UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 2, 2023March 31, 2024
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☐ | 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)
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Delaware | 38-4061754 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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2200 Faraday Ave., | Suite #150 | |
Carlsbad, | California | 92008 |
(Address of principal executive offices) | (Zip Code) |
(408) 890-3900
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | | ARLO | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,"” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Acceleratedaccelerated filer | | ☒ | | ☐ | Accelerated filer | | ☒☐ |
Non-AcceleratedNon-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | Emerging growth company | | ☒☐ |
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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 91,841,90097,579,315 as of May 5, 2023.3, 2024.
Arlo Technologies, Inc.
Form 10-Q
For the Quarterly Period Ended April 2, 2023March 31, 2024
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 5. | | |
Item 6. | | |
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PART I: FINANCIAL INFORMATION
Item 1.Financial Statements
ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| | As of |
| April 2, 2023 | | December 31, 2022 |
| (In thousands, except share and per share data) |
| As of | | | As of |
| March 31, 2024 | | | March 31, 2024 | | December 31, 2023 |
| (In thousands, except share and per share data) | | | (In thousands, except share and per share data) |
ASSETS | ASSETS | |
Current assets: | Current assets: | |
Current assets: | |
Current assets: | |
Cash and cash equivalents | |
Cash and cash equivalents | |
Cash and cash equivalents | Cash and cash equivalents | $ | 66,970 | | | $ | 84,024 | |
Short-term investments | Short-term investments | 51,703 | | | 29,700 | |
Accounts receivable, net | Accounts receivable, net | 52,837 | | | 65,960 | |
Inventories | Inventories | 39,922 | | | 46,554 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 7,415 | | | 6,544 | |
Total current assets | Total current assets | 218,847 | | | 232,782 | |
Property and equipment, net | Property and equipment, net | 7,055 | | | 7,336 | |
Operating lease right-of-use assets, net | Operating lease right-of-use assets, net | 11,985 | | | 12,809 | |
Goodwill | Goodwill | 11,038 | | | 11,038 | |
Restricted cash | Restricted cash | 4,175 | | | 4,155 | |
Other non-current assets | Other non-current assets | 3,983 | | | 4,081 | |
Total assets | Total assets | $ | 257,083 | | | $ | 272,201 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | Current liabilities: | |
Current liabilities: | |
Current liabilities: | |
Accounts payable | |
Accounts payable | |
Accounts payable | Accounts payable | $ | 46,031 | | | $ | 52,132 | |
Deferred revenue | Deferred revenue | 15,175 | | | 11,291 | |
Accrued liabilities | Accrued liabilities | 88,216 | | | 98,855 | |
Total current liabilities | Total current liabilities | 149,422 | | | 162,278 | |
Non-current operating lease liabilities | Non-current operating lease liabilities | 18,168 | | | 19,279 | |
Other non-current liabilities | Other non-current liabilities | 3,242 | | | 2,949 | |
Total liabilities | Total liabilities | 170,832 | | | 184,506 | |
Commitments and contingencies (Note 8) | Commitments and contingencies (Note 8) | | | | Commitments and contingencies (Note 8) | | | |
Stockholders’ Equity: | Stockholders’ Equity: | |
Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding | Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding | — | | | — | |
Common stock: $0.001 par value; 500,000,000 shares authorized; shares issued and outstanding: 90,785,158 at April 2, 2023 and 88,887,139 at December 31, 2022 | 91 | | | 89 | |
Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding | |
Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding | |
Common stock: $0.001 par value; 500,000,000 shares authorized; shares issued and outstanding: 97,202,042 at March 31, 2024 and 95,380,281 at December 31, 2023 | |
Additional paid-in capital | Additional paid-in capital | 445,809 | | | 433,138 | |
Accumulated other comprehensive income (loss) | 21 | | | (107) | |
Accumulated other comprehensive income | |
Accumulated deficit | Accumulated deficit | (359,670) | | | (345,425) | |
Total stockholders’ equity | Total stockholders’ equity | 86,251 | | | 87,695 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 257,083 | | | $ | 272,201 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
| | | Three Months Ended | |
| | April 2, 2023 | | April 3, 2022 | |
| | (In thousands, except per share data) |
| March 31, 2024 | |
| March 31, 2024 | |
| March 31, 2024 | |
| (In thousands, except per share data) | |
| (In thousands, except per share data) | |
| (In thousands, except per share data) | |
Revenue: | Revenue: | | |
Products | Products | $ | 67,060 | | | $ | 94,825 | | |
Products | |
Products | |
Services | |
Services | |
Services | Services | 43,944 | | | 29,926 | | |
Total revenue | Total revenue | 111,004 | | | 124,751 | | |
Total revenue | |
Total revenue | |
Cost of revenue: | |
Cost of revenue: | |
Cost of revenue: | Cost of revenue: | | |
Products | Products | 64,041 | | | 80,777 | | |
Products | |
Products | |
Services | |
Services | |
Services | Services | 11,746 | | | 10,399 | | |
Total cost of revenue | Total cost of revenue | 75,787 | | | 91,176 | | |
Total cost of revenue | |
Total cost of revenue | |
Gross profit | |
Gross profit | |
Gross profit | Gross profit | 35,217 | | | 33,575 | | |
| Operating expenses: | Operating expenses: | | |
| Operating expenses: | |
| Operating expenses: | |
Research and development | |
Research and development | |
Research and development | Research and development | 17,750 | | | 16,379 | | |
Sales and marketing | Sales and marketing | 15,353 | | | 13,168 | | |
Sales and marketing | |
Sales and marketing | |
General and administrative | |
General and administrative | |
General and administrative | General and administrative | 15,622 | | | 12,621 | | |
Others | Others | 632 | | | 79 | | |
Others | |
Others | |
Total operating expenses | |
Total operating expenses | |
Total operating expenses | Total operating expenses | 49,357 | | | 42,247 | | |
| Loss from operations | Loss from operations | (14,140) | | | (8,672) | | |
Interest income (expense), net | 726 | | | (5) | | |
Other income (expense), net | (39) | | | 411 | | |
| Loss from operations | |
| Loss from operations | |
Interest income, net | |
Interest income, net | |
Interest income, net | |
Other loss, net | |
Other loss, net | |
Other loss, net | |
Loss before income taxes | |
Loss before income taxes | |
Loss before income taxes | Loss before income taxes | (13,453) | | | (8,266) | | |
Provision for income taxes | Provision for income taxes | 792 | | | 213 | | |
Provision for income taxes | |
Provision for income taxes | |
Net loss | |
Net loss | |
Net loss | Net loss | $ | (14,245) | | | $ | (8,479) | | |
| Net loss per share: | Net loss per share: | | |
Basic | $ | (0.16) | | | $ | (0.10) | | |
Diluted | $ | (0.16) | | | $ | (0.10) | | |
| Net loss per share: | |
| Net loss per share: | |
Basic and diluted | |
Basic and diluted | |
Basic and diluted | |
| Weighted average shares used to compute net loss per share: | Weighted average shares used to compute net loss per share: | | |
Basic | 89,653 | | | 85,222 | | |
Diluted | 89,653 | | | 85,222 | | |
| Weighted average shares used to compute net loss per share: | |
| Weighted average shares used to compute net loss per share: | |
Basic and diluted | |
Basic and diluted | |
Basic and diluted | |
| Comprehensive loss: | |
| Comprehensive loss: | |
| | Comprehensive loss: | Comprehensive loss: | | |
Net loss | Net loss | $ | (14,245) | | | $ | (8,479) | | |
Net loss | |
Net loss | |
Other comprehensive income (loss), net of tax | |
Other comprehensive income (loss), net of tax | |
Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | 128 | | | (46) | | |
Total comprehensive loss | Total comprehensive loss | $ | (14,117) | | | $ | (8,525) | | |
Total comprehensive loss | |
Total comprehensive loss | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | Three Months Ended | |
| | April 2, 2023 | | April 3, 2022 | |
| | (In thousands) |
| March 31, 2024 | |
| March 31, 2024 | |
| March 31, 2024 | |
| (In thousands) | |
| (In thousands) | |
| (In thousands) | |
Total stockholders’ equity, beginning balances | Total stockholders’ equity, beginning balances | $ | 87,695 | | | $ | 112,652 | | |
| Common stock: | Common stock: | | |
| Common stock: | |
| Common stock: | |
Beginning balances | Beginning balances | $ | 89 | | | $ | 84 | | |
Beginning balances | |
Beginning balances | |
Issuance of common stock under stock-based compensation plans | |
Issuance of common stock under stock-based compensation plans | |
Issuance of common stock under stock-based compensation plans | Issuance of common stock under stock-based compensation plans | 3 | | | 3 | | |
| Restricted stock unit withholdings | Restricted stock unit withholdings | (1) | | | (1) | | |
| Restricted stock unit withholdings | |
| Restricted stock unit withholdings | |
Ending balances | |
Ending balances | |
Ending balances | Ending balances | $ | 91 | | | $ | 86 | | |
| Additional paid-in capital: | Additional paid-in capital: | | |
| Additional paid-in capital: | |
| Additional paid-in capital: | |
Beginning balances | |
Beginning balances | |
Beginning balances | Beginning balances | $ | 433,138 | | | $ | 401,367 | | |
Stock-based compensation expense | Stock-based compensation expense | 10,270 | | | 8,183 | | |
Stock-based compensation expense | |
Stock-based compensation expense | |
Settlement of liability classified restricted stock units | Settlement of liability classified restricted stock units | 6,739 | | | 4,966 | | |
Settlement of liability classified restricted stock units | |
Settlement of liability classified restricted stock units | |
Issuance of common stock under stock-based compensation plans | |
Issuance of common stock under stock-based compensation plans | |
Issuance of common stock under stock-based compensation plans | Issuance of common stock under stock-based compensation plans | 355 | | | 1,385 | | |
| Restricted stock unit withholdings | Restricted stock unit withholdings | (4,693) | | | (6,659) | | |
| Restricted stock unit withholdings | |
| Restricted stock unit withholdings | |
Ending balances | |
Ending balances | |
Ending balances | Ending balances | $ | 445,809 | | | $ | 409,242 | | |
| Accumulated deficit: | Accumulated deficit: | | |
| Accumulated deficit: | |
| Accumulated deficit: | |
Beginning balances | |
Beginning balances | |
Beginning balances | Beginning balances | $ | (345,425) | | | $ | (288,799) | | |
Net loss | Net loss | (14,245) | | | (8,479) | | |
Net loss | |
Net loss | |
Ending balances | |
Ending balances | |
Ending balances | Ending balances | $ | (359,670) | | | $ | (297,278) | | |
| Accumulated other comprehensive income (loss): | | |
Accumulated other comprehensive income: | |
| Accumulated other comprehensive income: | |
| Accumulated other comprehensive income: | |
Beginning balances | |
Beginning balances | |
Beginning balances | Beginning balances | $ | (107) | | | $ | — | | |
Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | 128 | | | (46) | | |
Other comprehensive income (loss), net of tax | |
Other comprehensive income (loss), net of tax | |
Ending balances | |
Ending balances | |
Ending balances | Ending balances | $ | 21 | | | $ | (46) | | |
| Total stockholders’ equity, ending balances | Total stockholders’ equity, ending balances | $ | 86,251 | | | $ | 112,004 | | |
| Total stockholders’ equity, ending balances | |
| Total stockholders’ equity, ending balances | |
| Common stock shares: | |
| Common stock shares: | |
| Common stock shares: | Common stock shares: | | |
Beginning balances | Beginning balances | 88,887 | | | 84,453 | | |
Beginning balances | |
Beginning balances | |
Issuance of common stock under stock-based compensation plans | |
Issuance of common stock under stock-based compensation plans | |
Issuance of common stock under stock-based compensation plans | Issuance of common stock under stock-based compensation plans | 3,165 | | | 2,127 | | |
| Restricted stock unit withholdings | Restricted stock unit withholdings | (1,267) | | | (745) | | |
| Restricted stock unit withholdings | |
| Restricted stock unit withholdings | |
Ending balances | Ending balances | 90,785 | | | 85,835 | | |
Ending balances | |
Ending balances | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Three Months Ended | | Three Months Ended |
| April 2, 2023 | | April 3, 2022 |
| (In thousands) |
| March 31, 2024 | | | March 31, 2024 | | April 2, 2023 |
| (In thousands) | | | (In thousands) |
