six Months Ended
	July 2, 2023		July 3, 2022
	(In thousands)
Cash flows from operating activities:
Net loss	$	(21,608)	$	(20,036)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation expense	27,564		21,834
Depreciation and amortization	2,353		2,523
Allowance for credit losses and inventory reserves	613		(120)
Deferred income taxes	243		133
Others	(567)		89
Changes in assets and liabilities:
Accounts receivable, net	8,734		5,498
Inventories	6,411		(628)
Prepaid expenses and other assets	(5,624)		767
Accounts payable	9,836		(6,565)
Deferred revenue	6,198		(16,763)
Accrued and other liabilities	(11,245)		(16,113)
Net cash provided by (used in) operating activities	22,908		(29,381)
Cash flows from investing activities:
Purchases of property and equipment	(1,954)		(451)
Purchases of short-term investments	(61,152)		(59,490)
Proceeds from maturities of short-term investments	29,956		9,512
Net cash used in investing activities	(33,150)		(50,429)
Cash flows from financing activities:
Proceeds related to employee benefit plans	4,611		3,171
Restricted stock unit withholdings	(16,562)		(13,555)
Net cash used in financing activities	(11,951)		(10,384)
Net decrease in cash, cash equivalents, and restricted cash	(22,193)		(90,194)
Cash, cash equivalents, and restricted cash, at beginning of period	88,179		179,856
Cash, cash equivalents, and restricted cash, at end of period	$	65,986	$	89,662
Reconciliation of cash, cash equivalents, and restricted cash to Unaudited Condensed Consolidated Balance Sheets
Cash and cash equivalents	$	61,951	$	85,537
Restricted cash	4,035		4,125
Total cash, cash equivalents, and restricted cash	$	65,986	$	89,662
Supplemental cash flow information:
Non-cash investing activities:
Purchases of property and equipment included in accounts payable and accrued liabilities	$	433	$	333

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

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. ~~The Company~~Description of Business and Basis of Presentation

~~The Company~~Description of Business

Arlo Technologies, Inc. ~~("Arlo" or the "Company"~~(“Arlo”) combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle. ~~The Company's~~Our deep expertise in product design, wireless connectivity, cloud infrastructure and cutting-edge AI capabilities focuses on delivering a seamless, smart home experience for Arlo users that is easy to setup and interact with every day. ~~The Company's~~Our cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection. ~~The Company conducts~~

We conduct business across three geographic regions—(i) the Americas; (ii) Europe, Middle-East and Africa (“EMEA”); and (iii) Asia Pacific (“APAC”)—and primarily ~~generates~~generate revenue by selling devices through retail channels, wholesale distribution, wireless carrier channels, security solution providers, and ~~Arlo's~~Arlo’s direct to consumer store and paid subscription services.

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

Basis of Presentation

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

These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements included in ~~the Company’s~~our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021.~~2022. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair statement of the unaudited condensed consolidated financial statements for interim periods.

Fiscal periods

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

Reclassification

Certain prior periods amounts have been reclassified to conform to the current ~~period's~~period’s presentation. None of these reclassifications had a material impact to the unaudited condensed consolidated financial statements.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Use of estimates

The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Management bases its estimates on various assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates and operating results for the ~~nine~~six months ended ~~October~~July 2, ~~2022~~2023 and are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022~~2023 or any future period.

Note 2. Significant Accounting Policies and Recent Accounting Pronouncements

~~The Company’s~~Our significant accounting policies are disclosed in ~~the~~our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. There have been no significant changes to such policies during the ~~nine~~six months ended ~~October~~July 2, ~~2022.~~

~~Recent accounting pronouncements~~2023.

Emerging Growth Company Status

As an emerging growth company (“EGC”), ~~the Company~~we may, under the Jumpstart Our Business Startups Act, delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless ~~the Company~~we otherwise irrevocably ~~elects~~elect not to avail ~~itself~~ourselves of this exemption. ~~The Company~~We did not make such an irrevocable election and ~~has~~have not delayed the adoption of any applicable accounting standards. We will no longer qualify as an EGC on December 31, 2023. Accordingly, our Annual Report on Form 10-K for the year ending December 31, 2023 will include an attestation report of our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.

Accounting Pronouncements Recently Adopted

~~In 2022,~~There were no accounting pronouncements adopted during the ~~Company adopted Accounting Standards Update ("ASU") 2020-04,~~ ~~Facilitation of the Effects of Reference Rate Reform on Financial Reporting~~. The ASU intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR"). The adoption of this guidance did not have a material impact on the Company's financial statements and related disclosures.six months ended July 2, 2023.

Accounting Pronouncements Not Yet Effective

~~The Company has~~We have considered all recent accounting pronouncements issued, but not yet effective, and ~~does~~do not expect any to have a material effect on ~~its~~our financial statements and related disclosures.

Note 3. ~~Deferred~~ Revenue

~~Deferred Revenue~~Performance Obligations

~~Deferred~~The following table includes estimated revenue ~~consists~~expected to be recognized in the future related to performance obligations that are unsatisfied and partially unsatisfied as of ~~advance payments and customer billings in advance of~~July 2, 2023:


	1 year		2 years		Greater than 2 years		Total
	(In thousands)
Performance obligations	$	18,320	$	58	$	6	$	18,384

The performance obligation classified as greater than one year pertains to revenue ~~recognition~~deferral from ~~subscription contracts where the Company has unsatisfied performance obligations. Advance payments include prepayments for Non-Recurring Engineering ("NRE") services under the Supply Agreement with~~ ~~Verisure S.à.r.l. (“Verisure”).~~prepaid services.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~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 October 2, 2022:~~

1 year 2 years Greater than 2 years Total
(In thousands)
Performance obligations $ 18,957 $ 331 $ 19 $ 19,307

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

For the ~~nine~~six months ended ~~October~~July 2, 2023 and July 3, 2022, ~~and October 3, 2021, $82.5~~$87.6 million and ~~$64.2~~$53.4 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and ~~$101.2~~$81.4 million and ~~$70.3~~$70.1 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. Approximately ~~$13.6~~$9.8 million and ~~$19.9~~$11.9 million of this recognized revenue was included in the contract liability balance at the beginning of the periods. There were no significant changes in estimates during the period that would affect the contract balances.

During the five-year period that commenced on January 1, 2020, Verisure Sàrl (“Verisure”) has an aggregate purchase commitment of $500.0 million. As of July 2, 2023, $403.1 million of the purchase commitment has been fulfilled. Based on the Supply Agreement with Verisure, a purchase obligation is not deemed to exist until we receive and accept Verisure’s purchase order. As of July 2, 2023, we had a backlog of $38.7 million which represents performance obligations that will be recognized as revenue once fulfilled, which is expected to occur over the next six months.

Disaggregation of Revenue

~~The Company conducts business across~~We disaggregate our revenue into three geographic regions: the Americas, EMEA, and ~~APAC. Sales and usage-based taxes are excluded from revenue. Refer to Note 11,~~ ~~Segment and Geographic Information, for~~APAC, where we conduct our business. The following table presents revenue disaggregated by ~~geography.~~geographic regions.


	Three Months Ended				Six Months Ended
	July 2, 2023		July 3, 2022		July 2, 2023		July 3, 2022
	(In thousands)
Americas	$	78,136	$	60,345	$	134,768	$	128,811
EMEA	30,958		54,483		79,430		104,458
APAC	5,982		4,151		11,882		10,461
Total	$	115,076	$	118,979	$	226,080	$	243,730

Note 4. Balance Sheet Components

~~Cash and Cash Equivalents and Restricted cash~~Short-term investments

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


	As of July 2, 2023								As of December 31, 2022
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
	(In thousands)
U.S. Treasuries	$	61,572	$	176	$	(24)	$	61,724	$	29,849	$	—	$	(149)	$	29,700

As of
October 2,
2022 December 31,
2021
(In thousands)
Cash and cash equivalents $ 80,773 $ 175,749
Restricted cash 4,128 4,107
Total as presented on the unaudited condensed consolidated statements of cash flows $ 84,901 $ 179,856

Accounts receivable, net


	As of
	July 2, 2023		December 31, 2022
	(In thousands)
Gross accounts receivable	$	57,649	$	66,383
Allowance for credit losses	(322)		(423)
Total	$	57,327	$	65,960

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of
October 3,
2021 December 31,
2020
(In thousands)
Cash and cash equivalents $ 166,057 $ 186,127
Restricted cash 4,105 4,164
Total as presented on the unaudited condensed consolidated statements of cash flows $ 170,162 $ 190,291

~~Available-for-sale short-term investments~~

As of October 2, 2022 As of December 31, 2021
Cost Unrealized Gains Unrealized Losses Estimated Fair Value Cost Unrealized Gains Unrealized Losses Estimated Fair Value
(In thousands)
U.S. treasuries $ 44,765 $ — $ (266) $ 44,499 $ — $ — $ — $ —

The Company’s short-term investments are classified as available-for-sale and consist of government securities with an original maturity or remaining maturity at the time of purchase of greater than three months and no more than twelve months. Accordingly, none of the available-for-sale securities have unrealized losses greater than twelve months. The Company did not recognize any allowance for credit losses related to available for sale short-term investments for the three months ended October 2, 2022.

~~Accounts receivable, net~~

As of
October 2,
2022 December 31,
2021
(In thousands)
Gross accounts receivable $ 83,071 $ 79,901
Allowance for credit losses (364) (337)
Total accounts receivable, net $ 82,707 $ 79,564

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


		Three Months Ended				Nine Months Ended					Three Months Ended				Six Months Ended
		October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021			July 2, 2023		July 3, 2022		July 2, 2023		July 3, 2022
		(In thousands)									(In thousands)
Balance at the beginning of the period	Balance at the beginning of the period	$	405	$	536	$	337	$	519	Balance at the beginning of the period	$	329	$	339	$	423	$	337
Provision for (release of) expected credit losses	Provision for (release of) expected credit losses	(41)		(210)		27		(193)		Provision for (release of) expected credit losses	(7)		66		(101)		68

Balance at the end of the period	Balance at the end of the period	$	364	$	326	$	364	$	326	Balance at the end of the period	$	322	$	405	$	322	$	405

~~Inventories~~Property and equipment, net

~~Inventories consist~~The components of ~~finished goods which~~property and equipment are ~~valued at~~as follows:


	As of
	July 2, 2023		December 31, 2022
	(In thousands)
Machinery and equipment	$	13,791	$	12,696
Software	15,818		15,606
Computer equipment	3,853		3,992
Leasehold improvements	4,661		4,657
Furniture and fixtures	2,546		2,554
Total property and equipment, gross	40,669		39,505
Accumulated depreciation	(34,248)		(32,169)
Total property and equipment, net (1)	$	6,421	$	7,336

_________________________

(1) $1.4 million and $1.7 million property and equipment, net, was included in the ~~lower of cost or net realizable value, with cost being determined using~~sublease arrangement for the ~~first-in, first-out method~~San Jose office building as of ~~October~~July 2, 2023 and December 31, 2022, respectively.

Depreciation expense pertaining to property and equipment was $1.2 million and $2.4 million for the three and six months ended July 2, 2023, and $1.2 million and $2.5 million for the three and six months ended July 3, 2022.

