What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-05 compared with 2020-08-06 · 131 added, 119 removed, 226 unchanged (53% of the section changed)

14 unchanged sentences

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 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.

Since the launch of our first product in December 2014, we have shipped approximately 18.0 million smart connected devices, and, as of September 27, 2020, our smart platform had approximately 4.8 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.

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.

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

International revenue was 33.0% and 23.3% of our revenue for the three months ended September 27, 2020 and September 29, 2019, respectively, and 31.4% and 25.4% of our revenue for the nine months ended September 27, 2020 and September 29, 2019, respectively.

For the three months ended September 27, 2020 and September 29, 2019, we generated revenue of $110.2 million and $106.1 million, respectively, representing a year-over-year increase of 3.9%.

Loss from operations was $18.0 million for the three months ended September 27, 2020 and $31.1 million for the three months ended September 29, 2019.

For the nine months ended September 27, 2020 and September 29, 2019, we generated revenue of $242.3 million and $247.6 million, respectively, representing a year-over-year decline of 2.1%.

Loss from operations was $89.2 million for the nine months ended September 27, 2020 and $107.0 million for the nine months ended September 29, 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.

3 unchanged sentences

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.

In addition, management’s incentive compensation is partially determined using certain of these key business metrics.

In 2019, management’s incentive compensation was partially determined using certain of these key business metrics.

We believe these key business metrics provide useful information by offering the ability to make more meaningful period-to-period comparisons of our on-going operating results and a better understanding of how management plans and measures our underlying business.

2 unchanged sentences

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

Three Months Ended Six Months Ended

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

Three Months Ended Nine Months Ended

September 27, 2020 % Change September 29, 2019 September 27, 2020 % Change September 29, 2019

(In thousands, except percentage data)

Cumulative registered accounts 4,774 29.3 % 3,691 4,774 29.3 % 3,691

Paid accounts 298 59.4 % 187 298 59.4 % 187

Cumulative paid accounts 356 68.7 % 211 356 68.7 % 211

Devices shipped for the period 978 (14.1) % 1,138 2,136 (21.4) % 2,718

5 unchanged sentences

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

Paid Accounts.

Cumulative 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 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.

6 unchanged sentences

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

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

suppliers and our other business partners conduct business.

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

COVID-19 has spread to many of the countries in which we, our customers, our suppliers and our other business partners conduct business.

Governments in affected regions have implemented, and may continue to implement, safety precautions which include quarantines, travel restrictions, business closures, cancellations of

public gatherings and other measures as they deem necessary.

Many organizations and individuals, including the Company and its employees are taking additional steps to avoid or reduce infection, including limiting travel and staying home from work.

These measures are disrupting normal business operations both in and outside of affected areas and have had significant negative impacts on businesses and financial markets worldwide.

We anticipate that our financial results could be adversely impacted due to:

• temporary closure or decrease in foot traffic to our major customers' retail stores and shift of focus to essential goods distribution;

• disruption to our supply chain caused by delayed delivery of components from our third-party manufacturers and other suppliers located in regions affected by COVID-19;

• deferment of customer spending due to economic uncertainty;

• 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.

The onset of the COVID-19 pandemic started to affect our product shipments in the second quarter of 2020 due to our major customers' retail stores facing temporary closures and decrease in foot traffic, certain of our customers shifting focus to essential goods distribution, and other uncertainties caused by the pandemic.

The decline in product shipments continued throughout the third quarter of 2020.

As of September 27, 2020, our Americas retail channel inventory declined to 8.5 weeks compared to 13.5 weeks as of September 29, 2019 due to disruption to our sales channel.

This has contributed to a decline in net revenue in Americas by 11.3% and 9.0%, compared to the three and nine months ended September 29, 2019, respectively.

At the same time, we saw a significant increase in freight-in expense of 41.2% and 84.9%, compared to the three and nine months ended September 29, 2019, respectively, as a result of higher airfreight rates.

While this is expected to be temporary, the current circumstances are dynamic and the future impacts of COVID-19 on our business operations, including the duration and impact on overall customer demand, cannot be reasonably estimated at this time.

