What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-11 · 153 added, 88 removed, 192 unchanged (56% of the section changed)

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All forward-looking statements in this document are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking 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.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this quarterly report and the audited financial statements and notes thereto as of and for the year ended December 31, 2019 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K, as amended, filed by us with the SEC.

Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us,” “the Company,” and “Arlo” refer to Arlo Technologies, Inc.

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Our cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection.

Since the launch of our first product in December 2014, we have shipped approximately 16.6 million smart connected devices, and, as of March 29, 2020 , our smart platform had approximately 4.2 million cumulative registered accounts across more than 100 countries around the world.

Since the launch of our first product in December 2014, we have shipped approximately 17.1 million smart connected devices, and, as of June 28, 2020, our smart platform had approximately 4.5 million cumulative registered accounts across more than 100 countries around the world.

We conduct business across three geographic regions-the Americas;

Europe, Middle-East and Africa (“EMEA”);

and Asia Pacific (“APAC”) and we primarily generate revenue by selling devices through retail, wholesale distribution and wireless carrier channels and paid subscription services through in-app purchases.

International revenue was 30.4% and 27.8% of our revenue for the three months ended March 29, 2020 and March 31, 2019 , respectively.

For the three months ended March 29, 2020 and March 31, 2019 , we generated revenue of $65.5 million and $57.9 million , respectively, representing a year-over-year increase of 13.1% .

Loss from operations was $40.9 million for the three months ended March 29, 2020 and $41.9 million for the three months ended March 31, 2019 .

Separation expense of $ 0.1 million and $0.9 million was included in the loss amount for the three months ended March 29, 2020 and March 31, 2019 , respectively.

Gain on sale of business of $0.3 million was included in the loss amount for the three months ended March 29, 2020 .

and Asia Pacific (“APAC”) and we primarily generate revenue by selling devices through retail, wholesale distribution and wireless carrier channels and paid subscription services.

International revenue was 29.6% and 26.4% of our revenue for the three months ended June 28, 2020 and June 30, 2019, respectively, and 30.0% and 27.0% of our revenue for the six months ended June 28, 2020 and June 30, 2019, respectively.

For the three months ended June 28, 2020 and June 30, 2019, we generated revenue of $66.6 million and $83.6 million, respectively, representing a year-over-year decline of 20.3%.

Loss from operations was $30.3 million for the three months ended June 28, 2020 and $34.1 million for the three months ended June 30, 2019.

For the six months ended June 28, 2020 and June 30, 2019, we generated revenue of $132.1 million and $141.5 million, respectively, representing a year-over-year decline of 6.6%.

Loss from operations was $71.2 million for the six months ended June 28, 2020 and $76.0 million for the six months ended June 30, 2019.

Our goal is to continue to develop innovative, world-class connected lifestyle solutions to expand and further monetize our current and future user and subscriber bases.

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We believe that any such inaccuracies or adjustments are immaterial unless otherwise stated.

Three Months Ended

March 29, 2020

March 31, 2019

Three Months Ended Six Months Ended

June 28, 2020 % Change June 30, 2019 June 28, 2020 % Change June 30, 2019

(In thousands, except percentage data)

Cumulative registered accounts 4,518 33.0 % 3,397 4,518 33.0 % 3,397

Paid accounts for the period

Paid accounts 298 59.4 % 187 298 59.4 % 187

Devices shipped for the period 516 (44.7) % 933 1,158 (26.7) % 1,580

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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 users at the end of a particular period as the number of unique registered accounts on the Arlo platform as of the end of such particular period.

We define our registered accounts at the end of a particular period as the number of unique registered accounts on the Arlo platform as of the end of such particular period.

The number of registered accounts does not necessarily reflect the number of end-users on the Arlo platform, as one registered account may be used by multiple people.

We have changed our definition from registered users to registered accounts starting in the fourth quarter ended December 31, 2019 due to the Verisure transaction, Verisure will own the registered accounts but we will continue to provide services to these European customers under the Verisure Agreements.