Cash flows from operating activities: | Cash flows from operating activities: | |
Net loss | Net loss | $ | (14,245) | | | $ | (8,479) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |
Net loss | |
Net loss | |
Adjustments to reconcile net loss to net cash provided by operating activities: | |
Stock-based compensation expense | |
Stock-based compensation expense | |
Stock-based compensation expense | Stock-based compensation expense | 14,591 | | | 9,589 | |
Depreciation and amortization | Depreciation and amortization | 1,149 | | | 1,302 | |
Allowance for credit losses and inventory reserves | 198 | | | (135) | |
Allowance for credit losses and non-cash changes to reserves | |
Deferred income taxes | Deferred income taxes | 127 | | | (9) | |
Others | (124) | | | 28 | |
Other | |
Changes in assets and liabilities: | Changes in assets and liabilities: | |
Accounts receivable, net | 13,216 | | | 1,508 | |
Accounts receivable | |
Accounts receivable | |
Accounts receivable | |
Inventories | Inventories | 6,341 | | | 1,490 | |
Prepaid expenses and other assets | Prepaid expenses and other assets | (900) | | | 556 | |
Accounts payable | Accounts payable | (6,093) | | | (15,676) | |
Deferred revenue | Deferred revenue | 3,785 | | | (13,411) | |
Accrued and other liabilities | Accrued and other liabilities | (7,716) | | | (1,320) | |
Net cash provided by (used in) operating activities | 10,329 | | | (24,557) | |
Net cash provided by operating activities | |
Cash flows from investing activities: | Cash flows from investing activities: | |
Purchases of property and equipment | |
Purchases of property and equipment | |
Purchases of property and equipment | Purchases of property and equipment | (923) | | | (298) | |
Purchases of short-term investments | Purchases of short-term investments | (36,755) | | | (44,640) | |
Proceeds from maturities of short-term investments | Proceeds from maturities of short-term investments | 15,006 | | | — | |
Net cash used in investing activities | Net cash used in investing activities | (22,672) | | | (44,938) | |
Cash flows from financing activities: | Cash flows from financing activities: | |
Proceeds related to employee benefit plans | Proceeds related to employee benefit plans | 3 | | | 1,388 | |
Proceeds related to employee benefit plans | |
Proceeds related to employee benefit plans | |
Restricted stock unit withholdings | Restricted stock unit withholdings | (4,694) | | | (6,660) | |
Net cash used in financing activities | Net cash used in financing activities | (4,691) | | | (5,272) | |
Net decrease in cash, cash equivalents, and restricted cash | (17,034) | | | (74,767) | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | |
Cash, cash equivalents, and restricted cash, at beginning of period | Cash, cash equivalents, and restricted cash, at beginning of period | 88,179 | | | 179,856 | |
Cash, cash equivalents, and restricted cash, at end of period | Cash, cash equivalents, and restricted cash, at end of period | $ | 71,145 | | | $ | 105,089 | |
Reconciliation of cash, cash equivalents, and restricted cash to Unaudited Condensed Consolidated Balance Sheets | Reconciliation of cash, cash equivalents, and restricted cash to Unaudited Condensed Consolidated Balance Sheets | | | |
Cash and cash equivalents | |
Cash and cash equivalents | |
Cash and cash equivalents | Cash and cash equivalents | $ | 66,970 | | | $ | 100,975 | |
Restricted cash | Restricted cash | 4,175 | | | 4,114 | |
Total cash, cash equivalents, and restricted cash | Total cash, cash equivalents, and restricted cash | $ | 71,145 | | | $ | 105,089 | |
Supplemental cash flow information: | Supplemental cash flow information: | | | |
Non-cash investing activities: | Non-cash investing activities: | |
Non-cash investing activities: | |
Non-cash investing activities: | |
Purchases of property and equipment included in accounts payable and accrued liabilities | Purchases of property and equipment included in accounts payable and accrued liabilities | $ | 894 | | | $ | 310 | |
Purchases of property and equipment included in accounts payable and accrued liabilities | |
Purchases of property and equipment included in accounts payable and accrued liabilities | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Basis of Presentation
Description of Business
Arlo Technologies, Inc. (“Arlo”we” or “Arlo”) combines an intelligentis transforming the ways in which people can protect everything that matters to them with advanced home, business, and personal security services that combine a globally scaled cloud infrastructureplatform, advanced monitoring and mobile app withanalytics capabilities, and award-winning app-controlled devices to create a variety of smart connected devices that transform the way people experience the connected lifestyle. Ourpersonalized security ecosystem. Arlo’s deep expertise in product design,cloud services, cutting-edge AI and computer vision analytics, wireless connectivity cloud infrastructure and cutting-edge AI capabilities focuses on delivering aintuitive user experience design delivers seamless, smart home experiencesecurity for Arlo users that is easy to setup and interactengage with every day. Our highly secure, cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection.connection – all rooted in a commitment to safeguard privacy for our users and their personal data.
We conduct business across three geographic regions—(i) the Americas; (ii) Europe, Middle-East and Africa (“EMEA”); and (iii) Asia Pacific (“APAC”)—and primarily generate revenue by selling devices through retail channels, wholesale distribution, wireless carrier channels, security solution providers, and Arlo’s direct to consumer store and paid subscription services.
Our corporate headquarters is located in Carlsbad, California, with other satellite offices across North America and various other global locations.
Basis of Presentation
We prepare our unaudited condensed consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated financial statements include the accounts of Arlo and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.2023, which was filed with the SEC on February 29, 2024. 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 periodsPeriods
Our fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. We report the results on a fiscal quarter basis rather than on a calendar quarter basis. Under the fiscal quarter basis, each of the first three fiscal quarters ends on the Sunday closest to the calendar quarter end, with the fourth quarter ending on December 31.
Reclassification
Certain prior periods amounts have been reclassified to conform to the current period’s presentation. None of these reclassifications had a material impact to the unaudited condensed consolidated financial statements.
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Use of estimatesEstimates
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 three months ended April 2, 2023March 31, 2024 and are not necessarily indicative of the results that may be expected for the year ending December 31, 20232024 or any future period.
Note 2. Significant Accounting Policies and Recent Accounting Pronouncements
Our significant accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.2023. There have been no significant changes to such policies during the three months ended April 2, 2023.
Emerging Growth Company Status
As an emerging growth company (“EGC”), we may, under the Jumpstart Our Business Startups Act, delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless we otherwise irrevocably elect not to avail ourselves of this exemption. We did not make such an irrevocable election and have not delayed the adoption of any applicable accounting standards. We will no longer qualify as an EGC on DecemberMarch 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 2002.2024.
Accounting Pronouncements Recently Adopted
There were no accounting pronouncements adopted during the three months ended April 2, 2023.March 31, 2024.
Accounting Pronouncements Not Yet Effective
We have considered all recent accounting pronouncementsIn October 2023, the Financial Accounting Standards Board (“FASB”) issued butAccounting Standards Update (“ASU”) No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative,which modifies the disclosure or presentation requirements of a variety of Topics in the Codification. Among the various codification amendments, Topic 470 Debt is applicable to Arlo which requires the disclosure of amounts, terms and weighted-average interest rates of unused lines of credit. The effective date is either the date on which the SEC’s removal of the related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, or on June 30, 2027, if the SEC has not yet effective, and doremoved the requirement by that date, with early adoption prohibited. The adoption of this new standard will not expect any to have a material effectimpact on our financial statements and related disclosures.
Note 3. RevenueIn November 2023, the FASB issued ASU No. 2023-07, Segment Reporting: Improvements to Reportable Segment Disclosures, which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. This guidance is effective for annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the impact that this guidance may have on our financial statements and related disclosures.
Performance Obligations
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes:
The following table includes estimated revenue expectedImprovements to be recognizedIncome Tax Disclosures,which requires on an annual basis to (1) disclose specific categories in the futurerate reconciliation, (2) provide additional information for reconciling items that meet a quantitative threshold, and (3) income taxes paid disaggregated by jurisdiction. This guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact that this guidance may have on our financial statements and related to performance obligations that are unsatisfied and partially unsatisfied as of April 2, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 1 year | | 2 years | | Greater than 2 years | | Total |
| | (In thousands) |
Performance obligations | | $ | 18,764 | | | $ | 110 | | | $ | 5 | | | $ | 18,879 | |
disclosures.
The performance obligation classified as greater than one year pertains to revenue deferral from prepaid services.
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 3. Revenue
Performance Obligations
The total estimated service revenue expected to be recognized in the future related to performance obligations that are unsatisfied and partially unsatisfied was $23.5 million as of March 31, 2024 and $18.8 million as of December 31, 2023, substantially related to a performance obligation classified as less than one year.
For the three months ended March 31, 2024 and April 2, 2023, and April 3, 2022, $41.2$52.7 million and $25.8$41.2 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $38.4$49.2 million and $27.5$38.4 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. Approximately $8.4$12.1 million and $9.0$8.4 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 April 2, 2023, $378.9 million ofMarch 31, 2024, the entire purchase commitment has been fulfilledfulfilled. 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 March 31, 2024, we had a backlog of $25.9 million.$44.5 million which represents performance obligations that will be recognized as revenue once fulfilled, which is expected to occur over the next six months.
On April 25, 2024, Verisure notified us that it is exercising its right under the Supply Agreement to extend the term for another five years (through November 2029) under the same terms but without minimum purchase obligations.
Disaggregation of Revenue
We disaggregate our revenue into three geographic regions: the Americas, EMEA, and APAC, where we conduct our business. The following table presents revenue disaggregated by geography.
| | | | | | | | | | | |
| Three Months Ended |
| April 2, 2023 | | April 3, 2022 |
| (In thousands) |
Americas | $ | 56,632 | | | $ | 68,466 | |
EMEA | 48,472 | | | 49,975 | |
APAC | 5,900 | | | 6,310 | |
Total | $ | 111,004 | | | $ | 124,751 | |
geographic region.
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2024 | | April 2, 2023 | | | | |
| (In thousands) |
Americas | $ | 57,169 | | | $ | 56,632 | | | | | |
EMEA | 61,380 | | | 48,472 | | | | | |
APAC | 5,651 | | | 5,900 | | | | | |
Total | $ | 124,200 | | | $ | 111,004 | | | | | |
As of March 31, 2024 and December 31, 2023, one customer accounted for 69.9%, and three customers accounted for 37.1%, 15.2%, and 10.2% of the total accounts receivable, net, respectively. No other customers accounted for 10% or greater of the total accounts receivable, net. For the three months ended March 31, 2024 and April 2, 2023, one customer accounted for 49.4% and 43.7%, respectively. No other customers accounted for 10% or greater of the total revenue.
