Table of Contents
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 OctoberJuly 2, 20222023
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) 
Delaware38-4061754
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)
2200 Faraday Ave., Suite #150
Carlsbad,California92008
(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 shareARLONew 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 filerAccelerated filer
Non-Accelerated filerSmaller 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 88,471,85694,054,943 as of NovemberAugust 4, 2022.2023.

1

ARLO TECHNOLOGIES, INC.Arlo Technologies, Inc.
Form 10-Q
For the Quarterly Period Ended July 2, 2023

TABLE OF CONTENTS

 
Page No.
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 5.
Item 6.
2

PART I: FINANCIAL INFORMATION

Item 1.Financial Statements

ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of
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 investments44,499 — 
Accounts receivable, net82,707 79,564 
Inventories73,243 38,390 
Prepaid expenses and other current assets9,871 9,919 
Total current assets291,093 303,622 
Property and equipment, net6,588 9,595 
Operating lease right-of-use assets, net14,161 14,814 
Goodwill11,038 11,038 
Restricted cash4,128 4,107 
Other non-current assets4,208 4,314 
Total assets$331,216 $347,490 
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable$107,103 $84,098 
Deferred revenue11,893 29,442 
Accrued liabilities92,117 97,389 
Total current liabilities211,113 210,929 
Non-current operating lease liabilities20,239 21,470 
Other non-current liabilities2,543 2,439 
Total liabilities233,895 234,838 
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, 202188 84 
Additional paid-in capital420,727 401,367 
Accumulated other comprehensive income (loss)(224)— 
Accumulated deficit(323,270)(288,799)
Total stockholders’ equity97,321 112,652 
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 investments61,724 29,700 
Accounts receivable, net57,327 65,960 
Inventories39,429 46,554 
Prepaid expenses and other current assets12,318 6,544 
Total current assets232,749 232,782 
Property and equipment, net6,421 7,336 
Operating lease right-of-use assets, net11,089 12,809 
Goodwill11,038 11,038 
Restricted cash4,035 4,155 
Other non-current assets3,689 4,081 
Total assets$269,021 $272,201 
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable$61,221 $52,132 
Deferred revenue17,639 11,291 
Accrued liabilities88,217 98,855 
Total current liabilities167,077 162,278 
Non-current operating lease liabilities17,141 19,279 
Other non-current liabilities3,047 2,949 
Total liabilities187,265 184,506 
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, 202294 89 
Additional paid-in capital448,543 433,138 
Accumulated other comprehensive income (loss)152 (107)
Accumulated deficit(367,033)(345,425)
Total stockholders’ equity81,756 87,695 
Total liabilities and stockholders’ equity$269,021 $272,201 