We changed our definition from registered users to registered accounts starting in the fourth quarter ended December 31, 2019 due to the Verisure transaction.

Verisure will own the registered accounts but we will continue to provide services to these European customers under the Verisure Agreements.

Paid Accounts.

Paid accounts worldwide measured as any account where a subscription to a paid service is being collected (either by Arlo or by Arlo's customers or channel partners), plus paid service plans of a duration of more than 3 months bundled with products (such bundles being counted as a paid account after 90 days have elapsed from the date of registration).

During the second quarter of 2019, we factored in an adjustment to the first quarter of 2019 paid account number and have subsequently revised the first quarter of 2019 paid accounts total to 162,000.

In the fourth quarter ended December 31, 2019, we have redefined paid subscribers as paid accounts to include customers that were transferred to Verisure as part of the disposal of our commercial operations in Europe because we will continue to provide services to these European customers and receive payments associated with them under the Verisure Agreements.

During the second quarter of 2019, we factored in an adjustment to the first quarter of 2019 paid account number and subsequently revised the first quarter of 2019 paid accounts total to 162,000.

In the fourth quarter ended December 31, 2019, we redefined paid subscribers as paid accounts to include customers that were transferred to Verisure as part of the disposal of our commercial operations in Europe, because we will continue to provide services to these European customers and receive payments associated with them, under the Verisure Agreements.

Devices Shipped .

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On March 11, 2020, the World Health Organization announced that COVID-19, a respiratory illness, caused by a novel coronavirus, is a pandemic.

COVID-19 has spread to many of the countries in which we, our customers, our suppliers

and our other business partners conduct business.

COVID-19 has spread to many of the countries in which we, our customers, our

suppliers and our other business partners conduct business.

Governments in affected regions have implemented, and may continue to implement, safety precautions which include quarantines, travel restrictions, business closures, cancellations of public gatherings and other measures as they deem necessary.

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• deferment of customer spending due to economic uncertainty;

decreased productivity due to travel ban, work-from-home policies or shelter in place orders;

• decreased productivity due to travel bans, work-from-home policies or shelter in place orders;

• a slow-down in the global economy or a credit crisis.

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The following table sets forth, for the periods presented, the unaudited condensed consolidated statements of operations data, which we derived from the accompanying unaudited condensed consolidated financial statements:

Three Months Ended

Three Months Ended Six Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

(In thousands, except percentage data)

Products $ 49,603 74.4 % $ 72,445 86.7 % $ 100,326 76.0 % $ 119,053 84.1 %

Services 17,029 25.6 % 11,153 13.3 % 31,756 24.0 % 22,425 15.9 %

Total revenue 66,632 100.0 % 83,598 100.0 % 132,082 100.0 % 141,478 100.0 %

Cost of revenue:

Products 51,186 76.9 % 67,839 81.1 % 103,374 78.3 % 118,123 83.5 %

Services 9,957 14.9 % 6,109 7.3 % 19,266 14.6 % 11,760 8.3 %

Total cost of revenue 61,143 91.8 % 73,948 88.5 % 122,640 92.9 % 129,883 91.8 %

Gross profit 5,489 8.2 % 9,650 11.5 % 9,442 7.1 % 11,595 8.2 %

Operating expenses:

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Provision for income taxes 183 0.3 % 349 0.4 % 328 0.2 % 569 0.3 %

Our gross revenue consists primarily of sales of devices and prepaid and paid subscription service revenue.

Net loss $ (29,256) (43.9) % $ (33,692) (40.3) % $ (68,582) (51.9) % $ (74,976) (53.0) %

Our gross revenue consists primarily of sales of devices, prepaid and paid subscription service revenue and NRE service revenue from Verisure.

We generally recognize revenue from product sales at the time the product is shipped and transfer of control from us to the customer occurs.

Our prepaid services primarily pertain to devices which are sold with our Arlo prepaid services offering, providing users with the ability to store and access data for up to five cameras for a rolling seven-day period, one-year free subscription for basic services.