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 4. Balance Sheet Components
Short-term investmentsShort-Term Investments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of April 2, 2023 | | As of December 31, 2022 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
| (In thousands) |
U.S. Treasuries | $ | 51,730 | | | $ | — | | | $ | (27) | | | $ | 51,703 | | | $ | 29,849 | | | $ | — | | | $ | (149) | | | $ | 29,700 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2024 | | As of December 31, 2023 |
| Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
| (In thousands) |
U.S. Treasuries | $ | 80,529 | | | $ | 280 | | | $ | — | | | $ | 80,809 | | | $ | 79,654 | | | $ | 320 | | | $ | — | | | $ | 79,974 | |
Accounts receivable, netReceivable, Net
| | As of |
| April 2, 2023 | | December 31, 2022 |
| (In thousands) |
| As of | | | As of |
| March 31, 2024 | | | March 31, 2024 | | December 31, 2023 |
| (In thousands) | | | (In thousands) |
Gross accounts receivable | Gross accounts receivable | $ | 53,166 | | | $ | 66,383 | |
Allowance for credit losses | Allowance for credit losses | (329) | | | (423) | |
Total | Total | $ | 52,837 | | | $ | 65,960 | |
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.
Table of Contents | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2024 | | April 2, 2023 | | | | |
| (In thousands) |
Balance at the beginning of the period | $ | 333 | | | $ | 423 | | | | | |
Provision for (release of) expected credit losses | (115) | | | (94) | | | | | |
Balance at the end of the period | $ | 218 | | | $ | 329 | | | | | |
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| April 2, 2023 | | April 3, 2022 | | | | |
| (In thousands) |
Balance at the beginning of the period | $ | 423 | | | $ | 337 | | | | | |
Provision for (release of) expected credit losses | (94) | | | 2 | | | | | |
Balance at the end of the period | $ | 329 | | | $ | 339 | | | | | |
Property and equipment, net
The components of property and equipment are as follows:
| | | | | | | | | | | |
| As of |
| April 2, 2023 | | December 31, 2022 |
| (In thousands) |
Machinery and equipment | $ | 13,526 | | | $ | 12,696 | |
Software | 15,635 | | | 15,606 | |
Computer equipment | 3,938 | | | 3,992 | |
Leasehold improvements | 4,661 | | | 4,657 | |
Furniture and fixtures | 2,553 | | | 2,554 | |
Total property and equipment, gross | 40,313 | | | 39,505 | |
Accumulated depreciation | (33,258) | | | (32,169) | |
Total property and equipment, net (1) | $ | 7,055 | | | $ | 7,336 | |
_________________________
(1) $1.5 million and $1.7 million property and equipment, net, was included in the sublease arrangement for the San Jose office building as of April 2, 2023 and December 31, 2022, respectively.
Depreciation expense pertaining to property and equipment was $1.1 million and $1.3 million for the three months ended April 2, 2023 and April 3, 2022, respectively.
Goodwill
We have determined that no event occurred or circumstances changed during the three months ended April 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 months ended April 2, 2023 and the goodwill balance was $11.0 million as of April 2, 2023 and December 31, 2022.
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment, Net
Other non-current assetsThe components of property and equipment are as follows:
| | | | | | | | | | | |
| As of |
| April 2, 2023 | | December 31, 2022 |
| (In thousands) |
Deferred income taxes | $ | 1,256 | | | $ | 1,384 | |
Sublease initial direct cost and adjustments | 928 | | | 777 | |
Other | 1,799 | | | 1,920 | |
Total | $ | 3,983 | | | $ | 4,081 | |
| | | | | | | | | | | |
| As of |
| March 31, 2024 | | December 31, 2023 |
| (In thousands) |
Machinery and equipment | $ | 14,531 | | | $ | 14,148 | |
Software | 15,676 | | | 15,639 | |
Computer equipment | 855 | | | 1,438 | |
Leasehold improvements | 4,572 | | | 4,661 | |
Furniture and fixtures | 2,544 | | | 2,544 | |
Total property and equipment, gross | 38,178 | | | 38,430 | |
Accumulated depreciation | (33,867) | | | (33,669) | |
Total property and equipment, net (1) | $ | 4,311 | | | $ | 4,761 | |
_________________________
(1) $0.8 million and $1.0 million property and equipment, net, was included in the sublease arrangement for the San Jose office building as of March 31, 2024 and December 31, 2023, respectively.
Depreciation expense pertaining to property and equipment was $0.9 million and $1.1 million for the three months ended March 31, 2024 and April 2, 2023, respectively.
Goodwill
We have determined that no event occurred or circumstances changed during the three months ended March 31, 2024 that would more likely than not reduce the fair value of goodwill below the carrying amount. No goodwill impairment was recognized in the three months ended March 31, 2024 and April 2, 2023.
Accrued liabilitiesLiabilities
| | | | | | | | | | | |
| As of |
| April 2, 2023 | | December 31, 2022 |
| (In thousands) |
Sales incentives | $ | 33,943 | | | $ | 36,271 | |
Sales returns | 15,000 | | | 18,656 | |
Compensation | 15,134 | | | 15,556 | |
Cloud and other costs | 7,196 | | | 11,154 | |
Operating lease liabilities | 3,880 | | | 4,190 | |
Professional services | 3,148 | | | 3,703 | |
Income taxes payable | 2,034 | | | 961 | |
Warranty obligations | 1,119 | | | 1,174 | |
Freight cost | 989 | | | 1,050 | |
Service cost | 907 | | | 806 | |
Restructuring charges | 749 | | | 1,265 | |
Other | 4,117 | | | 4,069 | |
Total | $ | 88,216 | | | $ | 98,855 | |
Other non-current liabilities
| | | | | | | | | | | |
| As of |
| April 2, 2023 | | December 31, 2022 |
| (In thousands) |
Non-current service cost | $ | 1,196 | | | $ | 1,259 | |
Non-current compensation | 994 | | | 616 | |
Non-current deferred revenue | 114 | | | 212 | |
Non-current income taxes payable | 77 | | | 77 | |
Other | 861 | | | 785 | |
Total | $ | 3,242 | | | $ | 2,949 | |
| | | | | | | | | | | |
| As of |
| March 31, 2024 | | December 31, 2023 |
| (In thousands) |
Sales incentives | $ | 22,941 | | | $ | 28,187 | |
Sales returns | 11,558 | | | 17,058 | |
Compensation | 15,240 | | | 13,278 | |
Cloud and other costs | 9,085 | | | 10,985 | |
Other | 20,276 | | | 18,701 | |
Total | $ | 79,100 | | | $ | 88,209 | |
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5. Fair Value Measurements
Fair Value Measurements - Recurring Basis
The following table summarizes assets measured at fair value on a recurring basis: | | As of |
| April 2, 2023 | | December 31, 2022 |
| (In thousands) |
| As of | | | As of |
| March 31, 2024 | | | March 31, 2024 | | December 31, 2023 |
| (In thousands) | | | (In thousands) |
Cash equivalents: money-market funds (<90 days) | Cash equivalents: money-market funds (<90 days) | $ | 1,450 | | | $ | 12,614 | |
Cash equivalents: U.S. Treasuries (<90 days) | Cash equivalents: U.S. Treasuries (<90 days) | 10,174 | | | 20,274 | |
Available-for-sale securities: U.S. Treasuries (1) | Available-for-sale securities: U.S. Treasuries (1) | 51,703 | | | 29,700 | |
Total | Total | $ | 63,327 | | | $ | 62,588 | |
_________________________
(1)Included in short-term investments on our unaudited condensed consolidated balance sheets.
Our investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.
As of April 2, 2023March 31, 2024 and December 31, 2022,2023, 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
We measure the fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For the three months ended April 2, 2023 and April 3, 2022, we had no assets or liabilities measured on a nonrecurring basis.
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. We expectAs of March 31, 2024, we have substantially incurred all costs pertaining to restructuring activities, with related cash outflows extending until the completion date to be in the thirdfourth quarter of 2023 with the total estimated restructuring charges of $2.1 million.2024.
The restructuring liabilities are included in accrued liabilities in our unaudited condensed consolidated balance sheets. The restructuring charges are included in “Others” in the unaudited condensed consolidated statements of comprehensive loss. Restructuring activities for the three months ended April 2, 2023 areactivity is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Severance Expense | | Office Exit Expense | | Other Exit Expense |
| (In thousands) |
Balance at the beginning of the period | $ | 1,265 | | | $ | 219 | | | $ | 991 | | | $ | 55 | |
Restructuring charges | 276 | | | 248 | | | 28 | | | — | |
Cash payments | (792) | | | (440) | | | (333) | | | (19) | |
Non-cash and other adjustments | — | | | — | | | — | | | — | |
Balance at the end of the period | $ | 749 | | | $ | 27 | | | $ | 686 | | | $ | 36 | |
Total costs incurred inception to date | $ | 2,081 | | | $ | 1,046 | | | $ | 956 | | | $ | 79 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Severance Expense | | Office Exit Expense | | Other Exit Expense |
| (In thousands) |
Balance as of December 31, 2021 | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Restructuring charges | 1,805 | | | 798 | | | 928 | | | 79 | |
Cash payments | (588) | | | (579) | | | — | | | (9) | |
Non-cash and other adjustments | 48 | | | — | | | 63 | | | (15) | |
Balance as of December 31, 2022 | $ | 1,265 | | | $ | 219 | | | $ | 991 | | | $ | 55 | |
Restructuring charges | 692 | | | 564 | | | 117 | | | 11 | |
Cash payments | (1,479) | | | (694) | | | (745) | | | (40) | |
Non-cash and other adjustments | (26) | | | — | | | — | | | (26) | |
Balance as of December 31, 2023 | $ | 452 | | | $ | 89 | | | $ | 363 | | | $ | — | |
Restructuring charges | 484 | | | 484 | | | — | | | — | |
Cash payments | (640) | | | (525) | | | (115) | | | — | |
Non-cash and other adjustments | — | | | — | | | — | | | — | |
Balance as of March 31, 2024 | $ | 296 | | | $ | 48 | | | $ | 248 | | | $ | — | |
Total costs incurred inception to date | $ | 3,003 | | | $ | 1,846 | | | $ | 1,108 | | | $ | 49 | |
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 7. Revolving Credit Facility
On October 27, 2021, we entered into a Loan and Security Agreement (the “Credit Agreement”) with Bank of America, N.A., a national banking association, as lender (the “Lender”).
The Credit Agreement provides for a three-year revolving credit facility (the “Credit Facility”) that matures on October 27, 2024. Borrowings under the Credit Facility are limited to the lesser of (x) $40.0 million, and (y) an amount equal to the borrowing base. The borrowing base will be the sum of (i) 90% of investment grade eligible receivables and (ii) 85% of non-investment grade eligible accounts, less applicable reserves established by the Lender. The Credit Agreement also includes a $5.0 million sublimit for the issuance by the Lender of letters of credit. In addition, the Credit Agreement includes an uncommitted accordion feature that allows us to request, from time to time, that the Lender increase the aggregate revolving loan commitments by up to an additional $25.0 million in the aggregate, subject to the satisfaction of certain conditions, including obtaining the Lender’s agreement to participate in each increase. The proceeds of the borrowings under the Credit Facility may be used for working capital and general corporate purposes. Based on certain terms and conditions including eligible accounts receivable as of April 2, 2023,March 31, 2024, we had unused borrowing capacity of $8.4$4.2 million.