Goodwill

We have determined that no event occurred or circumstances changed during the three and six months ended July 2, 2023 that would more likely than not reduce the fair value of goodwill below the carrying amount. No goodwill impairment was recognized in the three and six months ended July 2, 2023 and July 3, 2022.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Property and equipment, net~~Other non-current assets


	As of
	July 2, 2023		December 31, 2022
	(In thousands)
Deferred income taxes	$	1,141	$	1,384
Sublease initial direct cost and adjustments	896		777
Other	1,652		1,920
Total	$	3,689	$	4,081

~~The components of property and equipment are as follows:~~Accrued liabilities

As of
October 2,
2022 December 31,
2021
(In thousands)
Machinery and equipment $ 12,537 $ 13,302
Software 13,765 13,928
Computer equipment 4,093 4,062
Furniture and fixtures 2,567 2,404
Leasehold improvements
5,030 4,922
Total property and equipment, gross 37,992 38,618
Accumulated depreciation and amortization (31,404) (29,023)
Total property and equipment, net (1)
$ 6,588 $ 9,595

~~_________________________~~

~~(1)~~ ~~$1.8 million and $2.4 million property and equipment, net, respectively, was included in the sublease arrangement for the San Jose office building as of October 2, 2022 and December 31, 2021.~~


	As of
	July 2, 2023		December 31, 2022
	(In thousands)
Sales incentives	$	31,281	$	36,271
Sales returns	14,757		18,656
Compensation	16,155		15,556
Cloud and other costs	7,657		11,154
Operating lease liabilities	3,818		4,190
Professional services	2,496		3,703
Warranty obligations	1,093		1,174
Freight cost	1,921		1,050
Service cost	1,084		806
Restructuring charges	628		1,265
Other	7,327		5,030
Total	$	88,217	$	98,855

Depreciation and amortization expense pertaining to property and equipment was $1.1 million and $3.7 million for the three and nine months ended October 2, 2022, respectively, and $1.4 million and $4.5 million for the three and nine months ended October 3, 2021, respectively.Other non-current liabilities

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

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

As a result of the evaluation, the Company recorded an impairment charge of $9.1 million, which includes $6.8 million associated with the right-of-use assets and $2.3 million associated with other lease related property and equipment assets, during the second quarter of 2021.The assets indicated as impaired were written down to fair value as calculated using a discounted cash flow method (income approach). The fair value of the asset group was determined by utilizing projected cash flows from the sublease, discounted by a risk-adjusted discount rate that reflects the level of risk associated with receiving future cash flows. The inputs utilized in the analyses were classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement". Refer to Note 5, ~~Fair Value Measurements~~ ~~for additional information about the fair value measured on a non-recurring basis and Note 7,~~ ~~Commitments and Contingencies, for further information about the sublease.~~

~~Goodwill~~

~~There was no change in the carrying amount of goodwill during the nine months ended October 2, 2022. The goodwill as of October 2, 2022 and December 31, 2021 was $11.0 million.~~

~~Table of Contents~~


	As of
	July 2, 2023		December 31, 2022
	(In thousands)
Non-current service cost	$	1,202	$	1,259
Non-current compensation	872		616
Non-current deferred revenue	63		212
Non-current income taxes payable	77		77
Other	833		785
Total	$	3,047	$	2,949

~~ARLO TECHNOLOGIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~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 one operating and reportable segment.

The Company determined that no events occurred or circumstances changed during the nine months ended October 2, 2022 that would more likely than not reduce the fair value of the Company below its carrying amount. If there is a significant decline in the Company’s stock price based on market conditions and deterioration of the business, the Company may have to record a charge to its earnings for the goodwill impairment of up to $11.0 million.

~~Other non-current assets~~

As of
October 2,
2022 December 31,
2021
(In thousands)
Net deferred tax assets $ 1,306 $ 1,565
Sublease 793 1,471
Other 2,109 1,278
Total other non-current assets $ 4,208 $ 4,314

~~Accrued liabilities~~

As of
October 2,
2022 December 31,
2021
(In thousands)
Sales and marketing $ 35,988 $ 31,417
Sales returns
15,678 19,960
Accrued employee compensation 12,111 12,367
Current operating lease liabilities 4,507 4,609
Freight 2,332 8,086
Warranty obligation 1,121 1,330
Other 20,380 19,620
Total accrued liabilities $ 92,117 $ 97,389

1211

Table of Contents

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 5. Fair Value Measurements

~~Fair Value Measurements - Recurring Basis~~

The following table summarizes assets measured at fair value on a recurring basis:


		As of					As of
		October 2, 2022		December 31, 2021			July 2, 2023		December 31, 2022
		(In thousands)					(In thousands)
Cash equivalents: money-market funds (<90 days)	Cash equivalents: money-market funds (<90 days)	$	7,405	$	21,935	Cash equivalents: money-market funds (<90 days)	$	1,888	$	12,614
Cash equivalents: U.S. treasuries (<90 days)		20,113		—
Available-for-sale securities: U.S. treasuries (1)		44,499		—
Cash equivalents: U.S. Treasuries (<90 days)						Cash equivalents: U.S. Treasuries (<90 days)	471		20,274
Available-for-sale securities: U.S. Treasuries (1)						Available-for-sale securities: U.S. Treasuries (1)	61,724		29,700
Total	Total	$	72,017	$	21,935	Total	$	64,083	$	62,588

_________________________

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

~~The Company’s~~Our investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.

As of ~~October~~July 2, ~~2022~~2023 and December 31, ~~2021,~~2022, assets and liabilities measured as Level 2 fair value were not material and there were no Level 3 fair value assets or liabilities measured on a recurring basis.

~~Fair Value Measurements - Nonrecurring Basis~~

Note 6. Restructuring

In November 2022, we initiated a restructuring plan to reduce our cost structure to better align the operational needs of the business to current economic conditions while continuing to support our long-term strategy. This restructuring includes the reduction of headcount as well as the abandonment of certain lease contracts and the cancellation of contractual services arrangements with certain suppliers. As of July 2, 2023, we have substantially incurred all costs pertaining to restructuring activities, with related cash outflows extending until the fourth quarter of 2024.

The ~~Company measures~~restructuring liabilities are included in accrued liabilities in our unaudited condensed consolidated balance sheets. Restructuring activities for the ~~fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying amount the asset may not be recoverable. For the three and nine~~six months ended ~~October~~July 2, ~~2022, the Company had no assets or liabilities measured on a nonrecurring basis.~~2023 are as follows:


	Total		Severance Expense		Office Exit Expense		Other Exit Expense
	(In thousands)
Balance as of December 31, 2022	$	1,265	$	219	$	991	$	55
Restructuring charges	400		278		117		5
Cash payments	(1,011)		(464)		(521)		(26)
Non-cash and other adjustments	(26)		—		(21)		(5)
Balance as of July 2, 2023	$	628	$	33	$	566	$	29
Total costs incurred inception to date	$	2,454	$	1,323	$	1,052	$	79

Table of Contents

During the second quarter of 2021, in connection with the long-lived assets impairment analysis, certain lease related property and equipment assets and right-of-use assets were measured and written down to fair value on a nonrecurring basis as a result of impairment. The fair value measurements were determined using a discounted cash flow method with unobservable inputs and were classified within Level 3 of the fair value hierarchy. The fair value of the asset group was calculated by utilizing projected cash flows from the sublease, discounted by a market derived discount rate at 8.0%. Refer to Note 4, ~~Balance Sheet Components, for further information about the impairment of the right-of-use assets and long-lived assets.~~

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 6.7. Revolving Credit Facility

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

The Credit Agreement provides for a three-year revolving credit facility (the “Credit Facility”) that matures on October 27, 2024. Borrowings under the Credit Facility are limited to the lesser of (x) $40.0 million, and (y) an amount equal to the borrowing base. The borrowing base will be the sum of (i) 90% of investment grade eligible receivables and (ii) 85% of non-investment grade eligible accounts, less applicable reserves established by the Lender. The Credit Agreement also includes a $5.0 million sublimit for the issuance by the Lender of letters of credit. In addition, the Credit Agreement includes an uncommitted accordion feature that allows ~~the Company~~us to request, from time to time, that the Lender increase the aggregate revolving loan commitments by up to an additional $25.0 million in the aggregate, subject to the satisfaction of certain conditions, including obtaining the Lender’s agreement to participate in each increase. The proceeds of the borrowings under the Credit Facility may be used for working capital and general corporate purposes. Based on certain terms and conditions including eligible accounts receivable as of July 2, 2023, we had unused borrowing capacity of $13.8 million.

~~Table of Contents~~

~~ARLO TECHNOLOGIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

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

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

The Credit Agreement contains events of default, representations and warranties, and affirmative and negative covenants customary for credit facilities of this type. The Credit Agreement also contains financial covenants that require ~~the Company~~us to (a) until ~~the Company achieves~~we achieve a fixed charge coverage ratio of at least 1.00 to 1.00 for two consecutive quarters, maintain minimum liquidity of not less than $20.0 million at all times and (b) thereafter, if the Financial Covenant Trigger Period (as defined in the Credit Agreement) is in effect, maintain a fixed charge coverage ratio, tested quarterly on a trailing twelve month basis, of at least 1.00 to 1.00 at any time. As of ~~October~~July 2, ~~2022, the Company is~~2023, we were in compliance with all the covenants of the Credit Agreement.

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

No amounts had been drawn under the Credit Facility as of ~~October~~July 2, ~~2022.~~2023.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 7.8. 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 leases~~Certain lease agreements include options to ~~extend such leases for up~~renew 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 leases provide for rental payments on a graduated scale. ~~The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets,~~ ~~accrued liabilities~~, and non-current operating lease liabilities in the unaudited condensed consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for fixed lease payments are recognized in the unaudited condensed consolidated statements of operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. Gross lease expense was ~~$1.8~~$1.5 million and ~~$1.7~~$3.0 million for the three and six months ended ~~October~~July 2, ~~2022 and October 3, 2021,~~2023, respectively, and ~~$5.4~~$1.8 million and ~~$5.3~~$3.6 million for the ~~nine~~three and six months ended ~~October 2,~~July 3, 2022, ~~and October 3, 2021,~~ respectively. The lease expense was recorded within Cost of revenue, Research and development, Sales and marketing, and General and administrative expense in the unaudited condensed consolidated statements of operations. Short-term leases and variable lease costs were included in the lease expense and they were immaterial. The CompanyWe recorded sublease income as reduction of lease expense, in the amount of $0.5 million and ~~$1.5~~$1.0 million for the three and ~~nine~~six months ended ~~October~~July 2, 2023 and July 3, 2022.