Prepaid services also include one year of Arlo Smart bundled with our Arlo Ultra products launched in early 2019, and three-month free subscription for Arlo Smart services for our Arlo Pro 3 products launched in late September 2019, Arlo Video Doorbell launched in late November 2019, Arlo Floodlight camera launched in May 2020, Arlo Essential Spotlight camera launched in late June 2020, and the latest version of Arlo Ultra which started shipping in June 2020.

Upon device shipment, we attribute a portion of the sales price to the prepaid service, deferring this revenue at the outset and subsequently recognizing it ratably over the estimated useful life of the device or free trial period, as applicable.

Our paid subscription services relate to sales of subscription plans to our registered accounts.

Our revenue consists of gross revenue, less end-user customer rebates and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, allowances for estimated sales returns,

price protection, and net changes in deferred revenue.

Our NRE service revenue relates to the development services under the NRE arrangement with Verisure discussed in Note 4.

A significant portion of our marketing expenditure is with customers and is deemed to be a reduction of revenue under authoritative guidance for revenue recognition.

Under the Supply Agreement, Verisure became the exclusive distributor of our products in Europe for all channels, and will non-exclusively distribute our products through its direct channels globally.

Revenue associated with the NRE arrangement under the Supply Contract was not significant for the three months ended March 29, 2020 .

We expect that our revenue and profitability in Europe will improve over the lifetime of the Supply Agreement.

While the pandemic did not materially adversely affect our financial results and business operations for the first fiscal quarter ended March 29, 2020, we expect that our revenue, gross margin and operating expenses for the remainder of fiscal 2020 could be adversely affected by COVID-19.

The temporary closure or decrease in foot traffic at our major distributors' retail stores and shifting of focus on essential goods distribution of certain of our distributors, and delayed delivery of components from suppliers located in regions affected by COVID-19 may decrease our shipments and production as well increase in our estimated sales returns, excess and obsolescence reserves, allowance for credit losses and impairment of certain of our assets.

Refer to Note 4, Disposal of business , in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for a complete discussion of the Supply Agreement.

The COVID-19 pandemic adversely affected our product shipments and financial results for the second fiscal quarter ended June 28, 2020, and we expect that our revenue, gross margin and operating expenses for the remainder of fiscal 2020 could also be adversely affected by COVID-19.

The temporary closure or decrease in foot traffic at our major customers' retail stores and shifting of focus to essential goods distribution by certain of our customers, and delayed delivery of components from suppliers located in regions affected by COVID-19 may decrease our shipments and production and lead to an increase in our estimated sales returns, excess and obsolescence reserves, allowance for credit losses and impairment of certain of our assets.

Our priorities and actions during the COVID-19 pandemic are focused on protecting the health and safety of all those we serve, our employees, our customers, our suppliers and our communities, including implementing early and continuous updates to our health and safety policies and processes.

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We generally base revenue by geography on the ship-to location of the customer for device sales and device location for service sales.

Three Months Ended

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

(In thousands, except percentage data)

Americas $ 50,971 (21.1) % $ 64,564 $ 101,129 (7.2) % $ 108,930

Percentage of revenue 76.5 % 77.2 % 76.6 % 77.0 %

EMEA 11,263 (25.2) % 15,066 18,836 (22.7) % 24,368

Percentage of revenue 16.9 % 18.0 % 14.3 % 17.2 %

APAC 4,398 10.8 % 3,968 12,117 48.1 % 8,180

Percentage of revenue 6.6 % 4.7 % 9.2 % 5.8 %

Total revenue $ 66,632 (20.3) % $ 83,598 $ 132,082 (6.6) % $ 141,478

Revenue for the three months ended March 29, 2020 increased 13.1% , compared to the prior year period.

The increase was primarily driven by higher service revenue, less provisions for sales returns and marketing expenditures that are deemed to be a reduction of revenue, partially offset by a decrease in product shipments.