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3

ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
Three Months EndedNine Months Ended Three Months EndedSix 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:
ProductsProducts$92,720 $84,152 $273,736 $217,224 Products$64,749 $86,191 $131,809 $181,016 
ServicesServices35,437 26,997 98,151 75,052 Services50,327 32,788 94,271 62,714 
Total revenueTotal revenue128,157 111,149 371,887 292,276 Total revenue115,076 118,979 226,080 243,730 
Cost of revenue:Cost of revenue:Cost of revenue:
ProductsProducts79,386 75,682 233,992 184,858 Products60,446 73,829 124,487 154,606 
ServicesServices12,021 11,124 33,830 31,099 Services12,772 11,410 24,518 21,809 
Total cost of revenueTotal cost of revenue91,407 86,806 267,822 215,957 Total cost of revenue73,218 85,239 149,005 176,415 
Gross profitGross profit36,750 24,343 104,065 76,319 Gross profit41,858 33,740 77,075 67,315 
Operating expenses:Operating expenses:Operating expenses:
Research and developmentResearch and development16,471 14,377 50,252 45,419 Research and development17,618 17,402 35,368 33,781 
Sales and marketingSales and marketing22,193 12,779 49,867 36,445 Sales and marketing16,921 14,506 32,274 27,674 
General and administrativeGeneral and administrative12,253 12,119 38,023 36,905 General and administrative15,007 13,149 30,629 25,770 
Impairment charges— — — 9,116 
Separation expense273 683 377 1,342 
OthersOthers341 25 973 104 
Total operating expensesTotal operating expenses51,190 39,958 138,519 129,227 Total operating expenses49,887 45,082 99,244 87,329 
Loss from operationsLoss from operations(14,440)(15,615)(34,454)(52,908)Loss from operations(8,029)(11,342)(22,169)(20,014)
Interest income (expense), net290 (1)414 26 
Other income, net19 599 314 4,170 
Interest income, netInterest income, net835 129 1,561 124 
Other income (expense), netOther income (expense), net52 (116)13 295 
Loss before income taxesLoss before income taxes(14,131)(15,017)(33,726)(48,712)Loss before income taxes(7,142)(11,329)(20,595)(19,595)
Provision for income taxesProvision for income taxes304 181 745 525 Provision for income taxes221 228 1,013 441 
Net lossNet loss$(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)$(0.60)
Basic and dilutedBasic and diluted$(0.08)$(0.13)$(0.24)$(0.23)
Weighted average shares used to compute net loss per share:Weighted average shares used to compute net loss per share:Weighted average shares used to compute net loss per share:
Basic88,124 83,809 86,677 82,191 
Diluted88,124 83,809 86,677 82,191 
Basic and dilutedBasic and diluted92,337 86,868 90,984 85,966 
Comprehensive loss:Comprehensive loss:Comprehensive loss:
Net lossNet loss$(14,435)$(15,198)$(34,471)$(49,237)Net loss$(7,363)$(11,557)$(21,608)$(20,036)
Other comprehensive income (loss), net of taxOther comprehensive income (loss), net of tax(56)11 (224)Other comprehensive income (loss), net of tax131 (122)259 (168)
Total comprehensive lossTotal comprehensive loss$(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.
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Table of Contents
ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'STOCKHOLDERS’ EQUITY
Three Months EndedNine Months Ended Three Months EndedSix 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 balancesTotal stockholders’ equity, beginning balances$86,251 $112,004 $87,695 $112,652 
Common stock:Common stock:Common stock:
Beginning balancesBeginning balances$88 $83 $84 $79 Beginning balances$91 $86 $89 $84 
Issuance of common stock under stock-based compensation plansIssuance of common stock under stock-based compensation plansIssuance of common stock under stock-based compensation plans
Issuance of common stock under Employee Stock Purchase PlanIssuance of common stock under Employee Stock Purchase Plan— — 
Restricted stock unit withholdingsRestricted stock unit withholdings(1)(1)(2)(3)Restricted stock unit withholdings(1)(1)(2)(2)
Ending balancesEnding balances$88 $84 $88 $84 Ending balances$94 $88 $94 $88 
Additional paid-in capital:Additional paid-in capital:Additional paid-in capital:
Beginning balancesBeginning balances$411,316 $381,511 $401,367 $366,455 Beginning balances$445,809 $409,242 $433,138 $401,367 
Stock-based compensation expenseStock-based compensation expense9,953 6,688 25,228 18,134 Stock-based compensation expense9,997 7,093 20,622 15,276 
Settlement of liability classified RSUs3,669 8,525 8,731 15,087 
Settlement of liability classified restricted stock unitsSettlement of liability classified restricted stock units— 95 6,739 5,061 
Issuance of common stock under stock-based compensation plansIssuance of common stock under stock-based compensation plans— — 1,419 4,433 Issuance of common stock under stock-based compensation plans2,986 34 2,986 1,419 
Issuance of common stock under Employee Stock Purchase PlanIssuance of common stock under Employee Stock Purchase Plan— 1,265 1,746 2,962 Issuance of common stock under Employee Stock Purchase Plan1,617 1,746 1,617 1,746 
Restricted stock unit withholdingsRestricted stock unit withholdings(4,211)(3,853)(17,764)(12,935)Restricted stock unit withholdings(11,866)(6,894)(16,559)(13,553)
Ending balancesEnding balances$420,727 $394,136 $420,727 $394,136 Ending balances$448,543 $411,316 $448,543 $411,316 
Accumulated deficit:Accumulated deficit:Accumulated deficit:
Beginning balancesBeginning balances$(308,835)$(266,809)$(288,799)$(232,770)Beginning balances$(359,670)$(297,278)$(345,425)$(288,799)
Net lossNet loss(14,435)(15,198)(34,471)(49,237)Net loss(7,363)(11,557)(21,608)(20,036)
Ending balancesEnding balances$(323,270)$(282,007)$(323,270)$(282,007)Ending balances$(367,033)$(308,835)$(367,033)$(308,835)
Accumulated other comprehensive income (loss):Accumulated other comprehensive income (loss):Accumulated other comprehensive income (loss):
Beginning balancesBeginning balances$(168)$— $— $Beginning balances$21 $(46)$(107)$— 
Other comprehensive income (loss), net of taxOther comprehensive income (loss), net of tax(56)11 (224)Other comprehensive income (loss), net of tax131 (122)259 (168)
Ending balancesEnding balances$(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 balancesTotal stockholders’ equity, ending balances$81,756 $102,401 $81,756 $102,401 
Common stock shares:Common stock shares:Common stock shares:
Beginning balancesBeginning balances87,530 82,917 84,453 79,336 Beginning balances90,785 85,835 88,887 84,453 
Issuance of common stock under stock-based compensation plansIssuance of common stock under stock-based compensation plans1,464 1,723 5,885 6,321 Issuance of common stock under stock-based compensation plans3,976 2,294 7,141 4,421 
Issuance of common stock under Employee Stock Purchase PlanIssuance of common stock under Employee Stock Purchase Plan— 249 304 602 Issuance of common stock under Employee Stock Purchase Plan460 304 460 304 
Restricted stock unit withholdingsRestricted stock unit withholdings(584)(622)(2,232)(1,992)Restricted stock unit withholdings(1,567)(903)(2,834)(1,648)
Ending balancesEnding balances88,410 84,267 88,410 84,267 Ending balances93,654 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 expense31,787 27,548 
Impairment charges— 9,116 
Depreciation and amortization3,653 4,546 
Allowance for credit losses and inventory reserves(211)(2,530)
Deferred income taxes259 (284)
Others39 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 payable23,229 (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 investments24,542 20,000 
Net cash provided by (used in) investing activities(45,578)18,062 
Cash flows from financing activities:
Proceeds related to employee benefit plans3,172 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 expense27,564 21,834 
Depreciation and amortization2,353 2,523 
Allowance for credit losses and inventory reserves613 (120)
Deferred income taxes243 133 
Others(567)89 
Changes in assets and liabilities:
Accounts receivable, net8,734 5,498 
Inventories6,411 (628)
Prepaid expenses and other assets(5,624)767 
Accounts payable9,836 (6,565)
Deferred revenue6,198 (16,763)
Accrued and other liabilities(11,245)(16,113)
Net cash provided by (used in) operating activities22,908 (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 investments29,956 9,512 
Net cash used in investing activities(33,150)(50,429)
Cash flows from financing activities:
Proceeds related to employee benefit plans4,611 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 cash4,035 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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Table of Contents

ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Note 1.    The CompanyDescription of Business and Basis of Presentation

The CompanyDescription 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'sOur 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'sOur 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 generatesgenerate revenue by selling devices through retail channels, wholesale distribution, wireless carrier channels, security solution providers, and Arlo'sArlo’s direct to consumer store and paid subscription services.