Supplemental cash flow information related to operating leases was as follows:


	Six Months Ended
	July 2, 2023		July 3, 2022
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	3,799	$	3,618
Right-of-use assets obtained in exchange for lease liabilities
Operating leases	$	—	$	2,670

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


	As of
	July 2, 2023		December 31, 2022
Weighted average remaining lease term	5.5 years		5.1 years
Weighted average discount rate	5.69	%	5.69	%

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Supplemental cash flow information related to operating leases for the nine months ended October 2, 2022 and October 3, 2021 was as follows:~~

October 2, 2022 October 3, 2021
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 5,208 $ 4,939
Right-of-use assets obtained in exchange for lease liabilities
Operating leases $ 2,670 $ 1,429

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

As of
October 2, 2022 December 31, 2021
Weighted average remaining lease term 5.1 years 6.1 years
Weighted average discount rate 5.71 % 5.77 %

The ~~Company's~~ future minimum undiscounted lease payments under operating leases and future non-cancelable rent payments from ~~its~~our subtenants for each of the next five years and thereafter as of ~~October~~July 2, ~~2022~~2023 were as follows:

Operating Lease Payments Sublease Payments Net
(In thousands)
2022 (Remaining three months) $ 1,166 $ (502) $ 664
2023 6,050 (1,891) 4,159
2024 5,433 (1,947) 3,486
2025 3,753 (2,006) 1,747
2026 3,872 (2,066) 1,806
Thereafter 8,794 (5,942) 2,852
Total future lease payments 29,068 $ (14,354) $ 14,714
Less: interest (4,322)
Present value of future minimum lease payments $ 24,746
Accrued liabilities $ 4,507
Non-current operating lease liabilities 20,239
Total lease liabilities $ 24,746


	Operating Lease Payments		Sublease Payments		Net
	(In thousands)
2023 (Remaining six months)	$	1,988	$	(1,034)	$	954
2024	5,398		(1,947)		3,451
2025	3,904		(2,006)		1,898
2026	4,011		(2,066)		1,945
2027	3,986		(2,322)		1,664
Thereafter	5,130		(3,620)		1,510
Total future lease payments	24,417		$	(12,995)	$	11,422
Less: interest	(3,458)
Present value of future minimum lease payments	$	20,959

Accrued liabilities	$	3,818
Non-current operating lease liabilities	17,141
Total lease liabilities	$	20,959

Letters of Credit

In connection with the lease agreement for ~~the~~our office space located in San Jose, California, ~~the Company~~we executed a letter of credit with the landlord as the beneficiary. As of ~~October~~July 2, ~~2022, the Company~~2023, we had approximately $3.6 million of unused letters of credit outstanding, of which $3.1 million pertains to the lease arrangement in San Jose, California.

~~Table of Contents~~

~~ARLO TECHNOLOGIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

Purchase Obligations

~~The Company has~~We have entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. Orders are non-cancelable within 30 days prior to the expected shipment date. As of ~~October~~July 2, ~~2022, the Company~~2023, we had approximately ~~$42.5~~$50.1 million in non-cancelable purchase commitments with suppliers.

As of ~~October~~July 2, ~~2022, a further $37.7~~2023, an additional $24.9 million of purchase orders beyond contractual termination periods have been issued to supply chain partners in anticipation of demand requirements. Consequently, ~~the Company~~we may incur expenses for the materials and components, such as chipsets already purchased by the supplier to fulfill ~~the purchase order~~our orders if the purchase order is cancelled. Expenses incurred ~~in respect of cancelled purchase orders has~~have historically not been significant relative to the original order value. As of July 2, 2023, the loss liability from committed purchases was not material.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Warranty Obligations

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


		Three Months Ended				Nine Months Ended					Three Months Ended				Six Months Ended
		October 2, 2022		October 3, 2021		October 2, 2022		October 3, 2021			July 2, 2023		July 3, 2022		July 2, 2023		July 3, 2022
		(In thousands)									(In thousands)
Balance at the beginning of the period	Balance at the beginning of the period	$	1,285	$	1,805	$	1,330	$	2,451	Balance at the beginning of the period	$	1,119	$	1,330	$	1,174	$	1,330

Provision for (release of) warranty obligation		(88)		(53)		25		(438)
Provision for warranty obligations										Provision for warranty obligations	40		34		55		113
Settlements	Settlements	(76)		(107)		(234)		(368)		Settlements	(66)		(79)		(136)		(158)
Balance at the end of the period	Balance at the end of the period	$	1,121	$	1,645	$	1,121	$	1,645	Balance at the end of the period	$	1,093	$	1,285	$	1,093	$	1,285

Litigation and Other Legal Matters

~~Securities Class Action Lawsuits and Derivative Suit~~

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

~~Table of Contents~~Securities Class Action Lawsuits and Derivative Suit

~~ARLO TECHNOLOGIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

On ~~March 2, 2022, the Company filed its Form 10-K for the year ended December 31, 2021 which disclosed the status of certain securities class action lawsuits. In summary, on~~ December 11, 2018, purported stockholders of Arlo ~~Technologies, Inc.~~ filed six putative securities class action complaints in the Superior Court of California, County of Santa Clara (the ~~"State Action"~~“State Action”), and one complaint in the U.S. District Court for the Northern District of California (the ~~"Federal Action"~~“Federal Action”) against ~~the Company~~us and certain of ~~its~~our executives and directors. The plaintiffs in the State Action allege that ~~the Company~~we failed to adequately disclose quality control problems and adverse sales trends ahead of ~~the Company's~~our initial public offering (the ~~"IPO"~~“IPO”), violating the Securities Act of 1933, as amended (the ~~"Securities Act"~~“Securities Act”). The complaint seeks unspecified monetary damages and other relief on behalf of investors who purchased Company common stock issued pursuant and/or traceable to the IPO. In the Federal Action, the court appointed a shareholder named Matis Nayman as lead plaintiff. Lead plaintiff alleged violations of the Securities Act and the Securities Exchange Act of 1934, as amended, based on alleged materially false and misleading statements about ~~the Company’s~~our sales trends and products.In the amended complaint, lead plaintiff sought to represent a class of persons who purchased or otherwise acquired ~~the Company’s~~our common stock (i) during the period between August 3, 2018 through December 3, 2018 and/or (ii) pursuant to or traceable to the IPO. Lead plaintiff sought class certification, an award of unspecified damages, an award of costs and expenses, including attorneys’ fees, and other further relief as the court may deem just and proper.

On August 6, 2019, defendants filed a motion to dismiss. The federal court granted that motion, and lead plaintiff filed an amended complaint. On June 12, 2020, lead plaintiff filed an unopposed motion for preliminary approval of a class action settlement for $1.25 million, which was also the amount that ~~the Company~~we had accrued for loss

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

contingency. In October 2020, ~~the Company~~we made a $1.25 million payment to an escrow account administered by the court and plaintiff’s counsel (the “Settlement Fund”). The Settlement Fund was deemed to be in the custody of the court and remained subject to the jurisdiction of the court until such time as the Settlement Fund was distributed pursuant to the settlement agreement and/or further order of the court.

On February 5, 2021, lead plaintiff filed a motion for final approval of the settlement. In advance of the final approval hearing, three of the named plaintiffs in the State Action requested exclusion from the settlement. The court held a final approval hearing on March 11, 2021, and, on March 25, 2021, entered an order and final judgment approving the settlement and, among other things, dismissed with prejudice all claims of lead plaintiff and the Settlement Class (as defined in the settlement agreement). The Federal Action is now closed.

In the State Action, on May 5, 2021, the court held a status conference and instructed plaintiffs Perros, Patel, and Pham (“Plaintiffs”), who were the only Arlo stockholders to opt out of the federal settlement, to file an amended complaint by June 4, 2021. Plaintiffs filed their amended complaint, asserting their individual Securities Act claims, but also purporting to represent a new class of Arlo stockholders who purchased Arlo shares between December 3, 2018 and February 22, 2019. On June 21, 2021, the Arlo defendants filed a motion to dismiss the State Action (for forum non conveniens) based on the federal forum provision in Arlo’s certificate of incorporation. Plaintiffs opposed on July 28, 2021, and the Arlo defendants replied on August 13, 2021. On September 9, 2021, the court issued an order granting the Arlo defendants’ forum non conveniens motion, and on September 17, 2021, the court issued a final judgment dismissing the State Action in its entirety. On November 16, 2021, Plaintiffs filed a Notice of Appeal. The appeal ~~is pending~~occurred before the California Court of Appeal, Sixth Appellate District. Plaintiffs-Appellants filed their opening brief on May 20, 2022. Defendants-Respondents filed their responding brief on August 18, 2022, and Plaintiffs-Appellants filed their reply brief on September 7, 2022. ~~The~~On April 13, 2023, the court ~~has not yet set~~heard oral argument on the appeal and the case was submitted. On May 5, 2023, the Court of Appeal affirmed by written order the trial court’s dismissal of the State Action based on the federal forum provision in Arlo’s certificate of incorporation and awarded costs to Arlo. On June 14, 2023, Plaintiffs filed a ~~date~~petition for ~~oral argument.~~review in the Supreme Court of California. Defendants-Respondents filed their answer to the petition for review on July 5, 2023, and Plaintiffs filed their reply in support of the petition for review on July 17, 2023. On July 19, 2023, the Supreme Court of California denied Plaintiffs’ petition for review and closed the case.

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

In addition to the State Action and the Federal Action, a purported stockholder named Leonard Pinto filed a tagalong derivative action on June 13, 2019 in the U.S. District Court for the Northern District of California, captioned ~~Pinto v. Arlo Technologies, Inc. et al.~~, No. 19-CV-03354 (the “Derivative Action”). The Derivative Action is brought on behalf of the Company against the majority of the Company’s current directors. The complaint is based on the same alleged misconduct as the securities class actions but asserts claims for breach of fiduciary duty, waste of corporate

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~~ARLO TECHNOLOGIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

assets, and violation of the Securities Exchange Act of 1934, as amended. On August 20, 2019, the court stayed the Derivative Action in deference to the Federal Action. On April 8, 2021, because it had granted final approval of the settlement in the Federal Action, the court lifted the stay in the Derivative Action and asked the parties to file a joint status report by April 22, 2021. In their status report, the parties stipulated to a schedule for plaintiff to file an amended complaint and for the parties to brief a motion to dismiss. Plaintiff filed his amended complaint on May 24, 2021. Defendants moved to dismiss the amended complaint on July 9, 2021. On August 23, 2021, plaintiff filed a second amended complaint. Defendants moved to dismiss the second amended complaint on December 17, 2021. Plaintiff filed his opposition on January 31, 2022, and defendants filed their reply on March 2, 2022. On July 28, 2022, the Court heard defendants’ motion to dismiss. At the hearing, the Court informed the parties that it was inclined to grant defendants’ motion to dismiss for lack of jurisdiction, and the Court’s corresponding written order dismissing the case followed on August 8, 2022.

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

On December 18, 2020, Skybell Technologies, Inc., SB IP Holdings, LLC, and Eyetalk365, LLC (collectively, “Skybell”) filed a Section 337 complaint against the Company, Vivint Smart Home, Inc. and SimpliSafe, Inc. (collectively “Respondents”) at the U.S. International Trade Commission (“ITC”). The action alleges that the Company’s cameras and video doorbell cameras infringe certain patents (the Asserted Patents").

~~On September 15, 2021, the Administrative Law Judge (“ALJ”) hearing the case at the ITC issued an Initial Determination (“ID”) ruling that all the Asserted Patents are invalid.~~

Skybell appealed the ID by submitting its Petition for Review to the ITC on September 27, 2021, and the Respondents submitted their Response to the Petition to Review on October 4, 2021. On November 10, 2021, The ITC affirmed the ALJ’s ruling and did not grant any review of the ID, meaning that there is no trial on the ITC docket since there are no valid patents remaining, and the case is concluded at the ITC level. On January 9, 2022, Skybell filed its Notice of Appeal to the Federal Circuit to appeal the ITC’s rulings invalidating the Asserted Patents. On June 23, 2022, Skybell and the Respondents stipulated to the dismissal of the Skybell’s appeal, and on June 27, 2022, the Federal Circuit correspondingly dismissed the appeal.~~There was no material financial impact to the Company resulting from this litigation matter.~~

~~Indemnification Agreements~~Indemnifications

In the ordinary course of business, ~~the Company~~we may provide indemnification of varying scope and terms to customers, distributors, resellers, vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising from breach of such agreements or from intellectual property infringement claims made by third parties. In addition, ~~the Company has~~we have entered into indemnification agreements with members of ~~its~~our board of directors and certain of ~~its~~our executive officers that require ~~the Company,~~us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments ~~the Company~~we could be required to make under these indemnification agreements is, in many cases, unlimited. As of ~~October~~July 2, ~~2022~~2023 and December 31, ~~2021, the Company has~~2022, we have not incurred any material costs as a result of such indemnifications and iswe are not currently aware of any indemnification claims.