Service revenue increased by $3.5 million , or 30.7% , for the three months ended March 29, 2020 compared to the prior year period, due to increased paid subscribers compared to the prior year period and Verisure NRE services.

Revenue for the three and six months ended June 28, 2020 decreased 20.3% and 6.6%, compared to the prior year periods, respectively.

The decrease was primarily driven by a decrease in product shipments as a result of disruption to our sales channels due to the COVID-19 pandemic, partially offset by higher service revenue and less provisions for sales returns, price protection and marketing expenditures that are deemed to be a reduction of revenue.

Service revenue increased by $5.9 million, or 52.7%, and $9.3 million, or 41.6%, for the three and six months ended June 28, 2020 compared to the prior year periods, respectively, due to increased paid subscribers compared to the

prior year periods and NRE service revenue of $2.3 million and $3.2 million from Verisure recognized in three and six months ended June 28, 2020, respectively.

Cost of Revenue

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the cost of finished products from our third-party manufacturers;

overhead costs, including purchasing, product planning, inventory

control, warehousing and distribution logistics, third-party software licensing fees, inbound freight, warranty costs associated with returned goods, write-downs for excess and obsolete inventory, royalties to third parties;

overhead costs, including purchasing, product planning, inventory control, warehousing and distribution logistics, third-party software licensing fees, inbound freight, warranty costs associated with returned goods, write-downs for excess and obsolete inventory, royalties to third parties;

and amortization expense of certain acquired intangibles.

Cost of service consists of costs attributable to the provision and maintenance of our cloud-based platform, including personnel, storage, security and computing.

Cost of service consists of costs attributable to the provision and maintenance of our cloud-based platform, including personnel, storage, security and computing, as well as NRE service costs incurred under the Verisure NRE arrangement.

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:

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

Three Months Ended

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

(In thousands, except percentage data)

Cost of revenue:

Products $ 51,186 (24.5) % $ 67,839 $ 103,374 (12.5) % $ 118,123

Services 9,957 63.0 % 6,109 19,266 63.8 % 11,760

Total cost of revenue $ 61,143 (17.3) % $ 73,948 $ 122,640 (5.6) % $ 129,883

Cost of revenue increased for the three months ended March 29, 2020 , primarily due to the increase in product revenue, higher service costs and warranty costs compared to the prior year period.

The increase in warranty cost is a result of an adjustment to our sales returns reserves this quarter to take into account a longer warranty returns lag, which we calculate based on historical actual warranty returns data.

The increase in service costs is in line with the service revenue growth and due to our continued investment in our cloud service offerings to improve our customer experience and to enhance our security profile.

Gross margin increased for the three months ended March 29, 2020 compared to the prior year period, due to the product margin increase, which is primarily due to a reduction in channel promotion activities that are deemed to be reductions of revenue, partially offset by decreased product shipments and increased warranty costs and scrap provision.

Our service margin decreased for the three months ended March 29, 2020 compared to prior year period, primarily due to our higher investment in our cloud service offerings.

Cost of revenue decreased for the three and six months ended June 28, 2020, primarily due to the decrease in product revenue and overhead costs, partially offset by higher service costs, warranty costs and excess and obsolete inventory provision compared to the prior year periods.

The increase in warranty cost is a result of an adjustment to our sales returns reserves for the six months ended June 28, 2020 to take into account a longer warranty returns lag, which we calculate based on historical actual warranty returns data.

The increase in excess and obsolete inventory provision is a result of an increased provision for inventory and excess materials within certain older product lines for the six months ended June 28, 2020 to take into account for increased pricing pressure on older technology and lower demand impacted by the COVID-19 pandemic.