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

Basis of Presentation

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

Reclassification

Certain prior periods amounts have been reclassified to conform to the current period'speriod’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 ninesix months ended OctoberJuly 2, 20222023 and are not necessarily indicative of the results that may be expected for the year ending December 31, 20222023 or any future period.

Note 2.    Significant Accounting Policies and Recent Accounting Pronouncements

The Company’sOur significant accounting policies are disclosed in theour 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 ninesix months ended OctoberJuly 2, 2022.

Recent accounting pronouncements2023.

Emerging Growth Company Status

As an emerging growth company (“EGC”), the Companywe 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 Companywe otherwise irrevocably electselect not to avail itselfourselves of this exemption. The CompanyWe did not make such an irrevocable election and hashave 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 hasWe have considered all recent accounting pronouncements issued, but not yet effective, and doesdo not expect any to have a material effect on itsour financial statements and related disclosures.


Note 3.    Deferred    Revenue

Deferred RevenuePerformance Obligations

DeferredThe following table includes estimated revenue consistsexpected 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 ofJuly 2, 2023:
1 year2 yearsGreater than 2 yearsTotal
(In thousands)
Performance obligations$18,320 $58 $$18,384 

The performance obligation classified as greater than one year pertains to revenue recognitiondeferral 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 year2 yearsGreater than 2 yearsTotal
(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 ninesix months ended OctoberJuly 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 acrossWe 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, forAPAC, where we conduct our business. The following table presents revenue disaggregated by geography.geographic regions.

 Three Months EndedSix 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 
EMEA30,958 54,483 79,430 104,458 
APAC5,982 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 cashShort-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, 2023As of December 31, 2022
 Amortized CostUnrealized GainsUnrealized LossesEstimated Fair ValueAmortized CostUnrealized GainsUnrealized LossesEstimated 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 cash4,128 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 cash4,105 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, 2022As of December 31, 2021
 CostUnrealized GainsUnrealized LossesEstimated Fair ValueCostUnrealized GainsUnrealized LossesEstimated 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 EndedNine Months EndedThree Months EndedSix 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 periodBalance 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 lossesProvision 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 periodBalance at the end of the period$364 $326 $364 $326 Balance at the end of the period$322 $405 $322 $405 

InventoriesProperty and equipment, net

Inventories consistThe components of finished goods whichproperty and equipment are valued atas follows:
As of
July 2,
2023
December 31,
2022
(In thousands)
Machinery and equipment$13,791 $12,696 
Software15,818 15,606 
Computer equipment3,853 3,992 
Leasehold improvements
4,661 4,657 
Furniture and fixtures2,546 2,554 
Total property and equipment, gross40,669 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 usingsublease arrangement for the first-in, first-out methodSan Jose office building as of OctoberJuly 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, netOther 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 adjustments896 777 
Other1,652 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 
Software13,765 13,928 
Computer equipment4,093 4,062 
Furniture and fixtures2,567 2,404 
Leasehold improvements
5,030 4,922 
Total property and equipment, gross37,992 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 
Compensation16,155 15,556 
Cloud and other costs7,657 11,154 
Operating lease liabilities3,818 4,190 
Professional services2,496 3,703 
Warranty obligations1,093 1,174 
Freight cost1,921 1,050 
Service cost1,084 806 
Restructuring charges628 1,265 
Other7,327 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.

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As of
July 2,
2023
December 31,
2022
(In thousands)
Non-current service cost$1,202 $1,259 
Non-current compensation872 616 
Non-current deferred revenue63 212 
Non-current income taxes payable77 77 
Other833 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 
Sublease793 1,471 
Other2,109 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 compensation12,111 12,367 
Current operating lease liabilities4,507 4,609 
Freight2,332 8,086 
Warranty obligation1,121 1,330 
Other20,380 19,620 
Total accrued liabilities$92,117 $97,389 

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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 ofAs 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 
TotalTotal$72,017 $21,935 Total$64,083 $62,588 
_________________________
(1)Included in short-term investments on the Company’sour unaudited condensed consolidated balance sheets.

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

As of OctoberJuly 2, 20222023 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 measuresrestructuring 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 ninesix months ended OctoberJuly 2, 2022, the Company had no assets or liabilities measured on a nonrecurring basis.2023 are as follows:

TotalSeverance ExpenseOffice Exit ExpenseOther Exit Expense
(In thousands)
Balance as of December 31, 2022$1,265 $219 $991 $55 
Restructuring charges400 278 117 
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 
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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 Companywe 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 Companyus 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.