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~~ARLO TECHNOLOGIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

Note 8.9. Employee Benefit Plans

~~The Company grants~~We grant options and restricted stock units ~~("RSUs"~~(“RSUs”) under the 2018 Equity Incentive Plan (the “2018 Plan”), under which awards may be granted to all employees. ~~The Company~~We also ~~grants~~grant performance-based and market-based restricted stock units ~~("PSUs"~~(“PSUs”) to ~~its~~our executive officers periodically. Award vesting periods for the 2018 Plan are generally three to four years. As of ~~October~~July 2, ~~2022,~~2023, approximately ~~3.9~~4.0 million shares were available for future grants. Options may be granted for periods of up to 10 years or such shorter term as may be provided in the ~~applicable option~~ agreement and at prices no less than 100% of the fair market value of ~~the Company’s~~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.

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During the three months ended October 2, 2022 and October 3, 2021, the Compensation Committee of the Board of Directors (the “Committee”) of the unanimously approved amendments to the 2018 Plan to, among other things, reserve an additional 3,000,000 shares and 1,500,000 shares, respectively, of the Company’s common stock to be used exclusively for grants of awards to individuals who were not previously employees or non-employee directors of the Company (or following a bona fide period of non-employment with the Company), as an inducement material to the individual’s entry into employment with the Company within the meaning of Rule 303A.08 of the New York Stock Exchange (the “NYSE”) Listed Company Manual (“Rule 303A.08”). The 2018 Plan was amended by the Committee without stockholder approval pursuant to Rule 303A.08.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On January ~~21, 2022, the Company~~20, 2023, we registered an aggregate of up to ~~4,222,270~~4,444,072 shares of common stock on a Registration Statement on Form S-8, including ~~3,377,816~~3,555,258 shares issuable pursuant to the ~~Company's~~ 2018 Plan that were automatically added to the shares authorized for issuance under the 2018 Plan ~~on January 1, 2022 pursuant to an “evergreen” provision~~ and ~~844,454~~888,814 shares issuable pursuant to the Employee Stock Purchase Plan ~~(the "ESPP"~~(“ESPP”) that were automatically added to the shares authorized for issuance on January 1, ~~2022~~2023, both pursuant to an “evergreen” provision contained in the ~~ESPP.~~respective plans.

The following table sets forth the available shares for ~~grant under the 2018 Plan~~grants as of ~~October~~July 2, ~~2022:~~2023:


			Number of Shares
			(In thousands)
Shares available for ~~grant~~grants as of December 31, ~~2021~~2022			~~2,509~~4,213
Additional authorized shares			~~6,378~~3,555
Granted			~~(9,573)~~(7,023)
Forfeited / cancelled			~~2,395~~377
Shares traded for taxes			~~2,232~~2,834
Shares available for ~~grant~~grants as of ~~October~~July 2, ~~2022~~2023			~~3,941~~3,956

Employee Stock Purchase Plan

~~The Company sponsors~~We sponsor the ESPP ~~pursuant~~ to ~~which~~ eligible employees may contribute up to 15% of compensation, subject to certain income limits, to purchase shares of 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.employees. As of ~~October~~July 2, ~~2022, 1,855,548~~2023, 2.0 million shares were available for issuance under the ESPP.

Option Activity

Stock option activity during the ~~nine~~six months ended ~~October~~July 2, ~~2022~~2023 was as follows:


	Number of Shares	Weighted Average Exercise Price Per Share
	(In thousands)	(In dollars)
Outstanding as of December 31, 2022	2,082	$	10.24
Granted	—	$	—
Exercised	(433)	$	6.90
Forfeited / cancelled	—	$	—
Expired	(12)	$	7.55
Outstanding as of July 2, 2023	1,637	$	11.15
Vested and expected to vest as of July 2, 2023	1,637	$	11.15
Exercisable Options as of July 2, 2023	1,637	$	11.15

RSU Activity

RSU activity, excluding PSU activity, during the six months ended July 2, 2023 was as follows:

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Number of shares Weighted Average Exercise Price Per Share
(In thousands) (In dollars)
Outstanding as of December 31, 2021 2,574 $ 10.55
Granted — $ —
Exercised (209) $ 6.81
Forfeited / cancelled (3) $ 16.00
Expired (231) $ 15.75
Outstanding as of October 2, 2022 2,131 $ 10.35
Vested and expected to vest as of October 2, 2022 2,131 $ 10.35
Exercisable Options as of October 2, 2022 2,131 $ 10.35

~~RSU Activity~~

~~RSU activity, excluding PSU activity, during the nine months ended October 2, 2022 was as follows:~~


		Number of shares	Weighted Average Grant Date Fair Value Per Share			Number of Shares	Weighted Average Grant Date Fair Value Per Share
		(In thousands)	(In dollars)			(In thousands)	(In dollars)
Outstanding as of December 31, 2021		10,080	$	5.73
Outstanding as of December 31, 2022					Outstanding as of December 31, 2022	9,487	$	6.36
Granted	Granted	6,627	$	7.29	Granted	4,975	$	3.95
Vested	Vested	(5,065)	$	6.34	Vested	(4,641)	$	4.79
Forfeited	Forfeited	(1,779)	$	5.96	Forfeited	(363)	$	6.42
Outstanding as of October 2, 2022		9,863	$	6.43
Outstanding as of July 2, 2023					Outstanding as of July 2, 2023	9,458	$	5.86

PSU Activity

~~During the three months ended October 2, 2022 and October 3, 2021, the Company's~~Our executive officers ~~were~~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 number of units earned and eligible to vest are determined based on the achievement of various performance conditions or market conditions, including the cumulative paid accounts targets, ~~the Company's~~ stock price, cash balances at reporting period, and the ~~recipients'~~recipients’ continued ~~service with the Company.~~services. At the end of each reporting period, ~~the Company evaluates~~we evaluate the probability of achieving ~~these~~the performance or market conditions and ~~records~~record the related stock-based compensation expense ~~recognized~~based on the achievement over the ~~expected performance achievement period when the achievement becomes probable.~~service period.

PSU activity during the ~~nine~~six months ended ~~October~~July 2, ~~2022~~2023 was as follows:


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

Outstanding as of December 31, 2021		2,106	$	5.39
Outstanding as of December 31, 2022					Outstanding as of December 31, 2022	4,041	$	6.22
Granted	Granted	2,952	$	6.52	Granted	2,050	$	4.56
Vested	Vested	(612)	$	4.22	Vested	(2,067)	$	5.51
Forfeited	Forfeited	(386)	$	7.18	Forfeited	(3)	$	8.28
Outstanding as of October 2, 2022		4,060	$	6.22
Outstanding as of July 2, 2023					Outstanding as of July 2, 2023	4,021	$	5.74

Stock-Based Compensation Expense

The following table sets forth the stock-based compensation expense included in our unaudited condensed consolidated statements of comprehensive loss:


	Three Months Ended				Six Months Ended
	July 2, 2023		July 3, 2022		July 2, 2023		July 3, 2022
	(In thousands)
Cost of revenue	$	967	$	1,335	$	1,828	$	2,245
Research and development	3,311		3,621		7,222		5,923
Sales and marketing	1,670		1,790		3,392		3,170
General and administrative	7,025		5,499		15,122		10,496
Total	$	12,973	$	12,245	$	27,564	$	21,834

As of July 2, 2023, there was no unrecognized compensation cost related to stock options. Approximately $71.2 million of unrecognized compensation cost related to unvested RSUs and PSUs is expected to be recognized over a weighted-average period of 2.2 years as of July 2, 2023.

2019

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~Stock-Based Compensation Expense~~

~~The following table sets forth the stock-based compensation expense included in the Company’s unaudited condensed consolidated statements of operations during the periods indicated:~~

Three Months Ended Nine Months Ended
October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021
(In thousands)
Cost of revenue $ 1,365 $ 787 $ 3,610 $ 2,951
Research and development 2,679 2,086 8,602 8,474
Sales and marketing 1,389 1,119 4,559 3,947
General and administrative 4,520 3,607 15,016 12,176
Total stock-based compensation $ 9,953 $ 7,599 $ 31,787 $ 27,548

The Company recognizes this compensation expense generally on a straight-line basis over the requisite service period of the award. For PSUs, stock-based compensation expense is recognized over the expected performance achievement period when the achievement becomes probable.

As of October 2, 2022, there was no unrecognized compensation cost related to stock options. Approximately $82.7 million of unrecognized compensation cost related to unvested RSUs and PSUs is expected to be recognized over a weighted-average period of 2.5 years.

Note 9.10. Income Taxes

The provision for income taxes for the three and ~~nine~~six months ended ~~October~~July 2, ~~2022~~2023 was ~~$0.3~~$0.2 million and ~~$0.7~~$1.0 million, or an effective tax rate of ~~(2.2)~~(3.1)% and ~~(2.2)~~(4.9)%~~, respectively.~~. The provision for income taxes for the three and ~~nine~~six months ended ~~October~~July 3, ~~2021~~2022 was $0.2 million and ~~$0.5~~$0.4 million, or an effective tax rate of ~~(1.2)~~(2.0)% and ~~(1.1)~~(2.3)%~~, respectively.~~. During the three and ~~nine~~six months ended ~~October~~July 2, 2023 and July 3, 2022, ~~the Company~~we sustained U.S. book losses. Consistent with the prior year ~~the Company~~periods, we maintained a valuation allowance against ~~its~~our U.S. federal and state deferred tax assets and did not record a tax benefit on these deferred tax assets since it is more likely than not that these deferred tax assets will not be realized. ~~The Company's provision~~Provision for income taxes ~~was primarily attributable to income taxes on foreign earnings. The provision for income taxes~~decreased slightly for the three ~~and nine~~ months ended ~~October~~July 2, ~~2022 was slightly higher than the same periods in~~2023, compared to the prior year period and increased for the six months ended July 2, 2023, compared to the prior year period, primarily due to anthe higher U.S. earnings and also the application of Section 174 of the Internal Revenue Code requiring capitalization of research and experimental expenses, which increase was recognized mostly in ~~foreign earnings.~~the first quarter of 2023.

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~~ARLO TECHNOLOGIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

Note ~~10.~~11. Net Loss Per Share

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


	Three Months Ended				Six Months Ended
	July 2, 2023		July 3, 2022		July 2, 2023		July 3, 2022
	(In thousands, except per share data)
Numerator:
Net loss	$	(7,363)	$	(11,557)	$	(21,608)	$	(20,036)
Denominator:
Weighted average common shares - basic and dilutive	92,337		86,868		90,984		85,966



Basic and diluted net loss per share	$	(0.08)	$	(0.13)	$	(0.24)	$	(0.23)


Anti-dilutive employee stock-based awards, excluded	1,370		4,812		3,238		1,476

~~Net loss per share for the three and nine months ended October 2, 2022 and October 3, 2021 were as follows:~~

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Three Months Ended Nine Months Ended
October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021
(In thousands, except per share data)
Numerator:
Net loss $ (14,435) $ (15,198) $ (34,471) $ (49,237)
Denominator:
Weighted average common shares - basic 88,124 83,809 86,677 82,191
Potentially dilutive common share equivalent — — — —
Weighted average common shares - dilutive 88,124 83,809 86,677 82,191
Basic net loss per share $ (0.16) $ (0.18) $ (0.40) $ (0.60)
Diluted net loss per share $ (0.16) $ (0.18) $ (0.40) $ (0.60)
Anti-dilutive employee stock-based awards, excluded 8,400 5,980 2,610 4,826

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note ~~11.~~12. Segment and Geographic Information

Segment Information

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

Geographic Information for Revenue

~~The Company conducts business across three geographic regions: the 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. Sales and usage-based taxes are excluded from revenue. For reporting purposes, revenue by geography is generally based upon the ship-to location of the customer for device sales and device location for service sales. The following table presents revenue by geographic area. For comparative purposes, amounts in prior periods have been recast.