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We are focused on providing our team with the resources that they need to meet the needs of our customers and deliver new innovations to the markets we serve, despite challenges introduced by the COVID-19 pandemic.

We continue to work with our suppliers to address any supply chain disruptions, which might include larger component backlogs, travel restrictions and logistics changes that can impact our operations.

As a result, we could experience material charges from potential adjustments of the carrying value of our inventories and trade receivables, impairment charges on our long-lived assets, intangible assets and goodwill, and changes in the effectiveness of the Company’s hedging instruments, among others.

We also anticipate that COVID-19 could significantly reduce our revenues and increase product and service costs and operating expenses for the remainder of fiscal 2020 due to the following:

• temporary closure or decrease in foot traffic to our major distributors' retail stores and shift of focus to essential goods distribution;

• disruption to our supply chain caused by delayed delivery of components from our third-party manufacturers and other suppliers located in regions affected by COVID-19;

• deferment of customer spending due to economic uncertainty;

• 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.

We also anticipate that COVID-19 could continue to reduce our revenues and increase product and service costs and operating expenses for the remainder of fiscal 2020.

We are focused on navigating these recent challenges presented by COVID-19 through preserving our liquidity and managing our cash flow through taking preemptive action to enhance our ability to meet our short-term liquidity needs.

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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 Six Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

Three Months Ended Nine Months Ended

September 27,

2020 September 29,

2019 September 27,

2020 September 29,

(In thousands, except percentage data)

32 unchanged sentences

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.

We have successfully migrated all but a limited number of our global workforce to work remotely while local and state governments have imposed shelter-in-place orders in the United States and around the world.

We conduct business across three geographic regions:

1 unchanged sentence

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 Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

Three Months Ended Nine Months Ended

September 27,

2020 % Change September 29,

2019 September 27,

2020 % Change September 29,

(In thousands, except percentage data)

6 unchanged sentences

Total revenue $ 110,236 3.9 % $ 106,116 $ 242,318 (2.1) % $ 247,594

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.

Revenue for the three months ended September 27, 2020 increased 3.9%, compared to the prior year period.

The increase was primarily driven by higher service revenue and 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 as a result of disruption to our sales channels due to the COVID-19 pandemic.

Revenue for the nine months ended September 27, 2020 decreased 2.1%, compared to the prior year period.

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 an increase in service revenue and less provisions for sales returns and marketing expenditures that are deemed to be a reduction of revenue.

Service revenue increased by $7.2 million, or 60.6%, and $16.5 million, or 48.2%, for the three and nine months ended September 27, 2020 compared to the prior year periods, respectively, due to increased paid accounts compared to the prior year periods and recognition of NRE and other incremental service revenue of $3.2 million and $8.1 million from Verisure in three and nine months ended September 27, 2020, respectively.

Cost of Revenue

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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 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 services costs and gross margin.

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

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

Three Months Ended Nine Months Ended

September 27,

2020 % Change September 29,

2019 September 27,

2020 % Change September 29,

(In thousands, except percentage data)

3 unchanged sentences

Total cost of revenue $ 88,827 (7.1) % $ 95,613 $ 211,467 (6.2) % $ 225,496

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.

Cost of revenue decreased for the three and nine months ended September 27, 2020, primarily due to the decrease in product revenue and overhead costs, partially offset by higher service costs and excess and obsolete inventory provision compared to the prior year periods.

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, as well as Verisure NRE service costs.

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 increase in excess and obsolete inventory provision reflects lower expected future demand for certain older product lines for the nine months ended September 27, 2020 as we transition to newer technologies.

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,

Three Months Ended Nine Months Ended

September 27,

2020 September 29,

2019 September 27,

2020 September 29,

(In thousands, except percentage data)

7 unchanged sentences

Total gross profit percentage 19.4 % 9.9 % 12.7 % 8.9 %

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.

Product margin increased for the three and nine months ended September 27, 2020, compared to the prior year periods, primarily due to a decrease in provisions for sales returns and marketing expenditures that are deemed to be a reduction of revenue, partially offset by higher excess and obsolete inventory provision.

Service margin increased for the three months ended September 27, 2020, compared to the prior year period, primarily due to an increase in paid service revenue and cost optimizations implemented.