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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TheOur obligations of the Company under the Credit Agreement are secured by substantially all of itsour 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’sour 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 theour 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 theour average daily availability for the prior fiscal quarter. Among other fees, the Company iswe 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 Companyus to (a) until the Company achieveswe 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 OctoberJuly 2, 2022, the Company is2023, 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 fileswe file a bankruptcy petition, a bankruptcy petition is filed against the Companyus and is not dismissed or stayed within thirty days or the Company makeswe 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 OctoberJuly 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 leasesCertain lease agreements include options to extend such leases for uprenew or terminate the lease, which are not reasonably certain to five years,be exercised and some include options to terminate such leases within one year.therefore are not factored into our determination of lease payments. The terms of certain 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 OctoberJuly 2, 2022 and October 3, 2021,2023, respectively, and $5.4$1.8 million and $5.3$3.6 million for the ninethree 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 ninesix months ended OctoberJuly 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 term5.5 years5.1 years
Weighted average discount rate5.69 %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, 2022October 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, 2022December 31, 2021
Weighted average remaining lease term5.1 years6.1 years
Weighted average discount rate5.71 %5.77 %

The Company's future minimum undiscounted lease payments under operating leases and future non-cancelable rent payments from itsour subtenants for each of the next five years and thereafter as of OctoberJuly 2, 20222023 were as follows:

Operating Lease PaymentsSublease PaymentsNet
(In thousands)
2022 (Remaining three months)$1,166 $(502)$664 
20236,050 (1,891)4,159 
20245,433 (1,947)3,486 
20253,753 (2,006)1,747 
20263,872 (2,066)1,806 
Thereafter8,794 (5,942)2,852 
Total future lease payments29,068 $(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 liabilities20,239 
Total lease liabilities$24,746 

Operating Lease PaymentsSublease PaymentsNet
(In thousands)
2023 (Remaining six months)$1,988 $(1,034)$954 
20245,398 (1,947)3,451 
20253,904 (2,006)1,898 
20264,011 (2,066)1,945 
20273,986 (2,322)1,664 
Thereafter5,130 (3,620)1,510 
Total future lease payments24,417 $(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 liabilities17,141 
Total lease liabilities$20,959 

Letters of Credit

In connection with the lease agreement for theour office space located in San Jose, California, the Companywe executed a letter of credit with the landlord as the beneficiary. As of OctoberJuly 2, 2022, the Company2023, we had approximately $3.6 million of unused letters of credit outstanding, of which $3.1 million pertains to the lease arrangement in San Jose, California.

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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Purchase Obligations

The Company hasWe have entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders are cancelable by giving 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 OctoberJuly 2, 2022, the Company2023, we had approximately $42.5$50.1 million in non-cancelable purchase commitments with suppliers.

As of OctoberJuly 2, 2022, a further $37.72023, 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 Companywe may incur expenses for the materials and components, such as chipsets already purchased by the supplier to fulfill the purchase orderour orders if the purchase order is cancelled. Expenses incurred in respect of cancelled purchase orders hashave 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 Accruedaccrued liabilities in the unaudited condensed consolidated balance sheets, were as follows:

Three Months EndedNine Months Ended Three Months EndedSix 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 periodBalance 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 obligationsProvision for warranty obligations40 34 55 113 
SettlementsSettlements(76)(107)(234)(368)Settlements(66)(79)(136)(158)
Balance at the end of the periodBalance 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 isWe are involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below. In all cases, at each reporting period, the Company evaluateswe evaluate whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. In such cases, the Company accrueswe accrue for the amount or, if a range, the Company accrueswe accrue the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within litigation reserves, net. The Company monitorsgeneral and administrative expenses. We monitor developments in these legal matters that could affect the estimate the Companywe had previously accrued. In relation to such matters, the Companywe currently believesbelieve that there are no existing claims or proceedings that are likely to have a material adverse effect on itsour financial position within the next 12 months, or the outcome of these matters is currently not determinable. There are many uncertainties associated with any litigation, and these actions or other third-party claims against the Companyus may cause the Companyus to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any intellectual property litigation may require the Companyus to make royalty payments, which could have an adverse effect in future periods. If any of those events were to occur, the Company'sour business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from the Company'sour estimates, which could result in the need to adjust the liability and record additional expenses.

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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 Companyus and certain of itsour executives and directors. The plaintiffs in the State Action allege that the Companywe failed to adequately disclose quality control problems and adverse sales trends ahead of the Company'sour 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’sour sales trends and products.In the amended complaint, lead plaintiff sought to represent a class of persons who purchased or otherwise acquired the Company’sour 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 Companywe had accrued for loss
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contingency. In October 2020, the Companywe 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 pendingoccurred 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. TheOn April 13, 2023, the court has not yet setheard 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 datepetition 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 AgreementsIndemnifications

In the ordinary course of business, the Companywe 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 haswe have entered into indemnification agreements with members of itsour board of directors and certain of itsour 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 Companywe could be required to make under these indemnification agreements is, in many cases, unlimited. As of OctoberJuly 2, 20222023 and December 31, 2021, the Company has2022, 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 grantsWe 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 CompanyWe also grantsgrant performance-based and market-based restricted stock units ("PSUs"(“PSUs”) to itsour executive officers periodically. Award vesting periods for the 2018 Plan are generally three to four years. As of OctoberJuly 2, 2022,2023, approximately 3.94.0 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’sArlo’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 Company20, 2023, we registered an aggregate of up to 4,222,2704,444,072 shares of common stock on a Registration Statement on Form S-8, including 3,377,8163,555,258 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 844,454888,814 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, 20222023, 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 Plangrants as of OctoberJuly 2, 2022:2023:

 Number of Shares
(In thousands)
Shares available for grantgrants as of December 31, 202120222,5094,213 
Additional authorized shares6,3783,555 
Granted(9,573)(7,023)
Forfeited / cancelled2,395377 
Shares traded for taxes2,2322,834 
Shares available for grantgrants as of OctoberJuly 2, 202220233,9413,956 

Employee Stock Purchase Plan

The Company sponsorsWe 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 OctoberJuly 2, 2022, 1,855,5482023, 2.0 million shares were available for issuance under the ESPP.