The following table presents gross margin for the periods indicated:

Three Months Ended Six Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

(In thousands, except percentage data)

Gross profit:

Products $ (1,583) $ 4,606 $ (3,048) $ 930

Services 7,072 5,044 12,490 10,665

Total gross profit $ 5,489 $ 9,650 $ 9,442 $ 11,595

Gross profit percentage:

Products (3.2) % 6.4 % (3.0) % 0.8 %

Services 41.5 % 45.2 % 39.3 % 47.6 %

Total gross profit percentage 8.2 % 11.5 % 7.1 % 8.2 %

Gross margin decreased for the three and six months ended June 28, 2020 compared to the prior year periods, due to a product margin decrease, which is primarily due to an increase in warranty costs and excess and obsolete inventory provision, partially offset by a reduction in channel promotion activities that are deemed to be a reduction of revenue.

Our service margin decreased for the three and six months ended June 28, 2020 compared to prior year periods, primarily due to our higher investment in our cloud service offerings and lower gross margin on the NRE service revenue associated with the Verisure NRE arrangement.

Operating Expenses

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We believe that innovation and technological leadership are critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies, products, and services, including our hardware devices, cloud-based software, AI-based algorithms, and machine learning capabilities.

We expect research and development expense to

stay relatively flat in absolute dollars as we manage our expenses while continuing to develop new product and service offerings to support the connected lifestyle market.

We expect research and development expense to stay relatively flat in absolute dollars for the remainder of fiscal 2020 as we manage our expenses while continuing to develop new product and service offerings to support the connected lifestyle market.

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

Three Months Ended

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

(In thousands, except percentage data)

Research and development expense $ 14,192 (19.3) % $ 17,594 $ 29,435 (17.7) % $ 35,755

Research and development expense decreased for the three months ended March 29, 2020 , compared to the prior year period, due to decreases of $1.7 million in personnel-related expenses primarily due to the reduction in force implemented in the last quarter of 2019, and $0.5 million in corporate IT and facility overhead.

Also, certain research and development expenses amounting to $0.7 million were attributed to the Verisure NRE projects, and are classified as cost of service revenue.

Research and development expense decreased for the three months ended June 28, 2020, compared to the prior year period, due to decreases of $1.3 million in personnel-related expenses primarily due to the reduction in force implemented in the last quarter of 2019, and $1.5 million in corporate IT and facility overhead.

Also, certain research and development expenses amounting to $1.2 million were attributed to the Verisure NRE arrangement in fiscal 2020, and are classified as cost of service revenue.

Research and development expense decreased for the six months ended June 28, 2020,

compared to the prior year period, due to decreases of $3.0 million in personnel-related expenses primarily due to the reduction in force implemented in the last quarter of 2019, and $2.0 million in corporate IT and facility overhead.

Also, certain research and development expenses amounting to $1.8 million were attributed to the Verisure NRE arrangement, and are classified as cost of service revenue in fiscal 2020.

Sales and Marketing

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IT and facilities overhead;

outbound freight costs;

and amortization of certain intangibles.

We expect our sales and marketing expense to fluctuate based on the seasonality of our business for the foreseeable future.

and outbound freight costs.

We expect our sales and marketing expense to fluctuate for the foreseeable future based on the seasonality of our business, the growth of our online store, and the extent to which we invest in marketing to drive awareness of our brand and drive demand for our products.

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

Three Months Ended

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

(In thousands, except percentage data)

Sales and marketing expense $ 11,713 (19.3) % $ 14,511 $ 22,751 (20.8) % $ 28,732

Sales and marketing expense decreased for the three months ended March 29, 2020 , compared to the prior year period, primarily due to decreases in personnel-related expenses of $1.7 million and outside professional services of $1.0 million as a result of the transfer of our European sales and marketing on December 30, 2019 to Verisure, the reduction in force implemented in the last quarter of 2019, and reduction in travel-related expense as a result of COVID-19 restrictions.

Sales and marketing expense decreased for the three months ended June 28, 2020, compared to the prior year period, primarily due to decreases in personnel-related expenses of $1.5 million and marketing expenditures of $1.1 million as a result of the transfer of our European sales and marketing on December 30, 2019 to Verisure, the reduction in force implemented in the last quarter of 2019, and reduction in travel and marketing related expense as a result of COVID-19 restrictions.