	Three Months Ended				Six Months Ended
	July 2, 2023		July 3, 2022		July 2, 2023		July 3, 2022
	(In thousands)
United States	$	78,186	$	59,997	$	134,029	$	125,234
Spain	19,549		40,141		58,120		64,709
Ireland	4,106		10,664		8,986		32,751
Other countries	13,235		8,177		24,945		21,036
Total	$	115,076	$	118,979	$	226,080	$	243,730

Geographic Information for Long-Lived Assets

Long-lived assets include property and equipment, net and operating lease right-of-use assets, net. Our long-lived assets are based on the physical location of the assets. The following table presents long-lived assets by geographic area.


	As of
	July 2, 2023		December 31, 2022
	(In thousands)
United States	$	14,961	$	17,762
Other countries	2,549		2,383
Total	$	17,510	$	20,145

2221

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~~ARLO TECHNOLOGIES, INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

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

Three Months Ended Nine Months Ended
October 2,
2022 October 3,
2021 October 2,
2022 October 3,
2021
(In thousands)
United States (“U.S.”) $ 71,040 $ 74,511 $ 199,851 $ 190,828
EMEA 52,542 30,931 157,000 80,623
APAC 4,575 5,707 15,036 20,825
Total revenue $ 128,157 $ 111,149 $ 371,887 $ 292,276

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

As of
October 2,
2022 December 31,
2021
(In thousands)
U.S. $ 4,980 $ 7,302
Americas (excluding U.S.) 416 520
EMEA 266 402
China 600 1,143
APAC (excluding China) 326 228
Total property and equipment, net $ 6,588 $ 9,595

~~Note 12. Subsequent Event~~

In November 2022, the Company initiated a campaign to reduce its cost structure to better align the operational needs of the business to current economic conditions while continuing to support its long-term strategy. This campaign may potentially include the reduction of headcount as well as the termination of certain lease contracts and contractual services arrangements with vendors. As of the filing date of this Quarterly Report on Form 10-Q, the Company is still in the process of finalizing the scope and determining related cost of executing this campaign.

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

Forward-looking Statements

This ~~report~~Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “could,” “may,” “will,” and similar expressions are intended to identify forward-looking statements, including statements concerning our business and the expected performance characteristics, specifications, reliability, market acceptance, market growth, specific uses, user feedback, and market position of our products and ~~technology and the potential adverse impact of the COVID-19 pandemic on our business and operations.~~technology. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Part II—Item 1A—Risk Factors” and “Liquidity and Capital Resources” below.

All forward-looking statements in this document are based on information available to us as of the date hereof, such information may be limited or incomplete, and we assume no obligation to update any such forward-looking statements. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this ~~quarterly report.~~Quarterly Report. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us,” the ~~"Company,~~“Company,” and “Arlo” refer to Arlo Technologies, Inc. and our subsidiaries.

Business and Executive Overview

Arlo combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that are transforming the way people experience the connected lifestyle. Arlo’s deep expertise in product design, wireless connectivity, cloud infrastructure and cutting-edge AI capabilities focuses on delivering a seamless, smart home experience for Arlo users that is easy to setup and interact with every day. Our cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection. Since the launch of our first product in December 2014, we have shipped over ~~26.3~~29.4 million smart connected ~~devices, and as~~devices. As of ~~October~~July 2, ~~2022,~~2023, the Arlo platform had approximately ~~6.9~~7.9 million cumulative registered accounts across more than 100 countries around the ~~world.~~world coupled with 2.3 million cumulative paid subscribers and annual recurring revenue of $193.6 million.

We conduct business across three geographic regions—(i) the Americas; (ii) Europe, Middle-East and Africa (“EMEA”); and (iii) Asia Pacific (“APAC”)—and we primarily generate revenue by selling devices through retail, wholesale distribution, wireless carrier channels, security solution providers, Arlo’s direct to consumer store and paid subscription services. International revenue was 44.6% and 33.0% of our revenue for the three months ended October 2, 2022 and October 3, 2021, respectively, and 46.3% and 34.7% of our revenue for the nine months ended October 2, 2022 and October 3, 2021, respectively.

For the three months ended ~~October~~July 2, ~~2022~~2023 and ~~October~~July 3, ~~2021,~~2022, we generated total revenue of ~~$128.2~~$115.1 million and ~~$111.1~~$119.0 million, respectively, representing a year-over-year increase of 15.3%. For the nine months ended October 2, 2022 and October 3, 2021, we generated revenue of $371.9 million and $292.3 million, respectively, representing a year-over-year increase of 27.2%.respectively. Loss from operations ~~were $14.4~~was $8.0 million and ~~$15.6~~$11.3 million for the three months ended ~~October~~July 2, 2023 and July 3, 2022, respectively. For the six months ended July 2, 2023 and ~~October~~July 3, ~~2021,~~2022, we generated total revenue of $226.1 million and $243.7 million, respectively. Loss from operations ~~were $34.5~~was $22.2 million and ~~$52.9~~$20.0 million for the ~~nine~~six months ended ~~October~~July 2, ~~2022~~2023 and ~~October~~July 3, ~~2021,~~2022, respectively.

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

Our goal is to continue to develop innovative, world-class connected lifestyle solutions to expand and further monetize our current and future user and paid account bases. We believe that the growth of our business is dependent on many factors, including our ability to innovate and launch successful new products on a timely basis and grow our installed base, to increase subscription-based recurring revenue, to invest in ~~brand awareness and~~ channel partnerships and to continue our global expansion. We expect to increase our investment in research and development going forward as we continue to introduce new and innovative products and services to enhance the Arlo platform and compete for engineering talent. We also expect our sales and marketing expense to ~~significantly~~ increase ~~our Sales and Marketing expense~~in the future as we invest in ~~new campaigns~~marketing to ~~increase awareness~~drive demand for our products and services.

Table of ~~and preference for the Arlo brand.~~Contents

Key Business Metrics

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

As of
October 2, 2022 % Change October 3, 2021
(In thousands, except percentage data)
Cumulative registered accounts 6,930 19.0 % 5,822
Cumulative paid accounts 1,673 90.8 % 877
Annual recurring revenue $ 125,402 56.0 % $ 80,400


	As of and for the Three Months Ended
	July 2, 2023		% Change		July 3, 2022
	(In thousands, except percentage data)
Cumulative registered accounts	7,860		18.4	%	6,640
Cumulative paid accounts (1)	2,289		54.9	%	1,478
Annual recurring revenue	$	193,633	66.1	%	$	116,601

_________________________

(1)The increase for the three months ended July 2, 2023 compared to the prior year period reflects an increase in the number of paid accounts in our EMEA region which were managed by Verisure and now onboarded with us. This does not have an impact to our financial statements and key business metrics other than our number of Cumulative Paid Accounts.

Cumulative Registered Accounts. We believe that our ability to increase our user base is an indicator of our market penetration and growth of our business as we continue to expand and innovate our Arlo platform. We define our registered accounts at the end of a particular period as the number of unique registered accounts on the Arlo platform as of the end of such period. The number of registered accounts does not necessarily reflect the number of end-users on the Arlo platform as one registered account may be used by multiple end-users to monitor the devices attached to that household.

Cumulative Paid ~~Accounts.~~Accounts. Paid accounts are defined as any account worldwide where a subscription to a paid service is being collected (either by us or by our customers or channel partners, including Verisure)~~, plus paid service plans of a duration of more than three months bundled with products (such bundles being counted as a paid account after 90 days have elapsed from the date of registration)~~.

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

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

During the ~~nine~~six months ended ~~October~~July 2, ~~2022,~~2023, we remained focused on ~~navigating COVID-19 related challenges,~~ the ongoing conflict in Ukraine, supply chain disruptions, inflation, ~~lower~~fluctuating consumer confidence and rising interest rates by preserving our liquidity and managing our cash flow by taking preemptive action to enhance our ability to meet our short-term liquidity needs. These actions include, but are not limited to, proactively managing working capital by closely monitoring ~~customers'~~customers’ credit and collections, renegotiating payment terms with third-party manufacturers and key suppliers, closely monitoring inventory levels and purchases against forecasted demand, reducing or eliminating non-essential spending, and subleasing or reducing excess office ~~space, and deferring hiring.~~space. We continue to monitor ~~this rapidly developing~~the situation and may, as necessary, reduce expenditures further, borrow under our revolving credit facility, or pursue other sources of capital that may include other forms of external financing in order to maintain our cash position and preserve financial flexibility in response to the uncertainty in the United States and global markets resulting from the ~~COVID-19 pandemic, the~~ ongoing conflict in Ukraine, supply chain disruptions, ~~inflation, lower~~the inflationary macro environment, fluctuating consumer confidence and rising interest ~~rates.~~rates and current financial conditions within the banking industry, including the effects of recent failures of other financial institutions, and liquidity levels.

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Results of Operations

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

Three Months Ended Nine Months Ended
October 2,
2022 October 3,
2021 October 2,
2022 October 3,
2021
(In thousands, except percentage data)
Revenue:
Products $ 92,720 72.3 % $ 84,152 75.7 % $ 273,736 73.6 % $ 217,224 74.3 %
Services 35,437 27.7 % 26,997 24.3 % 98,151 26.4 % 75,052 25.7 %
Total revenue 128,157 100.0 % 111,149 100.0 % 371,887 100.0 % 292,276 100.0 %
Cost of revenue:
Products 79,386 61.9 % 75,682 68.1 % 233,992 62.9 % 184,858 63.2 %
Services 12,021 9.4 % 11,124 10.0 % 33,830 9.1 % 31,099 10.6 %
Total cost of revenue 91,407 71.3 % 86,806 78.1 % 267,822 72.0 % 215,957 73.9 %
Gross profit 36,750 28.7 % 24,343 21.9 % 104,065 28.0 % 76,319 26.1 %
Operating expenses:
Research and development 16,471 12.9 % 14,377 12.9 % 50,252 13.5 % 45,419 15.5 %
Sales and marketing 22,193 17.3 % 12,779 11.5 % 49,867 13.4 % 36,445 12.5 %
General and administrative 12,253 9.6 % 12,119 10.9 % 38,023 10.3 % 36,905 12.6 %
Impairment charges — — % — — % — — % 9,116 3.1 %
Separation expense 273 0.2 % 683 0.6 % 377 0.1 % 1,342 0.5 %
Total operating expenses 51,190 40.0 % 39,958 35.9 % 138,519 37.3 % 129,227 44.2 %
Loss from operations (14,440) (11.3) % (15,615) (14.0) % (34,454) (9.3) % (52,908) (18.1) %
Interest income (expense), net 290 0.2 % (1) — % 414 0.1 % 26 — %
Other income, net 19 0.0 % 599 0.5 % 314 0.1 % 4,170 1.5 %
Loss before income taxes (14,131) (11.1) % (15,017) (13.5) % (33,726) (9.1) % (48,712) (16.6) %
Provision for income taxes 304 0.2 % 181 0.2 % 745 0.2 % 525 0.2 %
Net loss $ (14,435) (11.3) % $ (15,198) (13.7) % $ (34,471) (9.3) % $ (49,237) (16.8) %