Option Activity

Stock option activity during the ninesix months ended OctoberJuly 2, 20222023 was as follows:
 Number of SharesWeighted Average Exercise Price Per Share
(In thousands)(In dollars)
Outstanding as of December 31, 20222,082 $10.24 
Granted— $— 
Exercised(433)$6.90 
Forfeited / cancelled— $— 
Expired(12)$7.55 
Outstanding as of July 2, 20231,637 $11.15 
Vested and expected to vest as of July 2, 20231,637 $11.15 
Exercisable Options as of July 2, 20231,637 $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 sharesWeighted Average Exercise Price Per Share
(In thousands)(In dollars)
Outstanding as of December 31, 20212,574 $10.55 
Granted— $— 
Exercised(209)$6.81 
Forfeited / cancelled(3)$16.00 
Expired(231)$15.75 
Outstanding as of October 2, 20222,131 $10.35 
Vested and expected to vest as of October 2, 20222,131 $10.35 
Exercisable Options as of October 2, 20222,131 $10.35 

RSU Activity

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

Number of sharesWeighted Average Grant Date Fair Value Per Share Number of SharesWeighted Average Grant Date Fair Value Per Share
(In thousands)(In dollars)(In thousands)(In dollars)
Outstanding as of December 31, 202110,080 $5.73 
Outstanding as of December 31, 2022Outstanding as of December 31, 20229,487 $6.36 
GrantedGranted6,627 $7.29 Granted4,975 $3.95 
VestedVested(5,065)$6.34 Vested(4,641)$4.79 
ForfeitedForfeited(1,779)$5.96 Forfeited(363)$6.42 
Outstanding as of October 2, 20229,863 $6.43 
Outstanding as of July 2, 2023Outstanding as of July 2, 20239,458 $5.86 

PSU Activity

During the three months ended October 2, 2022 and October 3, 2021, the Company'sOur executive officers wereand 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 evaluateswe evaluate the probability of achieving thesethe performance or market conditions and recordsrecord the related stock-based compensation expense recognizedbased on the achievement over the expected performance achievement period when the achievement becomes probable.service period.

PSU activity during the ninesix months ended OctoberJuly 2, 20222023 was as follows:


Number of SharesWeighted Average Grant Date Fair Value Per Share

Number of SharesWeighted Average Grant Date Fair Value Per Share
(In thousands)(In dollars)(In thousands)(In dollars)
Outstanding as of December 31, 20212,106 $5.39 
Outstanding as of December 31, 2022Outstanding as of December 31, 20224,041 $6.22 
GrantedGranted2,952 $6.52 Granted2,050 $4.56 
VestedVested(612)$4.22 Vested(2,067)$5.51 
ForfeitedForfeited(386)$7.18 Forfeited(3)$8.28 
Outstanding as of October 2, 20224,060 $6.22 
Outstanding as of July 2, 2023Outstanding as of July 2, 20234,021 $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 EndedSix 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 development3,311 3,621 7,222 5,923 
Sales and marketing1,670 1,790 3,392 3,170 
General and administrative7,025 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.
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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 EndedNine Months Ended
October 2, 2022October 3, 2021October 2, 2022October 3, 2021
(In thousands)
Cost of revenue$1,365 $787 $3,610 $2,951 
Research and development2,679 2,086 8,602 8,474 
Sales and marketing1,389 1,119 4,559 3,947 
General and administrative4,520 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 ninesix months ended OctoberJuly 2, 20222023 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 ninesix months ended OctoberJuly 3, 20212022 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 ninesix months ended OctoberJuly 2, 2023 and July 3, 2022, the Companywe sustained U.S. book losses. Consistent with the prior year the Companyperiods, we maintained a valuation allowance against itsour 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 provisionProvision for income taxes was primarily attributable to income taxes on foreign earnings. The provision for income taxesdecreased slightly for the three and nine months ended OctoberJuly 2, 2022 was slightly higher than the same periods in2023, 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 EndedSix 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 dilutive92,337 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, excluded1,370 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 EndedNine Months Ended
October 2, 2022October 3, 2021October 2, 2022October 3, 2021
(In thousands, except per share data)
Numerator:
Net loss$(14,435)$(15,198)$(34,471)$(49,237)
Denominator:
Weighted average common shares - basic88,124 83,809 86,677 82,191 
Potentially dilutive common share equivalent— — — — 
Weighted average common shares - dilutive88,124 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, excluded8,400 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 operatesWe operate as one operating and reportable segment. The Company has identified itsOur Chief Executive Officer ("CEO"(“CEO”) is identified as the Chief Operating Decision Maker (“CODM”). The CODM, who reviews financial information presented on a combinedconsolidated basis for purposes of allocating resources and evaluating financial performance.

Geographic Information for Revenue

The Company conducts business across 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 EndedSix 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 
Spain19,549 40,141 58,120 64,709 
Ireland4,106 10,664 8,986 32,751 
Other countries13,235 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 countries2,549 2,383 
Total$17,510 $20,145 

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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 EndedNine 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 
EMEA52,542 30,931 157,000 80,623 
APAC4,575 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 
EMEA266 402 
China600 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.