Service margin decreased for the nine months ended September 27, 2020, compared to the prior year period, primarily due to higher investment in our cloud service offerings and lower gross margin on the NRE service revenue associated with the Verisure NRE arrangement.

Operating Expenses

6 unchanged sentences

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

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

Three Months Ended Nine Months Ended

September 27,

2020 % Change September 29,

2019 September 27,

2020 % Change September 29,

(In thousands, except percentage data)

Research and development expense $ 15,436 (7.6) % $ 16,701 $ 44,871 (14.5) % $ 52,456

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.

Research and development expense decreased for the three months ended September 27, 2020, compared to the prior year period, due to decreases of $1.2 million in corporate IT and facility overhead, partially offset by increases of $0.6 million in personnel-related expenditures and $0.6 million in expenses related to outside professional services.

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.

Research and development expense decreased for the nine months ended September 27, 2020, compared to the prior year period, due to decreases of $2.4 million in personnel-related expenses primarily due to the reduction in force implemented in the last quarter of 2019, and $3.2 million in corporate IT

and facility overhead, partially offset by increase of $1.3 million in expenses related to outside professional services.

Also, contributing to the reduction in Research and development expense, various research and development expenses amounting to $3.1 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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The following table presents sales and marketing expense for the periods indicated:

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

Three Months Ended Nine Months Ended

September 27,

2020 % Change September 29,

2019 September 27,

2020 % Change September 29,

(In thousands, except percentage data)

Sales and marketing expense $ 12,720 (6.9) % $ 13,657 $ 35,471 (16.3) % $ 42,389

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.

Sales and marketing expense decreased for the three months ended September 27, 2020, compared to the prior year period, primarily due to decreases in personnel-related expenses of $1.1 million as a result of a general reduction of headcount within sales and marketing as well as the transfer of our European sales and marketing on December 30, 2019 to Verisure coupled with a reduction in travel related expenses as a result of COVID-19 restrictions.

Sales and marketing expense decreased for the nine months ended September 27, 2020, compared to the prior year period, primarily due to decreases in personnel-related expenses of $4.3 million, marketing expenditures of $1.4 million and corporate IT and facility overhead of $1.2 million as a result of a general reduction of headcount within sales and marketing as well as the transfer of our European sales and marketing on December 30, 2019 to Verisure coupled with a reduction in travel related expense as a result of COVID-19 restrictions.

General and Administrative

3 unchanged sentences

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

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

Three Months Ended Nine Months Ended

September 27,

2020 % Change September 29,

2019 September 27,

2020 % Change September 29,

(In thousands, except percentage data)

General and administrative expense $ 11,137 0.7 % $ 11,062 $ 39,758 22.3 % $ 32,512

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.

General and administrative expense increased for the three months ended September 27, 2020, compared to the prior year period, primarily due to higher personnel-related expenditures of $1.3 million, partially offset by lower costs of $0.9 million in legal and professional services.

General and administrative expense increased for the nine months ended September 27, 2020, compared to the prior year period, primarily due to higher personnel-related expenditures of $7.5 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, partially 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, partially offset by lower costs of $0.8 million in legal and professional services.

Separation Expense

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

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 significant reduction during the three and nine months ended September 27, 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 Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

Three Months Ended Nine Months Ended

September 27,

2020 % Change September 29,

2019 September 27,

2020 % Change September 29,

(In thousands, except percentage data)

2 unchanged sentences

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

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

Three Months Ended Nine Months Ended

September 27,

2020 % Change September 29,

2019 September 27,

2020 % Change September 29,

(In thousands, except percentage data)

3 unchanged sentences

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.

There was no gain or loss for the three months ended September 27, 2020 and the three and nine months ended September 29, 2019.

1 unchanged sentence

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

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

Three Months Ended Nine Months Ended

September 27,

2020 % Change September 29,

2019 September 27,

2020 % Change September 29,

(In thousands, except percentage data)

4 unchanged sentences

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 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.