Our obligations under the Credit Agreement are secured by substantially all of our domestic working capital assets, including accounts receivable, cash and cash equivalents, inventory, and other assets to the extent related to such working capital assets.
At our option, borrowings under the Credit Agreement will bear interest at a floating rate equal to: (i) the Bloomberg Short-Term Bank Yield Index rate plus the applicable rate of 2.0% to 2.5% determined based on our average daily availability for the prior fiscal quarter, or (ii) the base rate plus the applicable rate of 1.0% to 1.5% based on our average daily availability for the prior fiscal quarter. Among other fees, we are required to pay a monthly unused fee of 0.2% per annum on the amount by which the Lender’s aggregate commitment under the Credit Facility exceeds the average daily revolver usage during such month.
The Credit Agreement contains events of default, representations and warranties, and affirmative and negative covenants customary for credit facilities of this type. The Credit Agreement also contains financial covenants that require us to, (a) until we achieve a fixed charge coverage ratio of at least 1.00 to 1.00 for two consecutive quarters, maintain minimum liquidity of not less than $20.0 million at all times and (b) thereafter, if the Financial Covenant Trigger Period (as defined in the Credit Agreement) is in effect, maintain a fixed charge coverage ratio, tested quarterly on a trailing twelve month basis, of at least 1.00 to 1.00 at any time. As of April 2, 2023,March 31, 2024, we were in compliance with all the covenants of the Credit Agreement.
If an event of default under the Credit Agreement occurs, then the Lender may cease making advances under the Credit Agreement and declare any outstanding obligations under the Credit Agreement to be immediately due and payable. In addition, if we file a bankruptcy petition, a bankruptcy petition is filed against us and is not dismissed or stayed within thirty days or we make a general assignment for the benefit of creditors, then any outstanding obligations under the Credit Agreement will automatically and without notice or demand become immediately due and payable.
No amounts had been drawn under the Credit Facility as of April 2, 2023.March 31, 2024.
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8. Commitments and Contingencies
Operating Leases
Our operating leases compriselease obligations mostly include offices, equipment, data centers and distribution centers, with various expiration dates through June 2029. Certain lease agreements include options to renew or terminate the lease, which are not reasonably certain to be exercised and therefore are not factored into our determination of lease payments. The terms of certain leases provide for rental payments on a graduated scale. Gross lease expense was $1.5 million and $1.8 million for each of the three months ended March 31, 2024 and April 2, 2023 and April 3, 2022, respectively.2023. We recorded sublease income as reduction of lease expense, in the amount of $0.5 million for each of the three months ended March 31, 2024 and April 2, 2023 and April 3, 2022.2023.
Supplemental cash flow information related to operating leases wasis as follows:
| | Three Months Ended | | | Three Months Ended |
| March 31, 2024 | | | March 31, 2024 | | April 2, 2023 |
| (In thousands) | | | (In thousands) |
Cash paid for amounts included in the measurement of lease liabilities | |
Operating cash flows from operating leases | |
Operating cash flows from operating leases | |
Operating cash flows from operating leases | |
| | | Three Months Ended |
| April 2, 2023 | | April 3, 2022 |
| (in thousands) |
Cash paid for amounts included in the measurement of lease liabilities | |
Operating cash flows from operating leases | $ | 1,889 | | | $ | 2,036 | |
Right-of-use assets obtained in exchange for lease liabilities | |
Operating leases | $ | — | | | $ | 18 | |
Weighted average remaining lease term and weighted average discount rate related to operating leases wereare as follows:
| | As of |
| April 2, 2023 | | December 31, 2022 |
| As of | | | As of |
| March 31, 2024 | | | March 31, 2024 | | December 31, 2023 |
Weighted average remaining lease term | Weighted average remaining lease term | 4.9 years | | 5.1 years | Weighted average remaining lease term | 4.8 years | | 5.0 years |
Weighted average discount rate | Weighted average discount rate | 5.78 | % | | 5.69 | % | Weighted average discount rate | 5.74 | % | | 5.74 | % |
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The future minimum undiscounted lease payments under operating leases and future non-cancelable rent payments from our subtenants for each of the next five years and thereafter as of April 2, 2023 wereMarch 31, 2024 are as follows:
| | | | | | | | | | | | | | | | | |
| Operating Lease Payments | | Sublease Payments | | Net |
| (In thousands) |
2023 (Remaining nine months) | $ | 3,657 | | | $ | (1,551) | | | $ | 2,106 | |
2024 | 5,251 | | | (1,947) | | | 3,304 | |
2025 | 3,897 | | | (2,006) | | | 1,891 | |
2026 | 4,011 | | | (2,066) | | | 1,945 | |
2027 | 3,986 | | | (2,322) | | | 1,664 | |
Thereafter | 5,130 | | | (3,620) | | | 1,510 | |
Total future lease payments | 25,932 | | | $ | (13,512) | | | $ | 12,420 | |
Less: interest | (3,884) | | | | | |
Present value of future minimum lease payments | $ | 22,048 | | | | | |
| | | | | |
Accrued liabilities | $ | 3,880 | | | | | |
Non-current operating lease liabilities | 18,168 | | | | | |
Total lease liabilities | $ | 22,048 | | | | | |
| | | | | | | | | | | | | | | | | |
| Operating Lease Payments | | Sublease Payments | | Net |
| (In thousands) |
2024 (Remaining nine months) | $ | 3,923 | | | $ | (1,598) | | | $ | 2,325 | |
2025 | 4,488 | | | (2,006) | | | 2,482 | |
2026 | 4,631 | | | (2,066) | | | 2,565 | |
2027 | 4,594 | | | (2,322) | | | 2,272 | |
2028 | 3,659 | | | (2,392) | | | 1,267 | |
Thereafter | 1,750 | | | (1,228) | | | 522 | |
Total future lease payments | $ | 23,045 | | | $ | (11,612) | | | $ | 11,433 | |
Less: imputed interest | (2,909) | | | | | |
Present value of future minimum lease payments | $ | 20,136 | | | | | |
| | | | | |
Accrued liabilities | $ | 4,003 | | | | | |
Non-current operating lease liabilities | 16,133 | | | | | |
Total lease liabilities | $ | 20,136 | | | | | |
Letters of Credit
In connection with the lease agreement for our office space located in San Jose, California, we executed a letter of credit with the landlord as the beneficiary. As of April 2, 2023,March 31, 2024, we had approximately $3.6 million of unused letters of credit outstanding, of which $3.1 million pertains to the lease arrangement in San Jose, California.
Purchase Obligations
We have entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. Orders are non-cancelable within 30 days prior to the expected shipment date. As of April 2, 2023,March 31, 2024, we had approximately $36.6$40.0 million in non-cancelable purchase commitments with suppliers.suppliers which is expected to be paid over the next twelve months.
As of April 2, 2023,March 31, 2024, an additional $24.2$29.4 million of purchase orders beyond contractual termination periods have been issued to supply chain partners in anticipation of demand requirements. Consequently, we may incur expenses for the materials and components, such as chipsets already purchased by the supplier to fulfill our orders if the purchase order is cancelled. Expenses incurred have historically not been significantmaterial relative to the original order value. As of April 2, 2023, the loss liability from committed purchases was not material.
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Warranty Obligations
Changes in warranty obligations, which are included in accrued liabilities in the unaudited condensed consolidated balance sheets, wereare as follows:
| | | Three Months Ended | |
| | April 2, 2023 | | April 3, 2022 | |
| | (In thousands) |
| |
| |
| |
| (In thousands) | |
| (In thousands) | |
| (In thousands) | |
Balance at the beginning of the period | Balance at the beginning of the period | $ | 1,174 | | | $ | 1,330 | | |
Provision for warranty obligations | Provision for warranty obligations | 15 | | | 79 | | |
Provision for warranty obligations | |
Provision for warranty obligations | |
Settlements | |
Settlements | |
Settlements | Settlements | (70) | | | (79) | | |
Balance at the end of the period | Balance at the end of the period | $ | 1,119 | | | $ | 1,330 | | |
Balance at the end of the period | |
Balance at the end of the period | |
Litigation and Other Legal Matters
We are involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below.actions. In all cases, at each reporting period, we evaluate whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. In such cases, we accrue for the amount or, if a range, we accrue the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within general and administrative expenses. We monitor developments in these legal matters that could affect the estimate we had previously accrued. In relation to such matters, we currently believe that there are no existing claims or proceedings that are likely to have a material adverse effect on our financial position within the next 12 months, or the outcome of these matters is currently not determinable. There are many uncertainties associated with any litigation, and these actions or other third-party claims against us may cause us to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any intellectual property litigation may require us to make royalty payments, which could have an adverse effect in future periods. If any of those events were to occur, our business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from our estimates, which could result in the need to adjust the liability and record additional expenses.
Securities Class Action Lawsuits and Derivative Suit
On December 11, 2018, purported stockholders of Arlo filed six putative securities class action complaints in the Superior Court of California, County of Santa Clara (the “State Action”), and one complaint in the U.S. District Court for the Northern District of California (the “Federal Action”) against us and certain of our executives and directors. The plaintiffs in the State Action allege that we failed to adequately disclose quality control problems and adverse sales trends ahead of our initial public offering (the “IPO”), violating the Securities Act of 1933, as amended (the “Securities Act”). The complaint seeks unspecified monetary damages and other relief on behalf of investors who purchased Company common stock issued pursuant and/or traceable to the IPO. In the Federal Action, the court appointed a shareholder named Matis Nayman as lead plaintiff. Lead plaintiff alleged violations of the Securities Act and the Securities Exchange Act of 1934, as amended, based on alleged materially false and misleading statements about our sales trends and products. In the amended complaint, lead plaintiff sought to represent a class of persons who purchased or otherwise acquired our common stock (i) during the period between August 3, 2018 through December 3, 2018 and/or (ii) pursuant to or traceable to the IPO. Lead plaintiff sought class certification, an award of unspecified damages, an award of costs and expenses, including attorneys’ fees, and other further relief as the court may deem just and proper.
On August 6, 2019, defendants filed a motion to dismiss. The federal court granted that motion, and lead plaintiff filed an amended complaint. On June 12, 2020, lead plaintiff filed an unopposed motion for preliminary approval of a class action settlement for $1.25 million, which was also the amount that we had accrued for loss contingency. In October 2020, we made a $1.25 million payment to an escrow account administered by the court and
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
plaintiff’s counsel (the “Settlement Fund”). The Settlement Fund was deemed to be in the custody of the court and remained subject to the jurisdiction of the court until such time as the Settlement Fund was distributed pursuant to the settlement agreement and/or further order of the court.
On February 5, 2021, lead plaintiff filed a motion for final approval of the settlement. In advance of the final approval hearing, three of the named plaintiffs in the State Action requested exclusion from the settlement. The court held a final approval hearing on March 11, 2021, and, on March 25, 2021, entered an order and final judgment approving the settlement and, among other things, dismissed with prejudice all claims of lead plaintiff and the Settlement Class (as defined in the settlement agreement). The Federal Action is now closed.