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

Forward-looking Statements

This reportQuarterly 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 26.329.4 million smart connected devices, and asdevices. As of OctoberJuly 2, 2022,2023, the Arlo platform had approximately 6.97.9 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 OctoberJuly 2, 20222023 and OctoberJuly 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 $14.4was $8.0 million and $15.6$11.3 million for the three months ended OctoberJuly 2, 2023 and July 3, 2022, respectively. For the six months ended July 2, 2023 and OctoberJuly 3, 2021,2022, we generated total revenue of $226.1 million and $243.7 million, respectively. Loss from operations were $34.5was $22.2 million and $52.9$20.0 million for the ninesix months ended OctoberJuly 2, 20222023 and OctoberJuly 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.

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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 expensein the future as we invest in new campaignsmarketing to increase awarenessdrive demand for our products and services.
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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% ChangeOctober 3, 2021
(In thousands, except percentage data)
Cumulative registered accounts6,930 19.0 %5,822 
Cumulative paid accounts1,673 90.8 %877 
Annual recurring revenue$125,402 56.0 %$80,400 

As of and for the Three Months Ended
July 2,
2023
% ChangeJuly 3,
2022
(In thousands, except percentage data)
Cumulative registered accounts7,860 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 ninesix months ended OctoberJuly 2, 2022,2023, we remained focused on navigating COVID-19 related challenges, the ongoing conflict in Ukraine, supply chain disruptions, inflation, lowerfluctuating 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 developingthe situation and may, as necessary, reduce expenditures further, borrow under our revolving credit facility, or pursue other sources of capital that may include other forms of external financing in order to maintain our cash position and preserve financial flexibility in response to the uncertainty in the United States and global markets resulting from the COVID-19 pandemic, the ongoing conflict in Ukraine, supply chain disruptions, inflation, lowerthe 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 operationscomprehensive loss data, which we derived from the accompanying unaudited condensed consolidated financial statements:
 Three Months EndedNine 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 %$217,224 74.3 %
Services35,437 27.7 %26,997 24.3 %98,151 26.4 %75,052 25.7 %
Total revenue128,157 100.0 %111,149 100.0 %371,887 100.0 %292,276 100.0 %
Cost of revenue:
Products79,386 61.9 %75,682 68.1 %233,992 62.9 %184,858 63.2 %
Services12,021 9.4 %11,124 10.0 %33,830 9.1 %31,099 10.6 %
Total cost of revenue91,407 71.3 %86,806 78.1 %267,822 72.0 %215,957 73.9 %
Gross profit36,750 28.7 %24,343 21.9 %104,065 28.0 %76,319 26.1 %
Operating expenses:
Research and development16,471 12.9 %14,377 12.9 %50,252 13.5 %45,419 15.5 %
Sales and marketing22,193 17.3 %12,779 11.5 %49,867 13.4 %36,445 12.5 %
General and administrative12,253 9.6 %12,119 10.9 %38,023 10.3 %36,905 12.6 %
Impairment charges— — %— — %— — %9,116 3.1 %
Separation expense273 0.2 %683 0.6 %377 0.1 %1,342 0.5 %
Total operating expenses51,190 40.0 %39,958 35.9 %138,519 37.3 %129,227 44.2 %
Loss from operations(14,440)(11.3)%(15,615)(14.0)%(34,454)(9.3)%(52,908)(18.1)%
Interest income (expense), net290 0.2 %(1)— %414 0.1 %26 — %
Other income, net19 0.0 %599 0.5 %314 0.1 %4,170 1.5 %
Loss before income taxes(14,131)(11.1)%(15,017)(13.5)%(33,726)(9.1)%(48,712)(16.6)%
Provision for income taxes304 0.2 %181 0.2 %745 0.2 %525 0.2 %
Net loss$(14,435)(11.3)%$(15,198)(13.7)%$(34,471)(9.3)%$(49,237)(16.8)%

 Three Months EndedSix 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 %$181,016 74.3 %
Services50,327 43.7 %32,788 27.6 %94,271 41.7 %62,714 25.7 %
Total revenue115,076 100.0 %118,979 100.0 %226,080 100.0 %243,730 100.0 %
Cost of revenue:
Products60,446 52.5 %73,829 62.0 %124,487 55.1 %154,606 63.4 %
Services12,772 11.1 %11,410 9.6 %24,518 10.8 %21,809 8.9 %
Total cost of revenue73,218 63.6 %85,239 71.6 %149,005 65.9 %176,415 72.4 %
Gross profit41,858 36.4 %33,740 28.4 %77,075 34.1 %67,315 27.6 %
Operating expenses:
Research and development17,618 15.3 %17,402 14.6 %35,368 15.6 %33,781 13.9 %
Sales and marketing16,921 14.7 %14,506 12.2 %32,274 14.3 %27,674 11.4 %
General and administrative15,007 13.0 %13,149 11.1 %30,629 13.5 %25,770 10.6 %
Others341 0.4 %25 — %973 0.5 %104 — %
Total operating expenses49,887 43.4 %45,082 37.9 %99,244 43.9 %87,329 35.8 %
Loss from operations(8,029)(7.0)%(11,342)(9.5)%(22,169)(9.8)%(20,014)(8.2)%
Interest income, net835 0.8 %129 0.1 %1,561 0.7 %124 0.1 %
Other income (expense), net52 — %(116)(0.1)%13 — %295 0.1 %
Loss before income taxes(7,142)(6.2)%(11,329)(9.5)%(20,595)(9.1)%(19,595)(8.0)%
Provision for income taxes221 0.2 %228 0.2 %1,013 0.5 %441 0.2 %
Net loss$(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.