Sales and marketing expense decreased for the six months ended June 28, 2020, compared to the prior year period, primarily due to decreases in personnel-related expenses of $3.2 million and marketing expenditures of $1.5 million as a result of the transfer of our European sales and marketing on December 30, 2019 to Verisure, the reduction in force implemented in the last quarter of 2019, and reduction in travel and marketing related expense as a result of COVID-19 restrictions.

General and Administrative

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

Three Months Ended

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

(In thousands, except percentage data)

General and administrative expense $ 9,837 (9.9) % $ 10,914 $ 28,621 33.4 % $ 21,450

General and administrative expense increased for the three months ended March 29, 2020 , compared to the prior year period, primarily due to higher personnel-related expenditures of $7.4 million, as a result of the stock-based compensation expense recognized for the voluntary forfeiture of our CEO's IPO Options (Tranches 1, 2 and 3) in January 2020, and $0.5 million of Verisure transaction costs recognized in the first quarter of 2020.

General and administrative expense decreased for the three months ended June 28, 2020, compared to the prior year period, primarily due to lower personnel-related expenditures of $1.2 million, which was mainly driven by the reversal of previously recognized stock-based compensation expense in connection with Ms.

Gorjanc's separation from the Company in the second quarter of 2020.

General and administrative expense increased for the six months ended June 28,

2020, compared to the prior year period, primarily due to higher personnel-related expenditures of $6.2 million, as a result of the $7.4 million stock-based compensation expense recognized for the voluntary forfeiture of our CEO's IPO Options in January 2020, offset by the reversal of the previously recognized stock-based compensation expense amounting to $1.2 million of unvested IPO Options and RSU upon separation of Ms.

Gorjanc in June 2020 and $0.8 million of Verisure transaction costs recognized in 2020.

Separation Expense

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To operate as a standalone company, we have incurred separation costs.

The significant reduction during the three months ended March 29, 2020 was as a result of the substantial completion of our Separation from NETGEAR effective December 31, 2018.

The significant reduction during the three and six months ended June 28, 2020 was as a result of the substantial completion of our Separation from NETGEAR effective December 31, 2018.

The following table presents separation expense for the periods indicated:

Three Months Ended

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

(In thousands, except percentage data)

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The following table presents gain on sale of business for the periods indicated:

Three Months Ended

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

(In thousands, except percentage data)

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In the fourth quarter of 2019, we sold our commercial operations in Europe which resulted in a gain on sale of business.

In the first quarter of 2020, we recognized an additional gain of $0.3 million as a result of the final working capital adjustment.

There was no gain or loss for the three months ended March 31, 2019 .

In the first quarter of 2020, we recognized an additional gain of $292 thousand as a result of the final working capital adjustment.

There was no gain or loss for the three months ended June 28, 2020 and the three and six months ended June 30, 2019.

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

Three Months Ended

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

(In thousands, except percentage data)

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We expect our interest income in absolute dollars to decrease as we use up our short-term investments and cash and cash equivalents to fund our operations, while interest rates have also declined.

During the three months ended March 29, 2020 and March 31, 2019 , we earned interest income of $0.5 million and $0.9 million , respectively, from our short-term investments and cash and cash equivalents.

Other income (expense), net, increased for the three months ended March 29, 2020 , compared to the prior year period primarily due to Verisure TSA reimbursements of $1.1 million.

During the three and six months ended June 28, 2020, we earned interest income of $0.2 million and $0.7 million, respectively, from our short-term investments and cash and cash equivalents.

Other income (expense), net, increased for the three and six months ended June 28, 2020, compared to the prior year periods primarily due to Verisure TSA income of $1.0 million and $2.1 million, respectively.

Provision for Income Taxes

Three Months Ended

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

(In thousands, except percentage data)

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The Company’s provision for income taxes was primarily attributable to income taxes on foreign earnings.

The decrease in provision for income taxes for the three months ended March 29, 2020 , compared to the prior year period was primarily due to lower foreign earnings in 2020 compared to 2019.