In the State Action, on May 5, 2021, the court held a status conference and instructed plaintiffs Perros, Patel, and Pham (“Plaintiffs”), who were the only Arlo stockholders to opt out of the federal settlement, to file an amended complaint by June 4, 2021. Plaintiffs filed their amended complaint, asserting their individual Securities Act claims, but also purporting to represent a new class of Arlo stockholders who purchased Arlo shares between December 3, 2018 and February 22, 2019. On June 21, 2021, the Arlo defendants filed a motion to dismiss the State Action (for forum non conveniens) based on the federal forum provision in Arlo’s certificate of incorporation. Plaintiffs opposed on July 28, 2021, and the Arlo defendants replied on August 13, 2021. On September 9, 2021, the court issued an order granting the Arlo defendants’ forum non conveniens motion, and on September 17, 2021, the court issued a final judgment dismissing the State Action in its entirety. On November 16, 2021, Plaintiffs filed a Notice of Appeal. The appeal occurred before the California Court of Appeal, Sixth Appellate District. Plaintiffs-Appellants filed their opening brief on May 20, 2022. Defendants-Respondents filed their responding brief on August 18, 2022, and Plaintiffs-Appellants filed their reply brief on September 7, 2022. On April 13, 2023, the court heard oral argument on the appeal and the case was submitted. On May 5, 2023, the Court of Appeal affirmed by written order the trial court’s dismissal of the State Action based on the federal forum provision in Arlo’s certificate of incorporation and awarded costs to Arlo.
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 Arlo against the majority of our current directors. The complaint is based on the same alleged misconduct as the securities class actions but asserts claims for breach of fiduciary duty, waste of corporate assets, and violation of the Securities Exchange Act of 1934, as amended. On August 20, 2019, the court stayed the Derivative Action in deference to the Federal Action. On April 8, 2021, because it had granted final approval of the settlement in the Federal Action, the court lifted the stay in the Derivative Action and asked the parties to file a joint status report by April 22, 2021. In their status report, the parties stipulated to a schedule for plaintiff to file an amended complaint and for the parties to brief a motion to dismiss. Plaintiff filed his amended complaint on May 24, 2021. Defendants moved to dismiss the amended complaint on July 9, 2021. On August 23, 2021, plaintiff filed a second amended complaint. Defendants moved to dismiss the second amended complaint on December 17, 2021. Plaintiff filed his opposition on January 31, 2022, and defendants filed their reply on March 2, 2022. On July 28, 2022, the Court heard defendants’ motion to dismiss. At the hearing, the Court informed the parties that it was inclined to grant defendants’ motion to dismiss for lack of jurisdiction, and the Court’s corresponding written order dismissing the case followed on August 8, 2022. The Derivative Action is now closed.
Indemnifications
In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, distributors, resellers, vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising from breach of such agreements or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with members of our board of directors and certain of our executive officers that require us, among other things, to indemnify them against certain liabilities that may
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
arise by reason of their status or service as directors or officers. The maximum potential amount of future payments we could be required to make under these indemnification agreements is, in many cases, unlimited. As of April 2, 2023March 31, 2024 and December 31, 2022,2023, we have not incurred any material costs as a result of such indemnifications and we are not currently aware of any indemnification claims.
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9. Employee Benefit Plans
We grant options and restricted stock units (“RSUs”) under the 2018 Equity Incentive Plan (the “2018 Plan”), under which awards may be granted to all employees. We also grant performance-based and market-based restricted stock units (“PSUs”) to our executive officers periodically. Award vesting periods for the 2018 Plan are generally three to four years. As of April 2, 2023,March 31, 2024, approximately 3.73.8 million shares were available for future grants. Options may be granted for periods of up to 10 years or such shorter term as may be provided in the agreement and at prices no less than 100% of the fair market value of Arlo’s common stock on the date of grant. Options granted under the 2018 Plan generally vest over four years, the first tranche at the end of 12 months and the remaining shares underlying the option vesting monthly over the remaining three years.
On January 20, 2023,19, 2024, we registered an aggregate of up to 4,444,0724,759,901 shares of common stock on a Registration Statement on Form S-8, including 3,555,2583,807,921 shares issuable pursuant to the 2018 Plan that were automatically added to the shares authorized for issuance under the 2018 Plan and 888,814951,980 shares issuable pursuant to the Employee Stock Purchase Plan (“ESPP”) that were automatically added to the shares authorized for issuance on January 1, 2023,2024, both pursuant to an “evergreen” provision contained in the respective plans.
The following table sets forth the available shares for grants as of April 2, 2023:
March 31, 2024:
| | | | | |
| Number of Shares |
| (In thousands) |
Shares available for grants as of December 31, 20222023 | 4,2133,516 | |
Additional authorized shares | 3,5553,808 | |
Granted | (5,701)(5,257) | |
Forfeited / cancelled | 356327 | |
Shares traded for taxes | 1,2671,399 | |
Shares available for grants as of April 2, 2023March 31, 2024 | 3,6903,793 | |
Employee Stock Purchase Plan
We sponsor the ESPP to eligible employees. As of April 2, 2023, 2.4March 31, 2024, 2.8 million shares were available for issuance under the ESPP.
Option Activity
We granted no options during the three months ended March 31, 2024. Stock option activity during the three months ended April 2, 2023March 31, 2024 was as follows:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Exercise Price Per Share |
| (In thousands) | | (In dollars) |
Outstanding as of December 31, 2023 | 1,096 | | | $ | 12.48 | |
Granted | — | | | $ | — | |
Exercised | (68) | | | $ | 8.35 | |
Forfeited / cancelled | — | | | $ | — | |
Expired | — | | | $ | — | |
Outstanding as of March 31, 2024 | 1,028 | | | $ | 12.76 | |
Vested and exercisable as of March 31, 2024 | 1,028 | | | $ | 12.76 | |
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Exercise Price Per Share |
| (In thousands) | | (In dollars) |
Outstanding as of December 31, 2022 | 2,082 | | | $ | 10.24 | |
Granted | — | | | $ | — | |
Exercised | — | | | $ | — | |
Forfeited / cancelled | — | | | $ | — | |
Expired | (12) | | | $ | 7.55 | |
Outstanding as of April 2, 2023 | 2,070 | | | $ | 10.26 | |
Vested and expected to vest as of April 2, 2023 | 2,070 | | | $ | 10.26 | |
Exercisable Options as of April 2, 2023 | 2,070 | | | $ | 10.26 | |
RSU Activity
RSU activity, excluding PSU activity, during the three months ended April 2, 2023March 31, 2024 was as follows:
| | | Number of Shares | | Weighted Average Grant Date Fair Value Per Share | | Number of Shares | | Weighted Average Grant Date Fair Value Per Share |
| (In thousands) | | (In dollars) |
Outstanding as of December 31, 2022 | 9,487 | | | $ | 6.36 | |
| (In thousands) | | | (In thousands) | | (In dollars) |
Outstanding as of December 31, 2023 | |
Granted | Granted | 4,583 | | | $ | 3.66 | |
Vested | Vested | (3,072) | | | $ | 5.17 | |
Forfeited | Forfeited | (342) | | | $ | 6.43 | |
Outstanding as of April 2, 2023 | 10,656 | | | $ | 5.54 | |
Outstanding as of March 31, 2024 | |
PSU Activity
During the three months ended April 2, 2023 and April 3, 2022, ourOur executive officers and other senior employees werehave 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, stock price, cash balances at reporting period, and the recipients’ continued services. At the end of each reporting period, we evaluate the probability of achieving the performance or market conditions and record the related stock-based compensation expense based on the achievement over the service period.
PSU activity during the three months ended April 2, 2023March 31, 2024 was as follows: | | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value Per Share |
| (In thousands) | | (In dollars) |
Outstanding as of December 31, 2022 | 4,041 | | | $ | 6.22 | |
Granted | 1,120 | | | $ | 3.75 | |
Vested | (94) | | | $ | 7.71 | |
Forfeited | (3) | | | $ | 8.28 | |
Outstanding as of April 2, 2023 | 5,064 | | | $ | 5.64 | |
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant Date Fair Value Per Share |
| (In thousands) | | (In dollars) |
Outstanding as of December 31, 2023 | 3,851 | | | $ | 5.72 | |
Granted | 2,924 | | | $ | 9.12 | |
Vested | (742) | | | $ | 4.59 | |
Forfeited | (25) | | | $ | 4.33 | |
Outstanding as of March 31, 2024 | 6,008 | | | $ | 7.52 | |
Stock-Based Compensation Expense
The following table sets forth the stock-based compensation expense included in our unaudited condensed consolidated statements of comprehensive loss:
| | | Three Months Ended | |
| | April 2, 2023 | | April 3, 2022 | |
| | (In thousands) |
| March 31, 2024 | |
| March 31, 2024 | |
| March 31, 2024 | |
| (In thousands) | |
| (In thousands) | |
| (In thousands) | |
Cost of revenue | Cost of revenue | $ | 860 | | | $ | 910 | | |
Research and development | Research and development | 3,911 | | | 2,302 | | |
Research and development | |
Research and development | |
Sales and marketing | |
Sales and marketing | |
Sales and marketing | Sales and marketing | 1,722 | | | 1,380 | | |
General and administrative | General and administrative | 8,098 | | | 4,997 | | |
General and administrative | |
General and administrative | |
Total | Total | $ | 14,591 | | | $ | 9,589 | | |
Total | |
Total | |
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of April 2, 2023,March 31, 2024, all outstanding options were fully vested; therefore, there was no unrecognized compensation cost related to stock options. Approximately $75.5$83.3 million of unrecognized compensation cost related to unvested RSUs and PSUs is expected to be recognized over a weighted-average period of 1.91.5 years as of March 31, 2024.
During the three months ended March 31, 2024 and April 2, 2023.2023, we settled executive and employee bonuses by granting and issuing restricted stock units (non-cash financing activities) that vested immediately amounting to $6.9 million and $6.7 million, respectively.
Note 10. Income Taxes
The provision for income taxes for the three months ended March 31, 2024 was $0.4 million or an effective tax rate of (4.3)%. The provision for income taxes for the three months ended April 2, 2023 was $0.8 million or an effective tax rate of (5.9)%. The provision for income taxes for the three months ended April 3, 2022 was $0.2 million, or an effective tax rate of (2.6)%. During the three months ended March 31, 2024 and April 2, 2023, and April 3, 2022, we sustained U.S. book losses. Consistent with the prior year periods, we maintained a valuation allowance against our U.S. federal and state deferred tax assets and did not record a tax benefit on these deferred tax assets since it is more likely than not that these deferred tax assets will not be realized.
Provision for income taxes increaseddecreased for the three months ended April 2, 2023,March 31, 2024, compared to the prior year period, primarily due to higher U.S. earnings(i) foreign-derived intangible income (“FDII”) and also the application ofhigher Section 174 amortization in the U.S. and (ii) the utilization of the Internal Revenue Code requiring capitalization of research and experimental expenses.R&D credit in Ireland to partially offset its tax liability.