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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 EndedNine Months Ended
 October 2,
2022
% ChangeOctober 3,
2021
October 2,
2022
% ChangeOctober 3,
2021
 (In thousands, except percentage data)
Americas$71,040 (4.7)%$74,511 $199,851 4.7 %$190,828 
Percentage of revenue55.4 %67.0 %53.7 %65.3 %
EMEA52,542 69.9 %30,931 157,000 94.7 %80,623 
Percentage of revenue41.0 %27.8 %42.2 %27.6 %
APAC4,575 (19.8)%5,707 15,036 (27.8)%20,825 
Percentage of revenue3.6 %5.2 %4.1 %7.1 %
Total revenue$128,157 15.3 %$111,149 $371,887 27.2 %$292,276 
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 Three Months EndedSix Months Ended
 July 2,
2023
% ChangeJuly 3,
2022
July 2,
2023
% ChangeJuly 3,
2022
 (In thousands, except percentage data)
Americas$78,136 29.5 %$60,345 $134,768 4.6 %$128,811 
Percentage of revenue67.9 %50.7 %59.6 %52.8 %
EMEA30,958 (43.2)%54,483 79,430 (24.0)%104,458 
Percentage of revenue26.9 %45.8 %35.1 %42.9 %
APAC5,982 44.1 %4,151 11,882 13.6 %10,461 
Percentage of revenue5.2 %3.5 %5.3 %4.3 %
Total revenue$115,076 (3.3)%$118,979 $226,080 (7.2)%$243,730 

RevenueProduct revenue decreased by $21.4 million, or 24.9% and $49.2 million, or 27.2% for the three and ninesix months ended OctoberJuly 2, 20222023 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 thea 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 consistsService 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
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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 EndedNine Months Ended
 October 2,
2022
% ChangeOctober 3,
2021
October 2,
2022
% ChangeOctober 3,
2021
 (In thousands, except percentage data)
Cost of revenue:
Products$79,386 4.9 %$75,682 $233,992 26.6 %$184,858 
Services12,021 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 EndedSix Months Ended
 July 2,
2023
% ChangeJuly 3,
2022
July 2,
2023
% ChangeJuly 3,
2022
 (In thousands, except percentage data)
Cost of revenue:
Products$60,446 (18.1)%$73,829 $124,487 (19.5)%$154,606 
Services12,772 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 

CostProduct cost of product revenue increased 4.9%decreased 18.1% and 26.6%19.5% for the three and ninesix months ended OctoberJuly 2, 20222023 compared to the prior year periods, respectively, primarily due to increasesdecreases in grossproduct shipments plus increasescoupled with decreases in freight-in costs due to normalization of materialsthe supply chain and componentsutilization of our products mainly as the result of inflation. The cost of product revenue increase for the three months ended October 2, 2022 wasocean freight, partially offset by a decreaseincreases in freightinventory 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 ninesix months ended OctoberJuly 2, 20222023 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 EndedNine Months Ended Three Months EndedSix Months Ended
October 2,
2022
% ChangeOctober 3,
2021
October 2,
2022
% ChangeOctober 3,
2021
July 2,
2023
% ChangeJuly 3,
2022
July 2,
2023
% ChangeJuly 3,
2022
(In thousands, except percentage data) (In thousands, except percentage data)
Gross profit:Gross profit:Gross profit:
ProductsProducts$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 
ServicesServices23,416 47.5 %15,873 64,321 46.3 %43,953 Services37,555 75.7 %21,378 69,753 70.5 %40,905 
Total gross profitTotal 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:
ProductsProducts14.4 %10.1 %14.5 %14.9 %Products6.6 %14.3 %5.6 %14.6 %
ServicesServices66.1 %58.8 %65.5 %58.6 %Services74.6 %65.2 %74.0 %65.2 %
Total gross marginTotal gross margin28.7 %21.9 %28.0 %26.1 %Total gross margin36.4 %28.4 %34.1 %27.6 %

GrossProduct gross profit increased 51.0% and 36.4%decreased for the three and ninesix months ended OctoberJuly 2, 2022,2023 compared to the prior year periods, respectively, dueprimarily 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 combinationshift 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 increasedecrease 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 OctoberJuly 2, 2022 was primarily due2023 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 anin 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 EndedNine Months Ended
 October 2,
2022
% ChangeOctober 3,
2021
October 2,
2022
% ChangeOctober 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 EndedSix Months Ended
 July 2,
2023
% ChangeJuly 3,
2022
July 2,
2023
% ChangeJuly 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 OctoberJuly 2, 2022,2023 compared to the prior year period, primarily due to increasesan 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 thefrom 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 facilityfacilities overhead.

Research and development expense increased $4.8by $1.6 million for the ninesix months ended OctoberJuly 2, 2022,2023 compared to the prior year period, primarily due to increasesan 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 EndedNine Months Ended
 October 2,
2022
% ChangeOctober 3,
2021
October 2,
2022
% ChangeOctober 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 EndedSix Months Ended
 July 2,
2023
% ChangeJuly 3,
2022
July 2,
2023
% ChangeJuly 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 OctoberJuly 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
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customer care services, $0.7 million freight-out expenses, and $1.1$0.6 million in credit card processing fees partially offset byas a decreaseresult 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 professionalcredit 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 EndedNine Months Ended
 October 2,
2022
% ChangeOctober 3,
2021
October 2,
2022
% ChangeOctober 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 EndedSix Months Ended
 July 2,
2023
% ChangeJuly 3,
2022
July 2,
2023
% ChangeJuly 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 OctoberJuly 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 incorporate IT and facilityfacilities overhead.