	Three Months Ended								Six Months Ended
	July 2, 2023				July 3, 2022				July 2, 2023				July 3, 2022
	(In thousands, except percentage data)
Revenue:
Products	$	64,749	56.3	%	$	86,191	72.4	%	$	131,809	58.3	%	$	181,016	74.3	%
Services	50,327		43.7	%	32,788		27.6	%	94,271		41.7	%	62,714		25.7	%
Total revenue	115,076		100.0	%	118,979		100.0	%	226,080		100.0	%	243,730		100.0	%
Cost of revenue:
Products	60,446		52.5	%	73,829		62.0	%	124,487		55.1	%	154,606		63.4	%
Services	12,772		11.1	%	11,410		9.6	%	24,518		10.8	%	21,809		8.9	%
Total cost of revenue	73,218		63.6	%	85,239		71.6	%	149,005		65.9	%	176,415		72.4	%
Gross profit	41,858		36.4	%	33,740		28.4	%	77,075		34.1	%	67,315		27.6	%
Operating expenses:
Research and development	17,618		15.3	%	17,402		14.6	%	35,368		15.6	%	33,781		13.9	%
Sales and marketing	16,921		14.7	%	14,506		12.2	%	32,274		14.3	%	27,674		11.4	%
General and administrative	15,007		13.0	%	13,149		11.1	%	30,629		13.5	%	25,770		10.6	%
Others	341		0.4	%	25		—	%	973		0.5	%	104		—	%
Total operating expenses	49,887		43.4	%	45,082		37.9	%	99,244		43.9	%	87,329		35.8	%
Loss from operations	(8,029)		(7.0)	%	(11,342)		(9.5)	%	(22,169)		(9.8)	%	(20,014)		(8.2)	%
Interest income, net	835		0.8	%	129		0.1	%	1,561		0.7	%	124		0.1	%
Other income (expense), net	52		—	%	(116)		(0.1)	%	13		—	%	295		0.1	%
Loss before income taxes	(7,142)		(6.2)	%	(11,329)		(9.5)	%	(20,595)		(9.1)	%	(19,595)		(8.0)	%
Provision for income taxes	221		0.2	%	228		0.2	%	1,013		0.5	%	441		0.2	%
Net loss	$	(7,363)	(6.4)	%	$	(11,557)	(9.7)	%	$	(21,608)	(9.6)	%	$	(20,036)	(8.2)	%

Revenue

Our gross revenue consists primarily of sales of devices, prepaid and paid subscription ~~service revenue and NRE~~ service revenue. We generally recognize revenue from product sales at the time the product is shipped and transfer of control from us to the customer occurs. Upon device shipment, we attribute a portion of the sales price as prepaid service, deferring this revenue at the outset and subsequently recognizing it ratably over the estimated useful economic life of the device or free trial period, as applicable. Our paid subscription services relate to sales of subscription plans to our registered accounts. ~~Our services also include certain development services provided to strategic partners under NRE arrangements.~~

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

Under the Supply Agreement, Verisure became the exclusive distributor of our products in Europe for all channels, and will non-exclusively distribute our products through its direct channels globally for an initial term of five years. During the five-year period commencing January 1, 2020, Verisure has an aggregate product purchase commitment of $500.0 million. As of October 2, 2022, $304.3 million of the purchase commitment has been fulfilled. The Supply Agreement also provided for certain NRE services, including developing certain custom products specified by Verisure in exchange for an aggregate of $13.5 million, which Verisure fully paid in 2021. For the three months ended October 2, 2022 and October 3, 2021, we recognized service revenue of $0.5 million and $1.3 million, respectively, for these NRE services.

We conduct business across three geographic ~~regions:~~regions—(i) the ~~Americas, EMEA,~~Americas; (ii) EMEA; and ~~APAC. We~~(iii) APAC—and generally base revenue by geography on the ship-to location of the customer for device sales and device location for service sales.

Three Months Ended Nine Months Ended
October 2,
2022 % Change October 3,
2021 October 2,
2022 % Change October 3,
2021
(In thousands, except percentage data)
Americas $ 71,040 (4.7) % $ 74,511 $ 199,851 4.7 % $ 190,828
Percentage of revenue 55.4 % 67.0 % 53.7 % 65.3 %
EMEA 52,542 69.9 % 30,931 157,000 94.7 % 80,623
Percentage of revenue 41.0 % 27.8 % 42.2 % 27.6 %
APAC 4,575 (19.8) % 5,707 15,036 (27.8) % 20,825
Percentage of revenue 3.6 % 5.2 % 4.1 % 7.1 %
Total revenue $ 128,157 15.3 % $ 111,149 $ 371,887 27.2 % $ 292,276

Table of Contents


	Three Months Ended								Six Months Ended
	July 2, 2023			% Change		July 3, 2022			July 2, 2023			% Change		July 3, 2022
	(In thousands, except percentage data)
Americas	$	78,136		29.5	%	$	60,345		$	134,768		4.6	%	$	128,811
Percentage of revenue	67.9		%			50.7		%	59.6		%			52.8		%
EMEA	30,958			(43.2)	%	54,483			79,430			(24.0)	%	104,458
Percentage of revenue	26.9		%			45.8		%	35.1		%			42.9		%
APAC	5,982			44.1	%	4,151			11,882			13.6	%	10,461
Percentage of revenue	5.2		%			3.5		%	5.3		%			4.3		%
Total revenue	$	115,076		(3.3)	%	$	118,979		$	226,080		(7.2)	%	$	243,730

~~Revenue~~Product revenue decreased by $21.4 million, or 24.9% and $49.2 million, or 27.2% for the three and ~~nine~~six months ended ~~October~~July 2, ~~2022~~2023 compared to the prior year periods. The declines were experienced mainly in EMEA and Americas primarily driven by a reduction in the average selling prices (“ASPs”) of our products as we increased ~~15.3%~~promotional activities to stimulate household acquisition and ~~27.2%,~~increased subscriber growth coupled with a shift in product mix driven by the softening consumer demand as a result of current macro-economic factors and seasonality.

Service revenue increased in all regions by $17.5 million, or 53.5% and $31.6 million, or 50.3% for the three and six months ended July 2, 2023 compared to the prior year periods, ~~respectively,~~ primarily due to ~~higher product sales mainly the~~a 54.9% increase in volume and service revenue. Product revenue increased by $8.6 million, or 10.2% and $56.5 million, or 26.0% for the three and nine months ended October 2, 2022 compared to the prior year periods, respectively, primarily driven by an increase in product shipments in EMEA due to stronger customer demand and the launch of a customized camera in the Verisure Security channel, partially offset by a decrease in product sales in the Americas and APAC. The increase for the nine months ended October 2, 2022 was also partially offset by higher provisions for sales returns and sales incentives in the Americas that are deemed to be reductions of revenue. Service revenue increased by $8.4 million, or 31.3% and $23.1 million, or 30.8% for the three and nine months ended October 2, 2022 compared to the prior year periods, respectively, primarily due to an increase incumulative paid accounts ~~partially offset by a decrease in Verisure NRE revenue recognition.~~and rates for our subscription plans.

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 and overhead costs, including personnel expense for operation staff, purchasing, product planning, inventory control, warehousing and distribution logistics, third-party software licensing fees, inbound freight, IT and facilities overhead, warranty costs associated with returned goods, write-downs for excess and obsolete inventory and excess components, and royalties to third parties. ~~Cost of service consists~~Service costs consist of costs attributable to the provision and maintenance of our cloud-based platform, including personnel, storage, security and computing, IT and facilities ~~overhead as well as NRE service costs incurred under NRE arrangements.~~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, 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. We outsource our manufacturing, warehousing, and distribution logistics. We also outsource certain components of the required infrastructure to support our cloud-based back-end IT infrastructure. We believe this outsourcing strategy allows

us to better manage our product and service costs and gross margin and allows us to adapt to changing market dynamics and supply chain constraints.

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

Three Months Ended Nine Months Ended
October 2,
2022 % Change October 3,
2021 October 2,
2022 % Change October 3,
2021
(In thousands, except percentage data)
Cost of revenue:
Products $ 79,386 4.9 % $ 75,682 $ 233,992 26.6 % $ 184,858
Services 12,021 8.1 % 11,124 33,830 8.8 % 31,099
Total cost of revenue $ 91,407 5.3 % $ 86,806 $ 267,822 24.0 % $ 215,957


	Three Months Ended						Six Months Ended
	July 2, 2023		% Change		July 3, 2022		July 2, 2023		% Change		July 3, 2022
	(In thousands, except percentage data)
Cost of revenue:
Products	$	60,446	(18.1)	%	$	73,829	$	124,487	(19.5)	%	$	154,606
Services	12,772		11.9	%	11,410		24,518		12.4	%	21,809
Total cost of revenue	$	73,218	(14.1)	%	$	85,239	$	149,005	(15.5)	%	$	176,415

~~Cost~~Product cost of ~~product~~ revenue ~~increased 4.9%~~decreased 18.1% and ~~26.6%~~19.5% for the three and ~~nine~~six months ended ~~October~~July 2, ~~2022~~2023 compared to the prior year periods, respectively, primarily due to ~~increases~~decreases in ~~gross~~product shipments ~~plus increases~~coupled with decreases in freight-in costs due to normalization of ~~materials~~the supply chain and ~~components~~utilization of ~~our products mainly as the result of inflation. The cost of product revenue increase for the three months ended October 2, 2022 was~~ocean freight, partially offset by ~~a decrease~~increases in ~~freight~~inventory reserves.

Service cost ~~from the prior year period as a result~~ of ~~COVID-19 related supply chain disruption. Cost of service~~ revenue increased ~~8.1%~~11.9% and ~~8.8%~~12.4% for the three and ~~nine~~six months ended ~~October~~July 2, ~~2022~~2023 compared to the prior year periods, respectively, as a result of service revenue growth, offset by cost optimizations.

Gross Profit

The following table presents gross profit for the periods indicated:


		Three Months Ended								Nine Months Ended									Three Months Ended								Six Months Ended
		October 2, 2022			% Change		October 3, 2021			October 2, 2022			% Change		October 3, 2021				July 2, 2023			% Change		July 3, 2022			July 2, 2023			% Change		July 3, 2022
		(In thousands, except percentage data)																	(In thousands, except percentage data)
Gross profit:	Gross profit:																	Gross profit:
Products	Products	$	13,334		57.4	%	$	8,470		$	39,744		22.8	%	$	32,366		Products	$	4,303		(65.2)	%	$	12,362		$	7,322		(72.3)	%	$	26,410
Services	Services	23,416			47.5	%	15,873			64,321			46.3	%	43,953			Services	37,555			75.7	%	21,378			69,753			70.5	%	40,905
Total gross profit	Total gross profit	$	36,750		51.0	%	$	24,343		$	104,065		36.4	%	$	76,319		Total gross profit	$	41,858		24.1	%	$	33,740		$	77,075		14.5	%	$	67,315
Gross margin percentage:	Gross margin percentage:																	Gross margin percentage:
Products	Products	14.4		%			10.1		%	14.5		%			14.9		%	Products	6.6		%			14.3		%	5.6		%			14.6		%
Services	Services	66.1		%			58.8		%	65.5		%			58.6		%	Services	74.6		%			65.2		%	74.0		%			65.2		%
Total gross margin	Total gross margin	28.7		%			21.9		%	28.0		%			26.1		%	Total gross margin	36.4		%			28.4		%	34.1		%			27.6		%

~~Gross~~Product gross profit ~~increased 51.0% and 36.4%~~decreased for the three and ~~nine~~six months ended ~~October~~July 2, ~~2022,~~2023 compared to the prior year periods, ~~respectively, due~~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 ~~combination~~shift in product mix driven by the softening consumer demand as a result of ~~both product and service revenue increases.~~current macro-economic factors. The product gross profit ~~increase~~decrease was partially offset by the decrease in freight-in costs due to normalization of the supply chain and utilization of ocean freight.