Note 11. Net Loss Per Share
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| April 2, 2023 | | April 3, 2022 | | | | |
| (In thousands, except per share data) |
Numerator: | | | | | | | |
Net loss | $ | (14,245) | | | $ | (8,479) | | | | | |
Denominator: | | | | | | | |
Weighted average common shares - basic | 89,653 | | | 85,222 | | | | | |
Potentially dilutive common shares | — | | | — | | | | | |
Weighted average common shares - dilutive | 89,653 | | | 85,222 | | | | | |
| | | | | | | |
Basic net loss per share | $ | (0.16) | | | $ | (0.10) | | | | | |
Diluted net loss per share | $ | (0.16) | | | $ | (0.10) | | | | | |
| | | | | | | |
Anti-dilutive employee stock-based awards, excluded | 7,859 | | | 1,031 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2024 | | April 2, 2023 | | | | |
| (In thousands, except per share data) |
Numerator: | | | | | | | |
Net loss | $ | (9,644) | | | $ | (14,245) | | | | | |
Denominator: | | | | | | | |
Weighted average common shares - basic and diluted | 96,264 | | | 89,653 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Basic and diluted net loss per share | $ | (0.10) | | | $ | (0.16) | | | | | |
| | | | | | | |
Anti-dilutive employee stock-based awards, excluded | 805 | | | 7,859 | | | | | |
ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 12. Segment and Geographic Information
Segment Information
We operate as one operating and reportable segment. Our Chief Executive Officer (“CEO”) is identified as the Chief Operating Decision Maker (“CODM”), who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Geographic Information for Revenue
Revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates, net changes in deferred revenue, and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance. Sales and usage-based taxes are excluded from revenue. For reporting purposes, revenue by geographygeographic area is generally based upon the ship-tobill-to location of the customer for device sales and device location for service sales.customer. The following table presents revenue by geography.geographic area. For comparative purposes, amounts in prior periodsperiod have been recast.
| | | Three Months Ended | |
| | April 2, 2023 | | April 3, 2022 | |
| | (In thousands) |
| |
| |
| |
| (In thousands) | |
| (In thousands) | |
| (In thousands) | |
United States | United States | $ | 55,843 | | | $ | 65,237 | | |
Spain | Spain | 38,571 | | | 24,568 | | |
Ireland | 4,879 | | | 22,087 | | |
Spain | |
Spain | |
Sweden | |
Sweden | |
Sweden | |
Other countries | |
Other countries | |
Other countries | Other countries | 11,711 | | | 12,859 | | |
Total | Total | $ | 111,004 | | | $ | 124,751 | | |
Total | |
Total | |
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 geography.geographic area.
| | As of |
| April 2, 2023 | | December 31, 2022 |
| (In thousands) |
| As of | | | As of |
| March 31, 2024 | | | March 31, 2024 | | December 31, 2023 |
| (In thousands) | | | (In thousands) |
United States | United States | $ | 16,262 | | | $ | 17,762 | |
Other countries | Other countries | 2,778 | | | 2,383 | |
Total | Total | $ | 19,040 | | | $ | 20,145 | |
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. 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 on Form 10-Q (the “Quarterly Report”).Report. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us,” the “Company,” and “Arlo” refer to Arlo Technologies, Inc. and our subsidiaries.
Business and Executive Overview
Arlo combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that areis transforming the wayways in which people experience the connected lifestyle.can protect everything that matters to them with advanced home, business, and personal security services that combine a globally scaled cloud platform, advanced monitoring and analytics capabilities, and award-winning app-controlled devices to create a personalized security ecosystem. Arlo’s deep expertise in product design,cloud services, cutting-edge AI and computer vision analytics, wireless connectivity cloud infrastructure and cutting-edge AI capabilities focuses on delivering aintuitive user experience design delivers seamless, smart home experiencesecurity for Arlo users that is easy to setup and interactengage with every day. Our highly secure, cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection. connection – all rooted in a commitment to safeguard privacy for our users and their personal data.
Since the launch of our first product in December 2014, we have shipped over 28.433.4 million smart connected devices. As of April 2, 2023,March 31, 2024, the Arlo platform had approximately 7.59.2 million cumulative registered accounts across more than 100 countries around the world coupled with 2.03.2 million cumulative paid subscribers and annual recurring revenue of $182.6$227.0 million.
We conduct business across three geographic regions—(i) the Americas; (ii) Europe, Middle-East and Africa (“EMEA”); and (iii) Asia Pacific (“APAC”)—and we primarily generate revenue by selling devices through retail, wholesale distribution, wireless carrier channels, security solution providers, Arlo’s direct to consumer store and paid subscription services. For the three months ended March 31, 2024 and April 2, 2023, and April 3, 2022, we generated total revenue of $111.0$124.2 million and $124.8$111.0 million, respectively. Loss from operations was $14.1$10.6 million and $8.7$14.1 million for the three months ended March 31, 2024 and April 2, 2023, and April 3, 2022, respectively.
Our goal is to continue to develop innovative, world-class connected lifestylesmart security solutions to expand and further monetize our current and future user and paid account bases. We believe that the growth of our business is dependent on many factors, including our ability to innovate and launch successful new products on a timely basis and grow our installed base, to increase subscription-based recurring revenue, to invest in channel partnerships and to continue our global expansion. We expect to increase our investment in research and development going forward as we continue to introduce new and
innovative products and services to enhance the Arlo platform and compete for engineering talent. We also expect our sales and marketing expense to increase in the future as we invest in marketing to drive awareness of our brand and demand for our products and services.
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 |
| March 31, 2024 | | % Change | | April 2, 2023 |
| (In thousands, except percentage data) |
Cumulative registered accounts | 9,173 | | | 22.1 | % | | 7,510 | |
Cumulative paid accounts (1) | 3,235 | | | 58.3 | % | | 2,044 | |
Annual recurring revenue (“ARR”) (2) | $ | 226,968 | | | 24.3 | % | | $ | 182,583 | |
_________________________
(1) The number of cumulative paid accounts as of March 31, 2024 included paid accounts managed by Verisure Sàrl (“Verisure”) in our EMEA region which are now onboarded with us. This does not have an impact to our financial statements and key business metrics other than our number of cumulative paid accounts.
| | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the Three Months Ended | | |
| April 2, 2023 | | % Change | | April 3, 2022 | | | | | | |
| (In thousands, except percentage data) |
Cumulative registered accounts | 7,510 | | | 17.5 | % | | 6,389 | | | | | | | |
Cumulative paid accounts | 2,044 | | | 60.7 | % | | 1,272 | | | | | | | |
Annual recurring revenue | $ | 182,583 | | | 80.2 | % | | $ | 101,341 | | | | | | | |
(2) As described further below, in the first fiscal quarter of 2024, we changed the methodology on paid service revenue recognition from a mid-month convention to a daily recognition model. As a result, ARR as of March 31, 2024 was calculated using the daily recognition model while ARR as of April 2, 2023 was calculated using our former methodology, the mid-month convention. ARR as of April 2, 2023 calculated using the daily recognition model does not represent a material change from the mid-month convention over the same period.
Cumulative Registered Accounts. We believe that our ability to increase our user base is an indicator of our market penetration and growth of our business as we continue to expand and innovate our Arlo platform. We define our registered accounts at the end of a particular period as the number of unique registered accounts on the Arlo platform as of the end of such period. The number of registered accounts does not necessarily reflect the number of end-users on the Arlo platform as one registered account may be used by multiple end-users to monitor the devices attached to that household.
Cumulative Paid Accounts. Paid accounts are defined as any account worldwide where a subscription to a paid service is being collected (either by us or by our customers or channel partners, including Verisure).
Annual Recurring Revenue (“ARR”). We believe ARR enables measurement of our business initiatives and serves as an indicator of our future growth. ARR represents the amount of paid service revenue that we expect to recur annuallyannually. In the first fiscal quarter of 2024, we changed the methodology on paid service revenue recognition from a mid-month convention to a daily recognition model which recognizes paid service revenue based on the number of service days within the fiscal reporting period, commencing on the start date of the subscription and continuing over the term of the arrangement. Accordingly, the methodology used to calculate ARR was also changed as of March 31, 2024 and is now calculated by taking the average daily paid service revenue of the last calendar month in the fiscal quarter, multiplied by 365 days. We believe the daily recognition model aligns with our recurringcustomers’ subscription period and service usage and allows for a more precise measurement of paid service revenue relative to the former methodology of a mid-month convention, which was based on 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 fromThis change in calculation methodology has no material impact on our paid accounts and excludes prepaid service revenue and Non-Recurring Engineering (“NRE”) service revenue from strategic partners.financial statements or any previously reported ARR numbers. ARR is a performance metric and should be viewed independently of revenue and deferred revenue, and is not intended to be a substitute for, or combined with, any of these items.
Impact of Global Geopolitical, Economic and Business Conditions
During the three months ended April 2, 2023,March 31, 2024, we remained focused on the ongoing conflict in Ukraine, hostilities in the Middle-East, supply chain disruptions, inflation, lowerthe inflationary macro environment, fluctuating consumer confidence and rising interest rates by preserving our liquidity and managing our cash flow by taking preemptive action to enhance our ability to meet our short-term liquidity needs. These actions include, but are not limited to, proactively managing working capital by closely monitoring customers’ credit and collections, renegotiating payment terms with third-party manufacturers and key suppliers, closely monitoring inventory levels and purchases against forecasted demand, reducing or eliminating headcount and non-essential spending, and subleasing and not renewingor reducing excess office space, and deferring hiring.space. We continue to monitor the situation and may, as necessary, reduce expenditures further, borrow under our revolving credit facility, or pursue other sources of capital that may include other forms of external financing in order to maintain our cash position and preserve financial flexibility in response to the uncertainty in the United States and global markets resulting from the ongoing conflict in Ukraine, hostilities in the Middle-East, supply chain disruptions, the inflationary macro environment, lowerfluctuating consumer confidence and rising interest rates, and current financial conditions within the banking industry, including the effects of recent failures of other financial institutions, and liquidity levels.
Results of Operations
We operate as one operating and reportable segment. The following table sets forth, for the periods presented, the unaudited condensed consolidated statements of comprehensive loss data, which we derived from the accompanying unaudited condensed consolidated financial statements:
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| | | Three Months Ended | |
| | April 2, 2023 | | April 3, 2022 | |
| | (In thousands, except percentage data) | (In thousands, except percentage data) |
Revenue: | Revenue: | | |
Products | Products | $ | 67,060 | | | 60.4 | % | | $ | 94,825 | | | 76.0 | % | |
Products | |
Products | |
Services | |
Services | |
Services | Services | 43,944 | | | 39.6 | % | | 29,926 | | | 24.0 | % | |
Total revenue | Total revenue | 111,004 | | | 100.0 | % | | 124,751 | | | 100.0 | % | |
Total revenue | |
Total revenue | |
Cost of revenue: | |
Cost of revenue: | |
Cost of revenue: | Cost of revenue: | | | | | | | | |
Products | Products | 64,041 | | | 57.7 | % | | 80,777 | | | 64.8 | % | |
Products | |
Products | |
Services | |
Services | |
Services | Services | 11,746 | | | 10.6 | % | | 10,399 | | | 8.3 | % | |
Total cost of revenue | Total cost of revenue | 75,787 | | | 68.3 | % | | 91,176 | | | 73.1 | % | |
Total cost of revenue | |
Total cost of revenue | |
Gross profit | |
Gross profit | |
Gross profit | Gross profit | 35,217 | | | 31.7 | % | | 33,575 | | | 26.9 | % | |
Operating expenses: | Operating expenses: | | |
Operating expenses: | |
Operating expenses: | |
Research and development | |
Research and development | |
Research and development | Research and development | 17,750 | | | 16.0 | % | | 16,379 | | | 13.1 | % | |
Sales and marketing | Sales and marketing | 15,353 | | | 13.8 | % | | 13,168 | | | 10.6 | % | |
Sales and marketing | |
Sales and marketing | |
General and administrative | |
General and administrative | |
General and administrative | General and administrative | 15,622 | | | 14.1 | % | | 12,621 | | | 10.1 | % | |
Others | Others | 632 | | | 0.6 | % | | 79 | | | 0.1 | % | |
Others | |
Others | |
Total operating expenses | |
Total operating expenses | |
Total operating expenses | Total operating expenses | 49,357 | | | 44.5 | % | | 42,247 | | | 33.9 | % | |
Loss from operations | Loss from operations | (14,140) | | | (12.8) | % | | (8,672) | | | (7.0) | % | |
Interest income (expense), net | 726 | | | 0.7 | % | | (5) | | | — | % | |
Loss from operations | |
Loss from operations | |
Interest income, net | |
Interest income, net | |
Interest income, net | |
Other income, net | |
Other income, net | |
Other income, net | Other income, net | (39) | | | — | % | | 411 | | | 0.3 | % | |
Loss before income taxes | Loss before income taxes | (13,453) | | | (12.1) | % | | (8,266) | | | (6.7) | % | |
Loss before income taxes | |
Loss before income taxes | |
Provision for income taxes | |
Provision for income taxes | |
Provision for income taxes | Provision for income taxes | 792 | | | 0.7 | % | | 213 | | | 0.2 | % | |
Net loss | Net loss | $ | (14,245) | | | (12.8) | % | | $ | (8,479) | | | (6.9) | % | |
Net loss | |
Net loss | |
Revenue
Our gross revenue consists primarily of sales of devices and 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.