The decrease in provision for income taxes for the three and six months ended June 28, 2020, compared to the prior year periods was primarily due to lower foreign earnings in 2020.

Losses incurred predominantly in the U.S.

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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted by the United States.

We are continuing to analyze the CARES Act, but it had no material impact on our provision for income taxes for the three months ended March 29, 2020 .

The CARES Act did not have a material impact on the Company's provision for income taxes for the three and six months ended June 28, 2020.

Liquidity and Capital Resources

We have a history of losses and may continue to incur operating and net losses for the foreseeable future.

As of March 29, 2020 , our accumulated deficit was $170.8 million .

As of June 28, 2020, our accumulated deficit was $200.1 million.

Our principal sources of liquidity are cash, cash equivalents and short-term investments.

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The marketable securities are held in our company’s name with a high quality financial institution, which acts as our custodian and investment manager.

As of March 29, 2020 , we had cash, cash equivalents and short-term investments totaling $206.6 million .

As of June 28, 2020, we had cash, cash equivalents and short-term investments totaling $205.5 million.

8.1% of our cash and cash equivalents were held outside of the U.S.

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is subject to fluctuation based on the settlement of intercompany balances.

In November 2019, we entered into a business financing agreement with Western Alliance Bank providing for a credit facility to up to $40.0 million and as of March 29, 2020 , we have not borrowed against this credit facility.

In November 2019, we entered into a business financing agreement with Western Alliance Bank providing for a credit facility to up to $40.0 million and as of June 28, 2020, we have not borrowed against this credit facility.

Refer to Note 9.

Debt 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 details on such business financing agreement.

Based on our current plans, business financing agreement with Western Alliance Bank, and market conditions, we believe that such sources of liquidity will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months.

However, in the future, including sooner as may be anticipated, we may require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity or debt financings or collaborative agreements or from other sources.

However, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of

global financial markets.

If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our capacity to support our operating expenses and capital requirements or for other purposes, such as acquisitions.

Based on our current plans, the business financing agreement with Western Alliance Bank, and market conditions, we believe that such sources of liquidity will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months.

However, in the future we may require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity or debt financings or collaborative agreements or from other sources.

However, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial

In addition, to preserve the tax-free treatment of our separation from NETGEAR, we have agreed in the tax matters agreement with NETGEAR to certain restrictions on our business, which generally will be effective during the two-year period following the Distribution that could limit our ability to pursue certain transactions including equity issuances.

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

Three Months Ended

Six Months Ended

2020 June 30,

(In thousands)

Net cash used in operating activities $ (48,683) $ (54,661)

Net cash provided by (used in) investing activities

Net cash used in investing activities (1,278) (1,909)

Net cash used in financing activities (1,293) (1,670)

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Operating activities

Net cash used in operating activities increased by $33.4 million for the three months ended March 29, 2020 compared to the prior year period, due primarily to payments to suppliers for purchases made in the fourth quarter of 2019.

Our cash inflow from changes in assets and liabilities decreased by $42.3 million year over year as a result of increased accounts payable payments, and was offset by an $8.9 million year over year decrease in net loss, plus adjustments to reconcile net loss to net cash used in operations.

Our days sales outstanding (“DSO”) decreased to 83 days as of March 29, 2020 compared to 97 days as of December 31, 2019 .

Typically, our DSO in the fourth quarter is higher due to seasonal payment terms provided to our larger customers.

Inventory decreased to $61.0 million as of March 29, 2020 from $68.6 million as of December 31, 2019 , primarily due to continued focus on inventory management and an increase in certain inventory reserves as a result of the estimated impact of COVID-19 on expected future demand.

Despite lowering our inventory, our ending inventory turns were 3.4 x in the three months ended March 29, 2020 down from 5.9 x turns in the three months ended December 31, 2019 , primarily as a result of the normal seasonal reduction in our business.