Service gross profit increased for the three and six months ended ~~October~~July 2, ~~2022 was primarily due~~2023 compared to ~~an increase in product shipments and lower provisions for sales returns that are deemed to be reductions of revenue, partially offset by higher product costs. The product gross profit increase for~~ the nine months ended October 2, 2022 was primarily due to an increase in product shipments, partially offset by higher product costs and higher provisions of sales returns and marketing expenditures that are deemed to be reductions of revenue. The service gross profit increase isprior year periods, primarily due to growth in paid service revenue ~~due to an~~in all regions as a result of a 54.9% increase in cumulative paid accounts and rates for our subscription plans as well as cost ~~optimizations implemented.~~optimizations.

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Operating Expenses

Research and Development

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

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

Three Months Ended Nine Months Ended
October 2,
2022 % Change October 3,
2021 October 2,
2022 % Change October 3,
2021
(In thousands, except percentage data)
Research and development expense $ 16,471 14.6 % $ 14,377 $ 50,252 10.6 % $ 45,419


	Three Months Ended						Six Months Ended
	July 2, 2023		% Change		July 3, 2022		July 2, 2023		% Change		July 3, 2022
	(In thousands, except percentage data)
Research and development expense	$	17,618	1.2	%	$	17,402	$	35,368	4.7	%	$	33,781

Research and development expense increased by ~~$2.1~~$0.2 million for the three months ended ~~October~~July 2, ~~2022,~~2023 compared to the prior year period, primarily due to ~~increases~~an increase of ~~$1.2 million in outside professional services for the development of Arlo Safe and the Arlo Security System which will be released in the fourth quarter of 2022 and $1.1~~$0.5 million in personnel-related expenses mainly ~~due to the~~from increase in base compensation as a result of headcount increase, partially offset by a decrease of ~~$0.4~~$0.2 million in corporate IT and ~~facility~~facilities overhead.

Research and development expense increased ~~$4.8~~by $1.6 million for the ~~nine~~six months ended ~~October~~July 2, ~~2022,~~2023 compared to the prior year period, primarily due to ~~increases~~an increase of ~~$2.9 million in outside professional services for the development of Arlo Safe and the Arlo Security System which will be released in the fourth quarter of 2022 and $1.4~~$2.5 million in personnel-related expenses mainly ~~due to the increase in headcount,~~from stock-based compensation and merit increases, partially offset by a decrease of ~~$0.6~~$0.9 million in corporate IT and ~~facility overhead and other expenses.~~facilities overhead.

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;~~overhead, outbound freight ~~costs;~~costs, and credit card processing fees. We expect our sales and marketing expense to ~~significantly~~ increase in the future as we invest in marketing to ~~drive awareness of our brand and~~ drive demand for our products and services.

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

Three Months Ended Nine Months Ended
October 2,
2022 % Change October 3,
2021 October 2,
2022 % Change October 3,
2021
(In thousands, except percentage data)
Sales and marketing expense $ 22,193 73.7 % $ 12,779 $ 49,867 36.8 % $ 36,445


	Three Months Ended						Six Months Ended
	July 2, 2023		% Change		July 3, 2022		July 2, 2023		% Change		July 3, 2022
	(In thousands, except percentage data)
Sales and marketing expense	$	16,921	16.6	%	$	14,506	$	32,274	16.6	%	$	27,674

Sales and marketing expense increased ~~$9.4~~$2.4 million for the three months ended ~~October~~July 2, 2022, compared to the prior year period, primarily due to an increase of $9.0 million in media spend for our brand awareness advertising campaign. Sales and marketing expense increased $13.4 million for the nine months ended October 2, 2022,2023 compared to the prior year period, primarily due to increases of ~~$11.3~~$0.7 million in marketing expenditures, ~~primarily for the production of creative content and media spend for our brand awareness advertising campaign, $1.4~~$0.7 million in ~~personnel-related~~

customer care services, $0.7 million freight-out expenses, and ~~$1.1~~$0.6 million in credit card processing fees ~~partially offset by~~as a ~~decrease~~result of increases in Arlo.com Store sales and paid subscriber accounts.

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Sales and marketing expense increased $4.6 million for the six months ended July 2, 2023 compared to the prior year period, primarily due to increases of $1.7 million in marketing expenditures, $1.2 million in ~~outside professional~~credit card processing fees as a result of increases in Arlo.com Store sales and paid subscriber accounts, $1.1 million freight-out expenses, and $1.0 million in customer care services.

General and Administrative

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

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

Three Months Ended Nine Months Ended
October 2,
2022 % Change October 3,
2021 October 2,
2022 % Change October 3,
2021
(In thousands, except percentage data)
General and administrative expense $ 12,253 1.1 % $ 12,119 $ 38,023 3.0 % $ 36,905


	Three Months Ended						Six Months Ended
	July 2, 2023		% Change		July 3, 2022		July 2, 2023		% Change		July 3, 2022
	(In thousands, except percentage data)
General and administrative expense	$	15,007	14.1	%	$	13,149	$	30,629	18.9	%	$	25,770

General and administrative expense increased ~~$0.1~~$1.9 million for the three months ended ~~October~~July 2, ~~2022,~~2023 compared to the prior year period, primarily due to an increase of ~~$1.4~~$2.6 million in personnel-related expenses mainly from ~~the increase in~~ stock-based compensation, partially offset by decreases of ~~$0.7~~$0.6 million in legal and professional services and ~~$0.6 million in~~corporate IT and ~~facility~~facilities overhead.

General and administrative expense increased ~~$1.1~~$4.9 million for the ~~nine~~six months ended ~~October~~July 2, ~~2022,~~2023 compared to the prior year period, primarily due to an increase of ~~$3.9~~$6.6 million in personnel-related expenses mainly from ~~the increase in~~ stock-based compensation and merit increases, partially offset by decreases of ~~$1.4~~$1.6 million in corporate IT and facilities overhead and legal and professional ~~services and $1.2 million in IT and facility overhead.~~services.

~~Impairment Charges~~Others

~~The following table presents impairment charges for the periods indicated:~~

~~Three Months Ended~~

~~Nine Months Ended~~

October 2,
2022

~~% Change~~

October 3,
2021

October 2,
2022

~~% Change~~

October 3,
2021

~~(In thousands, except percentage data)~~

~~Impairment charges~~

—

~~9,116~~

**Percentage change not meaningful.

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

~~Separation Expense~~

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

~~The following table presents separation~~and restructuring charges, which consist of severance costs and office exit expense ~~for~~associated with the ~~periods indicated:~~

Three Months Ended Nine Months Ended
October 2,
2022 % Change October 3,
2021 October 2,
2022 % Change October 3,
2021
(In thousands, except percentage data)
Separation expense $ 273 (60.0) % $ 683 $ 377 (71.9) % $ 1,342
abandonment of certain lease contracts.

Interest Income ~~(Expense)~~ and Other Income (Expense), Net

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

Other income, net primarily represents miscellaneous income and expense, which includes reimbursements under the Verisure Transition Service Agreement ("Verisure TSA") and the Employee Retention Credit ("ERC") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") for qualified wages.

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

Three Months Ended Nine Months Ended
October 2,
2022 % Change October 3,
2021 October 2,
2022 % Change October 3,
2021
(In thousands, except percentage data)
Interest income (expense), net $ 290 ** $ (1) 414 ** 26
Other income, net $ 19 (96.8) % $ 599 314 (92.5) % 4,170


	Three Months Ended					Six Months Ended
	July 2, 2023		% Change	July 3, 2022		July 2, 2023	% Change		July 3, 2022
	(In thousands, except percentage data)
Interest income, net	$	835	**	$	129	1,561	**		124
Other income (expense), net	$	52	**	$	(116)	13	(95.6)	%	295

**Percentage change not meaningful.

~~Other~~Interest income, net increased for the three and six months ended July 2, 2023 compared to the prior year periods, primarily due to the increase in our short-term investments as well as a result of higher interest rates.

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Provision for Income Taxes

The following table presents provision for income taxes for the periods indicated:


	Three Months Ended								Six Months Ended
	July 2, 2023			% Change		July 3, 2022			July 2, 2023			% Change		July 3, 2022
	(In thousands, except percentage data)
Provision for income taxes	$	221		(3.1)	%	$	228		$	1,013		129.7	%	$	441
Effective tax rate	(3.1)		%			(2.0)		%	(4.9)		%			(2.3)		%

Provision for income taxes decreased ~~$0.6 million~~slightly for the three months ended ~~October~~July 2, ~~2022,~~2023, compared to the prior year period and increased for the six months ended July 2, 2023, compared to the prior year period, primarily due to ~~decreases~~the higher U.S. earnings and also the application of ~~$0.2 million~~Section 174 of the Internal Revenue Code requiring capitalization of research and experimental expenses, which increase was recognized mostly in ~~ERC under~~ the CARES Act and $0.5 million in Verisure TSA related income. Other income, net decreased $3.9 million for the nine months ended October 2, 2022, compared to the prior year period, primarily due to decreasesfirst quarter of ~~$2.0 million in ERC under the CARES Act and $2.0 million in Verisure TSA related income.~~

~~Provision for Income Taxes~~

Three Months Ended Nine Months Ended
October 2,
2022 % Change October 3,
2021 October 2,
2022 % Change October 3,
2021
(In thousands, except percentage data)
Provision for income taxes $ 304 68.0 % $ 181 $ 745 41.9 % $ 525
Effective tax rate (2.2) % (1.2) % (2.2) % (1.1) %

Our provision for income taxes was primarily attributable to income taxes on foreign earnings. The increase in provision for income taxes for the three and nine months ended October 2, 2022, compared to the prior year periods, was primarily due to higher foreign earnings.2023. Consistent with the prior year periods, we maintained a valuation allowance against our U.S. federal and state deferred tax assets and did not record a tax benefit on these deferred tax assets since it is more likely than not that these deferred tax assets will not be realized.

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Liquidity and Capital Resources

As of July 2, 2023, our cash and cash equivalents and short-term investments totaled $123.7 million and we had unused borrowing capacity of $13.8 million based on the terms and conditions of our revolving credit facility. We have a history of losses and may ~~continue to~~ incur operating and net losses ~~for~~in the ~~foreseeable~~ future. As of ~~October~~July 2, ~~2022,~~2023, our accumulated deficit was ~~$323.3~~$367.0 million.

~~Our~~ Historically, we have funded our principal ~~sources of liquidity are~~business activities through cash flows generated from operations and available cash equivalents and short-term investments. Short-term investments are marketable government securities with an original maturity or a remaining maturity at the time of purchase of greater than three months and no more than 12 months. The marketable securities are held in our name with a high quality financial institution, which acts as our custodian and investment manager.