We conduct business across three geographic regions—(i) the Americas; (ii) EMEA; and (iii) APAC—and generally base revenue by geographygeographic region on the ship-tobill-to location of the customer for device sales and device location for service sales.
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| | | Three Months Ended | |
| | April 2, 2023 | | % Change | | April 3, 2022 | |
| | (In thousands, except percentage data) | (In thousands, except percentage data) |
Americas | Americas | $ | 56,632 | | | (17.3) | % | | $ | 68,466 | | |
Percentage of revenue | Percentage of revenue | 51.0 | % | | 54.9 | % | |
Percentage of revenue | |
Percentage of revenue | |
EMEA | |
EMEA | |
EMEA | EMEA | 48,472 | | | (3.0) | % | | 49,975 | | |
Percentage of revenue | Percentage of revenue | 43.7 | % | | 40.1 | % | |
Percentage of revenue | |
Percentage of revenue | |
APAC | |
APAC | |
APAC | APAC | 5,900 | | | (6.5) | % | | 6,310 | | |
Percentage of revenue | Percentage of revenue | 5.3 | % | | 5.0 | % | |
Percentage of revenue | |
Percentage of revenue | |
Total revenue | Total revenue | $ | 111,004 | | | (11.0) | % | | $ | 124,751 | | |
Total revenue | |
Total revenue | |
Revenue by classification is as follows:
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| Three Months Ended |
| March 31, 2024 | | % Change | | April 2, 2023 |
| (In thousands, except percentage data) |
Product revenue | $ | 67,493 | | | 0.6 | % | | $ | 67,060 | |
Service revenue | 56,707 | | | 29.0 | % | | 43,944 | |
Total revenue | $ | 124,200 | | | 11.9 | % | | $ | 111,004 | |
Product revenue decreased in all regionsincreased by $27.8$0.4 million, or 29.3%0.6% for the three months ended April 2, 2023March 31, 2024 compared to the prior year period, primarily driven by an increase in product shipments in EMEA due to stronger customer demand, partially offset by the decrease in product shipmentssales in all regionsthe Americas and APAC due to seasonality. The increase in product revenue was partially offset by higher sales incentives that are deemed to be a reduction in the average selling prices (“ASPs”) of our products as we increased promotional activities to stimulate household acquisition and increased subscriber growth coupled with the softening consumer demand as a result of current macro-economic factors.revenue.
Service revenue increased in all regions by $14.0$12.8 million, or 46.8%29.0% for the three months ended April 2, 2023March 31, 2024 compared to the prior year period, primarily due to increasesa 58.3% increase in cumulative paid accounts and an approximated
30% increase in rates for our subscription plans.
Cost of Revenue
Cost of revenue consists of both product costs and service costs. Product costs primarily consist of the cost of finished products from our third-party manufacturers and overhead costs, including personnel expense for operation staff, purchasing, product planning, inventory control, warehousing and distribution logistics, third-party software licensing fees, inbound freight, IT and facilities overhead, warranty costs associated with returned goods, write-downs for excess and obsolete inventory and excess components, and royalties to third parties. Service costs consist of costs attributable to the provision and maintenance of our cloud-based platform, including personnel, storage, security and computing, IT and facilities overhead 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, product mix, sales channel mix, registered accounts’ acceptance of paid subscription service offerings, and changes in our cost of goods sold due to fluctuations in prices paid for components, net of vendor rebates, cloud platform costs, warranty and overhead costs, inbound freight and duty costs, and charges for excess or obsolete inventory. We outsource our manufacturing, warehousing, and distribution logistics. We also outsource certain components of the required
infrastructure to support our cloud-based back-end IT infrastructure. We believe this outsourcing strategy allows us to better manage our product and service costs and gross margin and allows us to adapt to changing market dynamics and supply chain constraints.
The following table presents cost of revenue and gross margin for the periods indicated:
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| Three Months Ended | | |
| April 2, 2023 | | % Change | | April 3, 2022 | | | | | | |
| (In thousands, except percentage data) |
Cost of revenue: | | | | | | | | | | | |
Products | $ | 64,041 | | | (20.7) | % | | $ | 80,777 | | | | | | | |
Services | 11,746 | | | 13.0 | % | | 10,399 | | | | | | | |
Total cost of revenue | $ | 75,787 | | | (16.9) | % | | $ | 91,176 | | | | | | | |
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| Three Months Ended | | |
| March 31, 2024 | | % Change | | April 2, 2023 | | | | | | |
| (In thousands, except percentage data) |
Cost of revenue: | | | | | | | | | | | |
Products | $ | 63,224 | | | (1.3) | % | | $ | 64,041 | | | | | | | |
Services | 13,596 | | | 15.8 | % | | 11,746 | | | | | | | |
Total cost of revenue | $ | 76,820 | | | 1.4 | % | | $ | 75,787 | | | | | | | |
Product cost of revenue decreased 20.7%1.3% for the three months ended April 2, 2023March 31, 2024 compared to the prior year period, primarily due to a decrease in product shipments coupled with a decreasewarranty reserves, partially offset by an increase in freight-in costs due to normalization of the supply chain and utilization of ocean freight.inventory reserves.
Service cost of revenue increased 13.0%15.8% for the three months ended April 2, 2023March 31, 2024 compared to the prior year period, primarily due to service revenue growth as a result of service revenue growth,the increase in cumulative paid accounts, partially offset by cost optimizations.
Gross Profit
The following table presents gross profit for the periods indicated:
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| | | Three Months Ended | |
| | April 2, 2023 | | % Change | | April 3, 2022 | |
| | (In thousands, except percentage data) | (In thousands, except percentage data) |
Gross profit: | Gross profit: | | |
Products | Products | $ | 3,019 | | | (78.5) | % | | $ | 14,048 | | |
Products | |
Products | |
Services | |
Services | |
Services | Services | 32,198 | | | 64.9 | % | | 19,527 | | |
Total gross profit | Total gross profit | $ | 35,217 | | | 4.9 | % | | $ | 33,575 | | |
Total gross profit | |
Total gross profit | |
Gross margin percentage: | |
Gross margin percentage: | |
Gross margin percentage: | Gross margin percentage: | | | | |
Products | Products | 4.5 | % | | 14.8 | % | |
Products | |
Products | |
Services | |
Services | |
Services | Services | 73.3 | % | | 65.3 | % | |
Total gross margin | Total gross margin | 31.7 | % | | 26.9 | % | |
Total gross margin | |
Total gross margin | |
Product gross profit decreasedincreased for the three months ended April 2, 2023March 31, 2024 compared to the prior year period, primarily due to the decreasedriven by increased product sales in product shipments in all regions due to a reduction in the ASPs of our products as we increased promotional activities to stimulate household acquisition and increased subscriber growth coupled with the softening consumer demand as a result of current macro-economic factors. The product gross profit decrease wasEMEA, partially offset by the decrease in freight-in costs duehigher sales incentives that are deemed to normalizationbe a reduction of the supply chain and utilization of ocean freight.revenue.
Service gross profit increased for the three months ended April 2, 2023March 31, 2024 compared to the prior year period, primarily due to growth in paid service revenue growth in all regions as a result of increases in cumulative paid accounts and rates for our subscription plans, as well as cost optimizations.
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 corporateallocated IT and facilities overhead. Generally, we recognize research and development expenses as they are incurred. Research and development expense directly attributable to delivering the Verisure NRE is recognized in cost of service. We have invested in and expanded our research and development organization to enhance our ability to introduce innovative products and services. We expect research and development expense to increase in absolute dollars as we develop new product and service offerings and compete for engineering talent. We believe that innovation and technological leadership are critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies, products, and services, including our hardware devices, cloud-based software, AI-based algorithms, and machine learning capabilities.
The following table presents research and development expense for the periods indicated:
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| Three Months Ended | | |
| April 2, 2023 | | % Change | | April 3, 2022 | | | | | | |
| (In thousands, except percentage data) |
Research and development expense | $ | 17,750 | | | 8.4 | % | | $ | 16,379 | | | | | | | |
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| Three Months Ended | | |
| March 31, 2024 | | % Change | | April 2, 2023 | | | | | | |
| (In thousands, except percentage data) |
Research and development expense | $ | 20,793 | | | 17.1 | % | | $ | 17,750 | | | | | | | |
Research and development expense increased by $1.4$3.0 million for the three months ended April 2, 2023March 31, 2024 compared to the prior year period, primarily due to an increase of $2.0$2.1 million in personnel-related expenses mainly from merit increases and stock-based compensation and merit increase in base salary, partially offset by a decrease of $0.7 million in corporate IT and facilities overhead.compensation.
Sales and Marketing
Sales and marketing expense consists primarily of personnel expense for sales and marketing staff, technical support expense, advertising, trade shows, media and placement, corporate communications and other marketing expense, product marketing expense, allocated IT and facilities overhead, outbound freight costs, and credit card processing fees. We expect our sales and marketing expense to increase in the future as we invest in marketing to drive awareness of our brand and demand for our products and services.
The following table presents sales and marketing expense for the periods indicated:
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| Three Months Ended | | |
| April 2, 2023 | | % Change | | April 3, 2022 | | | | | | |
| (In thousands, except percentage data) |
Sales and marketing expense | $ | 15,353 | | | 16.6 | % | | $ | 13,168 | | | | | | | |
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| Three Months Ended | | |
| March 31, 2024 | | % Change | | April 2, 2023 | | | | | | |
| (In thousands, except percentage data) |
Sales and marketing expense | $ | 17,370 | | | 13.1 | % | | $ | 15,353 | | | | | | | |
Sales and marketing expense increased $2.2$2.0 million for the three months ended April 2, 2023March 31, 2024 compared to the prior year period, primarily due to increases of $1.0 million in marketing expenditures, $0.6professional services as a result of continued investment in customer experience improvements across customer care and engineering, $0.9 million in personnel-related expenses mainly from stock-based compensation and merit increases, and $0.2 million credit card processing fees as a result of increases in Arlo.com store sales and $0.4 million freight-out expenses.paid subscriber accounts.
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, corporateallocated 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:
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| Three Months Ended | | |
| April 2, 2023 | | % Change | | April 3, 2022 | | | | | | |
| (In thousands, except percentage data) |
General and administrative expense | $ | 15,622 | | | 23.8 | % | | $ | 12,621 | | | | | | | |
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| Three Months Ended | | |
| March 31, 2024 | | % Change | | April 2, 2023 | | | | | | |
| (In thousands, except percentage data) |
General and administrative expense | $ | 19,348 | | | 23.9 | % | | $ | 15,622 | | | | | | | |
General and administrative expense increased $3.0$3.7 million for the three months ended April 2, 2023March 31, 2024 compared to the prior year period, primarily due to an increaseincreases of $3.9$2.8 million in personnel-related expenses mainly from stock-based compensation and merit increase in base salary, partially offset by decreases of $0.8 million in corporate IT and facilities overhead and other.