General and administrative expense increased $1.1$4.9 million for the ninesix months ended OctoberJuly 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 ChargesOthers

The following table presents impairment charges for the periods indicated:
Three Months EndedNine Months Ended
October 2,
2022
% ChangeOctober 3,
2021
October 2,
2022
% ChangeOctober 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.


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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 separationand restructuring charges, which consist of severance costs and office exit expense forassociated with the periods indicated:
 Three Months EndedNine Months Ended
 October 2,
2022
% ChangeOctober 3,
2021
October 2,
2022
% ChangeOctober 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 EndedNine Months Ended
 October 2,
2022
% ChangeOctober 3,
2021
October 2,
2022
% ChangeOctober 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 EndedSix Months Ended
 July 2,
2023
% ChangeJuly 3,
2022
July 2,
2023
% ChangeJuly 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.

OtherInterest 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 EndedSix Months Ended
 July 2,
2023
% ChangeJuly 3,
2022
July 2,
2023
% ChangeJuly 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 millionslightly for the three months ended OctoberJuly 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 decreasesthe higher U.S. earnings and also the application of $0.2 millionSection 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 EndedNine Months Ended
 October 2,
2022
% ChangeOctober 3,
2021
October 2,
2022
% ChangeOctober 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 forin the foreseeable future. As of OctoberJuly 2, 2022,2023, our accumulated deficit was $323.3$367.0 million.

Our Historically, we have funded our principal sources of liquidity arebusiness 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, weWe believe that suchour existing sources of liquidity will be sufficient to satisfymeet 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 EndedSix 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 activitiesNet cash provided by (used in) operating activities$22,908 $(29,381)
Net cash used in investing activitiesNet cash used in investing activities(33,150)(50,429)
Net cash used in financing activitiesNet cash used in financing activities(14,594)(5,535)Net cash used in financing activities(11,951)(10,384)
Net cash decreaseNet cash decrease$(94,955)$(20,129)Net cash decrease$(22,193)$(90,194)

Operating activities

Net cash used inprovided by operating activities increased by $2.1$52.3 million for the ninesix months ended OctoberJuly 2, 20222023 compared to the prior year period. This increase comprised an increaseperiod, 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 restockingan increase in anticipationour 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 objectivereduced 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 increaseddecreased by $63.6$17.3 million for the ninesix months ended OctoberJuly 2, 20222023 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 ninesix months ended OctoberJuly 2, 20222023 compared to the prior year period, primarily due to the increase in withholding tax withholding from restricted stock unit releases, and the decrease inpartially 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 ninesix months ended OctoberJuly 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 ninesix months ended OctoberJuly 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, havehas 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 werehave been no changes in our internal control over financial reporting that occurred during the three months ended October 2, 2022period 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 certainfuture 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, 20212022 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 asDuring the price of our stock, can be materially and adversely affected. Below aresix months ended July 2, 2023, there have been no significant changes to ourthe risk factors includedunder the heading “Risk Factors” described in Part I, Item 1A of our Annual Report Fromon 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 challengesquarter ended July 2, 2023, our directors and officers (as defined in China may continue to put negative pressure on global economic conditions. If conditionsRule 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, Australiatable below:
Type of Trading Arrangement
Name and PositionActionDate
Rule 10b5-1 (1)
Non-Rule 10b5-1 (2)
Total Shares to be SoldExpiration Date
Matthew McRae,
Chief Executive Officer
Adoption
May 31, 2023 (3)
X577,014September 15, 2023
_________________________
(1)Contract, instruction or written plan intended to satisfy the United States, or other key vertical or geographic markets deteriorate, suchaffirmative 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
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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 componentsAdopted 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.
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Item 6.Exhibits
Exhibit Index 
Incorporated by Reference
Exhibit NumberExhibit DescriptionFormDateNumberFiled Herewith
8-K8/7/20183.1
8-K8/7/20183.2
S-1/A7/23/20184.1
X
X
X
X
X
X
X
8-K8/26/202210.1
8-K8/26/202210.2
X
X
X
X
X
X
X
X
101.INSInline 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.SCHInline XBRL Taxonomy Extension Schema DocumentX
101.CALInline XBRL Taxonomy Extension Calculation Linkbase DocumentX
101.DEFInline XBRL Taxonomy Extension Definition Linkbase DocumentX
101.LABInline XBRL Taxonomy Extension Label Linkbase DocumentX
101.PREInline XBRL Taxonomy Extension Presentation Linkbase DocumentX
104104 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 NumberExhibit DescriptionFormDateNumberFiled Herewith
8-K8/7/20183.1
8-K8/7/20183.2
S-1/A7/23/20184.1
X
X
X
X
101.INSInline 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.SCHInline XBRL Taxonomy Extension Schema DocumentX
101.CALInline XBRL Taxonomy Extension Calculation Linkbase DocumentX
101.DEFInline XBRL Taxonomy Extension Definition Linkbase DocumentX
101.LABInline XBRL Taxonomy Extension Label Linkbase DocumentX
101.PREInline XBRL Taxonomy Extension Presentation Linkbase DocumentX
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)X
#This certification is deemed to accompany this Quarterly Report on Form 10-Q and will not be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that section. This certification will not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
ARLO TECHNOLOGIES, INC.
Registrant
/s/ MATTHEW MCRAE
Matthew McRae
Chief Executive Officer
(Principal Executive Officer)
/s/ KURTIS BINDER
Kurtis Binder
Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: November 8, 2022August 10, 2023
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