Other income (expense), net, increased for the three months ended September 27, 2020, compared to the prior year period primarily due to Verisure TSA income of $0.9 million recognized in 2020, partially offset by a decrease of $0.4 million in fair value remeasurement of liability-classified awards for employees transferred to Verisure in December 2019 and a decrease of $0.2 million due to losses in foreign currency hedging contracts.

Other income (expense), net, increased

for the nine months ended September 27, 2020, compared to the prior year period primarily due to Verisure TSA income of $3.0 million recognized in 2020.

Provision for Income Taxes

Three Months Ended Six Months Ended

2020 % Change June 30,

2019 June 28,

2020 % Change June 30,

Three Months Ended Nine Months Ended

September 27,

2020 % Change September 29,

2019 September 27,

2020 % Change September 29,

(In thousands, except percentage data)

2 unchanged sentences

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 and six months ended June 28, 2020, compared to the prior year periods was primarily due to lower foreign earnings in 2020.

The decrease in provision for income taxes for the three and nine months ended September 27, 2020, compared to the prior year periods was primarily due to lower foreign earnings in 2020.

Losses incurred predominantly in the U.S.

1 unchanged sentence

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

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.

The CARES Act did not have a material impact on the Company's provision for income taxes for the three and nine months ended September 27, 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 June 28, 2020, our accumulated deficit was $200.1 million.

As of September 27, 2020, our accumulated deficit was $217.6 million.

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

1 unchanged sentence

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

As of September 27, 2020, we had cash, cash equivalents and short-term investments totaling $193.6 million.

6.3% of our cash and cash equivalents were held outside of the U.S.

2 unchanged sentences

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 June 28, 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 September 27, 2020, we have not borrowed against this credit facility.

Refer to Note 9.

2 unchanged sentences

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

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

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

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.

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 special stock dividend (the “Distribution”) by NETGEAR to NETGEAR stockholders of the 62,500,000 shares of Arlo common stock owned by NETGEAR that occurred on December 31, 2018, that could limit our ability to pursue certain transactions including equity issuances.

We have no commitments to obtain such additional financing and cannot assure you 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.

1 unchanged sentence

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

Six Months Ended

2020 June 30,

Nine Months Ended

September 27,

2020 September 29,

(In thousands)

4 unchanged sentences

Operating activities

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.

Net cash used in operating activities increased by $16.6 million for the nine months ended September 27, 2020 compared to the prior year period.

This increase comprised $35.8 million improvement in net cash used in operating activities excluding changes in working capital, primarily due to a reduction in net loss, offset by an increase in cash used in working capital of $52.4 million, mainly as a result of a reduction in inventory in 2019 which has not been repeated in 2020.

Our days sales outstanding (“DSO”) decreased to 47 days as of September 27, 2020 compared to 97 days as of December 31, 2019, primarily as a result of customer mix, an increase in service revenue and growth in Arlo online store sales, all of which have shorter payment terms.

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

Inventory decreased to $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.

Inventory increased marginally to $69.0 million as of September 27, 2020 from $68.6 million as of December 31, 2019, primarily due to higher inventory purchases, partially offset by lower on-hand inventory balance.

Our ending inventory turns were 4.6x in the three months ended September 27, 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 $74.7 million as of September 27, 2020 from $111.7 million as of December 31, 2019, primarily as a result of payments to suppliers for the purchases made in the fourth quarter of 2019 and the normal seasonality of our business.

Investing activities

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.

Net cash used in investing activities increased by $7.4 million for the nine months ended September 27, 2020 compared to the prior year period, primarily due to higher short-term investments of $10.3 million, partially offset by less purchases of property and equipment of $3.0 million due to the completion of leasehold improvements in 2019 at our San Jose headquarters.

Financing activities

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.

Net cash used in financing activities of $1.6 million and $0.1 million in the nine months ended September 27, 2020 and September 29, 2019, respectively, represented withholding tax from restricted stock unit releases, offset by proceeds from ESPP contributions.

Contractual Obligations

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Off-Balance Sheet Arrangements

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.

As of September 27, 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 six months ended June 28, 2020, other than as discussed in Note 2.

There have been no material changes to our critical accounting policies and estimates during the nine months ended September 27, 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 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.

During the nine months ended September 27, 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