Others
Others include separation expense, which consists primarily of costs of legal and professional services for IPO-related litigation associated with our separation from NETGEAR, and restructuring charges, which consist of severance costs, office exit expense, and officeother exit expense associated with the abandonment of certain lease contracts.contracts and cancellation of contractual services arrangements with certain suppliers.
Interest Income, (Expense)Net and Other Income (Expense),Loss, Net
The following table presents interest income (expense) and other income (expense), net for the periods indicated:
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| Three Months Ended | | |
| April 2, 2023 | | % Change | | April 3, 2022 | | | | | | |
| (In thousands, except percentage data) |
Interest income (expense), net | $ | 726 | | | ** | | $ | (5) | | | | | | | |
Other income (expense), net | $ | (39) | | | ** | | $ | 411 | | | | | | | |
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| Three Months Ended | | |
| March 31, 2024 | | % Change | | April 2, 2023 | | | | | | |
| (In thousands, except percentage data) |
Interest income, net | $ | 1,386 | | | 90.9 | % | | $ | 726 | | | | | | | |
Other loss, net | $ | (25) | | | ** | | $ | (39) | | | | | | | |
**Percentage change not meaningful.
Interest income, (expense), net increased for the three months ended April 2, 2023March 31, 2024 compared to the prior year period, primarily due to the increase in our short-term investments as well as a result of higher interest rates.
Other income (expense), net decreased for the three months ended April 2, 2023 compared to the prior year period, primarily due to the foreign currency exchange losses for the three months ended April 2, 2023 compared to the foreign currency exchange gains in the prior year period.
Provision for Income Taxes
The following table presents provision for income taxes for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2024 | | % Change | | April 2, 2023 | | | | | | |
| (In thousands, except percentage data) |
Provision for income taxes | $ | 395 | | | (50.1) | % | | $ | 792 | | | | | | | |
Effective tax rate | (4.3) | % | | | | (5.9) | % | | | | | | |
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| Three Months Ended | | |
| April 2, 2023 | | % Change | | April 3, 2022 | | | | | | |
| (In thousands, except percentage data) |
Provision for income taxes | $ | 792 | | | 271.8 | % | | $ | 213 | | | | | | | |
Effective tax rate | (5.9) | % | | | | (2.6) | % | | | | | | |
Provision for income taxes increasedThe effective tax rate for the three months ended April 2, 2023, compared toMarch 31, 2024 was lower than the prior year period, primarilyU.S. federal income tax rate due to higher U.S.a lower effective tax rate on foreign earnings and also the application of Section 174 of the Internal Revenue Code requiring capitalization of research and experimental expenses. Consistent with the prior year, we maintained a valuation allowance againston our net U.S. federal and state deferred tax assets and did not record acertain foreign tax benefit on these deferred tax assets sinceattributes as it is more likely than not that thesesome or all of our deferred tax assets will not be realized.
Liquidity and Capital Resources
As of April 2, 2023,March 31, 2024, our cash and cash equivalentequivalents and short-term investments totaled $118.7$142.9 million and we had unused borrowing capacity of $8.4$4.2 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 April 2, 2023,March 31, 2024, our accumulated deficit was $359.7$377.1 million. Historically, we have funded our principal business activities through cash flows generated from operations and available cash on hand.
Material Cash Requirements
We believe that our existing sources of liquidity will be sufficient to meet our anticipated cash requirements for at least the next 12 months.months and beyond. However, in the future we may require or desire additional funds to support our operating expenses and capital requirements. To the extent that current and anticipated future sources of liquidity are insufficient, we may seek to raise additional funds through public or private equity. We have no commitments to obtain such additional financing and cannot provide assurance that additional financing will be available at all or, if available, that such financing would be obtainable on terms favorable to us and would not be dilutive.
Our future liquidity and cash requirements may vary from those currently planned and will depend on numerous factors, including the introduction of new products, the growth in our service revenue, the ability to increase our gross margin dollars, as well as cost optimization initiatives and controls over our operating expenditures. As we grow our installed base and related cost structure, there will be a need for additional working capital, hence, we have increased our subscription rates effective February 3, 2023.
Leases and Contractual Commitments
Our operating lease obligations mostly include offices, equipment, data centers, and distribution centers. Our contractual commitments are primarily inventory-related purchase obligations with suppliers.
Contingencies
We are involved in disputes, litigation, and other legal actions. We evaluate whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. Significant judgment is required to determine both the probability and the estimated amount of loss. In such cases, we accrue for the amount or, if a range, we accrue the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within litigation reserves, net.
Refer to Note 8. Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for further information about our operating leases, purchase obligations, and legal contingencies.
Cash Flow
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| Three Months Ended |
| March 31, 2024 | | April 2, 2023 |
| (In thousands) |
Net cash provided by operating activities | $ | 19,806 | | | $ | 10,329 | |
Net cash used in investing activities | (440) | | | (22,672) | |
Net cash used in financing activities | (13,782) | | | (4,691) | |
Net cash increase (decrease) | $ | 5,584 | | | $ | (17,034) | |
Cash Flow
The following table presents our cash flows for the periods presented:
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| Three Months Ended |
| April 2, 2023 | | April 3, 2022 |
| (In thousands) |
Net cash provided by (used in) operating activities | $ | 10,329 | | | $ | (24,557) | |
Net cash used in investing activities | (22,672) | | | (44,938) | |
Net cash used in financing activities | (4,691) | | | (5,272) | |
Net cash decrease | $ | (17,034) | | | $ | (74,767) | |
Operating activities
Net cash provided by operating activities increased by $34.9$9.5 million for the three months ended April 2, 2023March 31, 2024 compared to the prior year period, primarily due to changes inimproved profitability and favorable working capital movements as a result of an increase in our service revenue driven by growth in paidhigher accounts and increased subscription rates, higher collection from customers on products salespayable balances due to enhanced collection efforts, and lowerthe timing of payments, to suppliers primarily as a result of loweroffset by increased inventory purchases.
Investing activities
Net cash used in investing activities decreased by $22.3$22.2 million for the three months ended April 2, 2023March 31, 2024 compared to the prior year period, primarily due to lower net purchases of short-term investments.
Financing activities
Net cash used in financing activities decreasedincreased by $0.6$9.1 million for the three months ended April 2, 2023March 31, 2024 compared to the prior year period, primarily due to the decreaseincrease in withholding tax from restricted stock unit releases, partially offset by lower proceeds related to employee benefit plans.releases.
Critical Accounting Policies and Estimates
For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2022.2023. There have been no material changes to our critical accounting policies and estimates during the three months ended April 2, 2023,March 31, 2024, 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.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
During the three months ended April 2, 2023,March 31, 2024, there were no material changes to our market risk disclosures as set forth in Part II, Item 7A "Quantitative“Quantitative and Qualitative Disclosures About Market Risk"Risk” in our Annual Report on Form 10-K for the year ended December 31, 2022.2023.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), has evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)Act) as of the end of the period covered by this Quarterly Report. Based on thatthis evaluation, our Chief Executive Officermanagement, including our CEO and our Chief Financial Officer haveCFO, has concluded that, as ofdue to the end of the period covered by this Quarterly Report,material weakness described below, our disclosure controls and procedures were in design and operation,not effective as of March 31, 2024 at thea 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.
Notwithstanding the material weakness in our internal control over financial reporting described below, our management believes that the unaudited condensed consolidated financial statements and related financial information included in this Quarterly Report for the three months ended March 31, 2024 fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with accounting principles generally accepted in the United States of America.
Previously Reported Material Weaknesses
As reported in Part II, Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2023, in connection with our assessment of the effectiveness of internal control over financial reporting, our management identified certain control deficiencies in the area of our Information Technology General Control (“ITGC”) related to (i) user access and segregation of duty controls that restrict user and privileged access to appropriate personnel; (ii) program change management controls; and (iii) certain computer operations controls that, when aggregated, arise to a material weakness.
Management is committed to remediating the material weakness in a timely manner. Our remediation process includes, but is not limited to: (i) increasing timely reviews of information technology system changes made; (ii) rationalizing access privileges for developer system users; (iii) implementing or modifying controls related to program change management and certain computer operations; and (iv) training of relevant personnel on the design and operation of any new or modified ITGCs.
These steps are subject to ongoing management review, as well as oversight by the audit committee of our board of directors. Additional or modified measures may also be required to remediate the material weaknesses. We will not be able to conclude that we have completely remediated the material weaknesses until the applicable controls are fully implemented and have operated for a sufficient period of time and management has concluded, through formal testing, that the remediated controls are operating effectively. We will continue to monitor the design and effectiveness of these and other processes, procedures, and controls and make any further changes management deems appropriate.
Changes in Internal Control over Financial Reporting
There have beenOther than the ongoing remediation efforts described above, there were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Reportthree months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. It should be noted that any system of controls, however well designed and operated, can provide only reasonable assurance, and not absolute assurance, that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals in all future circumstances.
PART II: OTHER INFORMATION
Item 1.Legal Proceedings
The information set forth under the heading “Litigation and Other Legal Matters” in Note 8, Commitments and Contingencies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report, is incorporated herein by reference. For additional discussion of certain risks associated with legal proceedings, see the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report.
Item 1A.Risk Factors
Our business, reputation, results of operations and financial condition, as well as the price of our stock, can be affected by a number of factors, whether currently known or unknown, including those described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20222023 under the heading “Risk Factors.” During the three months ended April 2, 2023,March 31, 2024, there have been no significant changes to the risk factors under the heading “Risk Factors” described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022.2023.
Item 5. Other Information
Trading Arrangements
During the quarter ended March 31, 2024, our directors and officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated the contracts, instructions or written plans for the purchase or sale of Arlo's securities set forth in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Type of Trading Arrangement | | | | |
Name and Position | | Action | | Action Date | | Rule 10b5-1 (1) | | Non-Rule 10b5-1 (2) | | Total Shares to be Sold | | Expiration Date |
Amy Rothstein, Director | | Adoption | | March 14, 2024 (3) | | X | | | | 40,000 | | March 12, 2025 |
_________________________
(1)Contract, instruction or written plan intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act.
(2)“Non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of Regulation S-K under the Exchange Act.
(3)Adopted for personal tax planning purposes.
Item 6.Exhibits
Exhibit Index
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | Date | | Number | | Filed Herewith |
| | | | 8-K | | 8/7/2018 | | 3.1 | | |
| | | | 8-K | | 8/7/2018 | | 3.2 | | |
| | | | S-1/A | | 7/23/2018 | | 4.1 | | |
| | | | | | | | | | X |
| | | | | | | | | | X |
| | | | | | | | | | X |
| | | | | | | | | | X |
101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | X |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | X |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | X |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | X |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | X |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | X |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | X |
# | | This certification is deemed to accompany this Quarterly Report on Form 10-Q and will not be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that section. This certification will not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
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.
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ARLO TECHNOLOGIES, INC. |
Registrant |
|
|
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/s/ MATTHEW MCRAE |
Matthew McRae |
Chief Executive Officer |
(Principal Executive Officer) |
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/s/ KURTIS BINDER |
Kurtis Binder |
Chief Financial Officer and Chief Operating Officer |
(Principal Financial and Accounting Officer) |
Date: May 11, 20239, 2024