~~On October 27, 2021, we entered into a Loan and Security Agreement with Bank of America, N.A. for a $40.0 million three-year revolving credit facility. Refer to Note 6.~~ ~~Revolving Credit Facility~~ ~~for further information about the terms and structure of the credit facility.~~on hand.

Material Cash Requirements

~~Based on our current plans, the Loan and Security Agreement with Bank of America, N.A, and market conditions, we~~We believe that ~~such~~our existing sources of liquidity will be sufficient to ~~satisfy~~meet our anticipated cash requirements for at least the next 12 months. However, in the future we may require or desire additional funds to support our operating expenses and capital requirements. To the extent that current and anticipated future sources of liquidity are insufficient, we may seek to raise additional funds through public or private equity. We have no commitments to obtain such additional financing and cannot provide assurance that additional financing will be available at all or, if available, that such financing would be obtainable on terms favorable to us and would not be dilutive.

Our future liquidity and cash requirements may vary from those currently planned and will depend on numerous factors, including the introduction of new products, the growth in our service revenue, the ability to increase our gross margin dollars, as well as cost optimization initiatives and controls over our operating expenditures. As we grow our installed base and related cost structure, there will be a need for additional working capital, hence, we have increased our subscription rates effective February 3, 2023.

Leases and Contractual Commitments

Our operating lease obligations mostly include offices, equipment, data centers, and distribution centers. Our contractual commitments are primarily inventory-related purchase obligations with suppliers.

Contingencies

We are involved in disputes, litigation, and other legal actions. We evaluate whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. Significant judgment is required to determine both the probability and the estimated amount of loss. In such cases, we accrue for the amount or, if a range, we accrue the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within litigation reserves, net.

Refer to Note 7.8. Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report ~~on Form 10-Q~~ for further information

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

leases, purchase obligations, and legal contingencies.

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Cash Flow

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


		Nine Months Ended					Six Months Ended
		October 2, 2022		October 3, 2021			July 2, 2023		July 3, 2022
		(In thousands)					(In thousands)
Net cash used in operating activities		$	(34,783)	$	(32,656)
Net cash provided by (used in) investing activities		(45,578)		18,062
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	$	22,908	$	(29,381)
Net cash used in investing activities						Net cash used in investing activities	(33,150)		(50,429)
Net cash used in financing activities	Net cash used in financing activities	(14,594)		(5,535)		Net cash used in financing activities	(11,951)		(10,384)
Net cash decrease	Net cash decrease	$	(94,955)	$	(20,129)	Net cash decrease	$	(22,193)	$	(90,194)

Operating activities

Net cash ~~used in~~provided by operating activities increased by ~~$2.1~~$52.3 million for the ~~nine~~six months ended ~~October~~July 2, ~~2022~~2023 compared to the prior year ~~period. This increase comprised an increase~~period, primarily due to improved profitability and changes in working capital used in operations of $14.0 million, offset by a $11.8 million reduction in net loss adjusted for non-cash items. The increase in working capital used in operations was mainly driven by higher inventory purchases as a result of ~~the seasonal restocking~~an increase in ~~anticipation~~our service revenue driven by growth in paid accounts and increased subscription rates, lower payments to suppliers primarily as a result of ~~the holiday consumer purchasing pattern coupled with our internal objective~~reduced inventory purchases, and higher collection from customers on products sales due to ~~maintain more appropriate inventory levels to support consumer demand in the fourth quarter of 2022 and early 2023.~~enhanced collection efforts.

Investing activities

Net cash used in investing activities ~~increased~~decreased by ~~$63.6~~$17.3 million for the ~~nine~~six months ended ~~October~~July 2, ~~2022~~2023 compared to the prior year period, primarily due to a decrease in net purchases, and maturities, of short-term investments.

Financing activities

Net cash used in financing activities increased by ~~$9.1~~$1.6 million for the ~~nine~~six months ended ~~October~~July 2, ~~2022~~2023 compared to the prior year period, primarily due to the increase in withholding tax ~~withholding~~ from restricted stock unit releases, ~~and the decrease in~~partially offset by higher proceeds ~~from exercises of stock options.~~related to employee benefit plans.

Critical Accounting Policies and Estimates

For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. There have been no material changes to our critical accounting policies and estimates during the ~~nine~~six months ended ~~October~~July 2, ~~2022,~~2023, other than as discussed in Note 2. Significant Accounting Policies and Recent Accounting Pronouncements, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly ~~Report on Form 10-Q.~~Report.

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

During the ~~nine~~six months ended ~~October~~July 2, ~~2022,~~2023, there were no material changes to our market risk disclosures as set forth in Part II Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There ~~were~~have been no changes in our internal control over financial reporting that occurred during the ~~three months ended October 2, 2022~~period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. It should be noted that any system of controls, however well designed and operated, can provide only reasonable assurance, and not absolute assurance, that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of ~~certain~~future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals in all future circumstances.

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PART II: OTHER INFORMATION

Item 1.Legal Proceedings

The information set forth under the heading “Litigation and Other Legal Matters” in Note 7,8, Commitments and Contingencies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report, ~~on Form 10-Q,~~ is incorporated herein by reference. For additional discussion of certain risks associated with legal proceedings, see the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly ~~Report on Form 10-Q.~~Report.

Item 1A.Risk Factors

Our business, reputation, results of operations and financial condition, as well as the price of our stock, can be affected by a number of factors, whether currently known or unknown, including those described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 under the heading “Risk Factors.” ~~When any one or more of these risks materialize from time to time, our business, reputation, results of operations and financial condition, as well as~~During the ~~price of our stock, can be materially and adversely affected. Below are~~six months ended July 2, 2023, there have been no significant changes to ~~our~~the risk factors ~~included~~under the heading “Risk Factors” described in Part I, Item 1A of our Annual Report ~~From~~on Form 10-K for the year ended December 31, ~~2021.~~2022.

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

Item 5. Other Information

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

InDuring the ~~recent past, various regions worldwide have experienced slow economic growth. In addition, current economic challenges~~quarter ended July 2, 2023, our directors and officers (as defined in ~~China may continue to put negative pressure on global economic conditions. If conditions~~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 ~~global economy, including in Europe, China, Australia~~table below:

Type of Trading Arrangement

Name and Position

Action

Date

Rule 10b5-1 (1)

Non-Rule 10b5-1 (2)

Total Shares to be Sold

Expiration Date

Matthew McRae,

Chief Executive Officer

Adoption

May 31, 2023 (3)

577,014

September 15, 2023

_________________________

(1)Contract, instruction or written plan intended to satisfy the ~~United States, or other key vertical or geographic markets deteriorate, such~~affirmative defense conditions ~~could materially adversely affect our business, results~~ of operations, and financial condition. If we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, which could materially adversely affect our business, results of operations, and financial condition. In addition,Rule 10b5-1(c) under 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.Exchange Act.

~~In addition,~~(2)“Non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of Regulation S-K under the challenges faced by the European Union to stabilize some of its member state economies, such as Greece, Portugal, Spain, Hungary, and Italy, have had international implications, affecting the stability of global financial markets and hindering economies worldwide. Many member states in the European Union have been addressing the issues with controversial austerity measures. In addition, the potential consequences of the “Brexit” process in the United Kingdom have led to significant uncertainty in the region. Should the European Union monetary policy measures be insufficient to restore confidence and stability to the financial markets, or should the United Kingdom’s “Brexit” decision

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

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

(3)

~~A portion of our global and U.S. sales are comprised of goods assembled and manufactured in our facilities in Taiwan and the People’s Republic of China, and components~~Adopted 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.

personal tax planning purposes.

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

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

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

3734

`Table of Contents

Item 6.Exhibits

Exhibit Index

Incorporated by Reference
Exhibit Number Exhibit Description Form Date Number Filed Herewith
3.1
Amended and Restated Certificate of Incorporation of Arlo Technologies, Inc.
8-K 8/7/2018 3.1
3.2
Amended and Restated Bylaws of Arlo Technologies, Inc.
8-K 8/7/2018 3.2
4.1
Common Stock Certificate of Arlo Technologies, Inc.
S-1/A 7/23/2018 4.1
10.1^
Form of Notice of Stock Option Grant (Change in Control)
X
10.2^
Form of Notice of Stock Option Grant (Global)
X
10.3^
Form of Notice of Grant of Restricted Stock Units (Standard)
X
10.4^
Form of Notice of Grant of NEO Service and Performance-Based Stock Option (IPO Grant)
X
10.5^
Form of Notice of Grant of Restricted Stock Units (Non-Employee Director)
X
10.6^
Form of Notice of Grant of Service and Performance-Based Restricted Stock Units (Cash Balance)
X
10.7^
Form of Notice of Grant of Service and Performance-Based Restricted Stock Units (TSR)
X
10.8^
Employment Offer Letter with Kurt Binder, dated August 23, 2022
8-K 8/26/2022 10.1
10.9^
Arlo Technologies, Inc. 2018 Equity Incentive Plan, as amended
8-K 8/26/2022 10.2
10.10^
Form of Retention Agreement
X
10.11^
Form of Notice of Grant of Performance-Based Restricted Stock Units (Retention Agreement)
X
10.12^
Form of Notice of Grant of Restricted Stock Units (Inducement Award)
X
10.13^
Form of Notice of Grant of Performance-Based Restricted Stock Units (Inducement Award)
X
31.1
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
X
31.2
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
X
32.1#
Section 1350 Certification of Principal Executive Officer
X
32.2#
Section 1350 Certification of Principal Financial Officer
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.
# This certification is deemed to accompany this Quarterly Report on Form 10-Q and will not be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that section. This certification will not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

Date

Number

Filed Herewith

3.1

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

8-K

8/7/2018

3.1

3.2

Amended and Restated Bylaws of Arlo Technologies, Inc.

8-K

8/7/2018

3.2

4.1

Common Stock Certificate of Arlo Technologies, Inc.

S-1/A

7/23/2018

4.1

31.1

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

31.2

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

32.1#

Section 1350 Certification of Principal Executive Officer

32.2#

Section 1350 Certification of Principal Financial Officer

101.INS

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

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

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

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

3835

`Table of Contents

SIGNATURES

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


ARLO TECHNOLOGIES, INC.
Registrant



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



/s/ KURTIS BINDER
Kurtis Binder
Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: ~~November 8, 2022~~August 10, 2023

3936


PART I: FINANCIAL INFORMATION
		Page ~~No.~~
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets	3
	Unaudited Condensed Consolidated Statements of ~~Operations and~~ Comprehensive Loss	4
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity	5
	Unaudited Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2422
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3533
Item 4.	Controls and Procedures	3533

PART II: OTHER INFORMATION

Item 1.	Legal Proceedings	3634
Item 1A.	Risk Factors	3634
Item 5.	Other Information	34
Item 6.	Exhibits	3835
Signatures		3936



	As of
	October 3, 2021		December 31, 2020
	(In thousands)
Cash and cash equivalents	$	166,057	$	186,127
Restricted cash	4,105		4,164
Total as presented on the unaudited condensed consolidated statements of cash flows	$	170,162	$	190,291


	As of October 2, 2022								As of December 31, 2021
	Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
	(In thousands)
U.S. treasuries	$	44,765	$	—	$	(266)	$	44,499	$	—	$	—	$	—	$	—


	October 2, 2022		October 3, 2021
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	5,208	$	4,939
Right-of-use assets obtained in exchange for lease liabilities
Operating leases	$	2,670	$	1,429


	As of
	October 2, 2022		December 31, 2021
Weighted average remaining lease term	5.1 years		6.1 years
Weighted average discount rate	5.71	%	5.77	%