Our accounts payable decreased to $39.1 million as of March 29, 2020 from $111.7 million as of December 31, 2019 , primarily as a result of lower inventory purchases and payments to suppliers for the purchases made in the fourth quarter of 2019.

Net cash used in operating activities decreased by $6.0 million for the six months ended June 28, 2020 compared to the prior year period, primarily due to a reduction in Operating expenses.

Our cash outflow from net loss, plus adjustments to reconcile net loss to net cash used in operations decreased $15.4 million year over year mainly due to a reduction in Operating expenses, and was offset by a decrease in cash inflow from changes in working capital accounts of $9.4 million year over year.

Our days sales outstanding (“DSO”) decreased to 63 days as of June 28, 2020 compared to 97 days as of December 31, 2019.

Typically, our DSO in the fourth quarter is higher due to seasonal payment terms provided to our larger customers, while service revenue is typically a lower percentage of our revenue in the fourth quarter.

Inventory decreased to $65.8 million as of June 28, 2020 from $68.6 million as of December 31, 2019, primarily due to continued focus on inventory management and an increase in certain inventory reserves as a result of the estimated impact of COVID-19 on expected future demand.

Despite lowering our inventory, our ending inventory turns were 3.1x in the three months ended June 28, 2020 down from 5.9x turns in the three months ended December 31, 2019, primarily as a result of the normal seasonal reduction in our business, accentuated by the impact of COVID-19.

Our accounts payable decreased to $52.9 million as of June 28, 2020 from $111.7 million as of December 31, 2019, primarily as a result of lower inventory purchases and payments to suppliers for the purchases made in the fourth quarter of 2019.

Investing activities

Net cash used in investing activities increased by $12.1 million for the three months ended March 29, 2020 compared to the prior year period, primarily due to purchases of short-term investments of $10.2 million , less maturity of short-term investments in the amount of $5.0 million , partially offset by less purchases of property equipment of $3.1 million .

Net cash used in investing activities decreased by $0.6 million for the six months ended June 28, 2020 compared to the prior year period, primarily due to less purchases of property and equipment of $5.9 million due to the completion of

leasehold improvements in 2019 at our San Jose headquarters, offset by more purchases of short-term investments of $0.3 million and less maturity of short-term investments in the amount of $5.0 million.

Financing activities

Net cash used in financing activities of $166 thousand in the three months ended March 29, 2020 represented tax withholdings from restricted stock unit releases, primarily offset by proceeds from ESPP contributions.

Net cash used in financing activities was $1.1 million for the three months ended March 31, 2019 , representing tax withholdings from restricted stock unit releases.

Net cash used in financing activities of $1.3 million in the six months ended June 28, 2020 represented withholding tax from restricted stock unit releases, offset by proceeds from ESPP contributions.

Net cash used in financing activities was $1.7 million for the six months ended June 30, 2019, representing withholding tax from restricted stock unit releases.

Contractual Obligations

As of the date of this report, there were no material changes to our contractual obligations during the three months ended March 29, 2020 from those disclosed in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 .

Our principal commitments consist of obligations under operating leases for office space, equipment, data center facilities and distribution center facilities, as well as non-cancellable purchase commitments.

Refer to Note 10.

Commitments and Contingencies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for a complete discussion of our contractual obligations.

Off-Balance Sheet Arrangements

As of March 29, 2020 , we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

As of June 28, 2020, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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, 2019.

There have been no material changes to our critical accounting policies and estimates during the three months ended March 29, 2020 , other than Trade accounts receivable as discussed in Note 2 .

There have been no material changes to our critical accounting policies and estimates during the six months ended June 28, 2020, other than as discussed in Note 2.

Significant Accounting Policies and Recent Accounting Pronouncements, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q,

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Quantitative and Qualitative Disclosures About Market Risk

During the three months ended March 29, 2020 , there were no material changes to our market risk disclosures as set forth in Part II Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2019 .

During the six months ended June 28, 2020, there were no material changes to our market risk disclosures as set forth in Part II Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2019.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis