What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-10 compared with 2021-08-05 · 138 added, 112 removed, 239 unchanged (51% of the section changed)

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Business and Executive Overview

Arlo combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that is transforming the way people experience the connected lifestyle.

Arlo combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that are transforming the way people experience the connected lifestyle.

Arlo’s deep expertise in product design, wireless connectivity, cloud infrastructure and cutting-edge AI capabilities focuses on delivering a seamless, smart home experience for Arlo users that is easy to setup and interact with every day.

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

Since the launch of our first product in December 2014, we have shipped over 20.6 million smart connected devices, and as of June 27, 2021, our smart platform had approximately 5.5 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 over 21.6 million smart connected devices, and as of October 3, 2021, our smart platform had approximately 5.8 million cumulative registered accounts across more than 100 countries around the world.

We conduct business across three geographic regions—the Americas;

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and Asia Pacific (“APAC”) and we primarily generate revenue by selling devices through retail, wholesale distribution, wireless carrier channels, security solution providers, Arlo’s direct to consumer store and paid subscription services.

International revenue was 32.5% and 25.2% of our revenue for the three months ended June 27, 2021 and June 28, 2020, respectively, and 35.9% and 25.7% of our revenue for the six months ended June 27, 2021 and June 28, 2020, respectively.

For the three months ended June 27, 2021 and June 28, 2020, we generated revenue of $98.6 million and $66.6 million, respectively, representing a year-over-year increase of 47.9%.

For the six months ended June 27, 2021 and June 28, 2020, we generated revenue of $181.1 million and $132.1 million, respectively, representing a year-over-year increase of 37.1%.

Loss from operations were $25.8 million and $30.3 million for the three months ended June 27, 2021 and June 28, 2020, respectively.

Loss from operations were $37.3 million and $71.2 million for the six months ended June 27, 2021 and June 28, 2020, respectively.

International revenue was 35.0% and 32.9% of our revenue for the three months ended October 3, 2021 and September 27, 2020, respectively, and 35.6% and 28.9% of our revenue for the nine months ended October 3, 2021 and September 27, 2020, respectively.

For the three months ended October 3, 2021 and September 27, 2020, we generated revenue of $111.1 million and $110.2 million, respectively, representing a year-over-year increase of 0.8%.

For the nine months ended October 3, 2021 and September 27, 2020, we generated revenue of $292.3 million and $242.3 million, respectively, representing a year-over-year increase of 20.6%.

Loss from operations were $15.6 million and $18.0 million for the three months ended October 3, 2021 and September 27, 2020, respectively.

Loss from operations were $52.9 million and $89.2 million for the nine months ended October 3, 2021 and September 27, 2020, respectively.

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

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

June 27, 2021 % Change June 28, 2020

October 3, 2021 % Change September 27, 2020

(In thousands, except percentage data)

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Cumulative paid accounts 877 146.3 % 356

Annual recurring revenue $ 80,400 102.9 % $ 39,634

Cumulative Registered Accounts .

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In the fourth quarter of 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.

Annual Recurring Revenue ("ARR") .

Effective as of the quarter ended October 3, 2021, we have adopted ARR as one of the key indicators of our business performance.

We believe ARR enables measurement of our business initiatives, and serves as an indicator of our future growth.

ARR represents the amount of paid service revenue that we expect to recur annually and is calculated by taking our recurring paid service revenue for the last calendar month in the fiscal quarter, multiplied by 12 months.

Recurring paid service revenue represents the revenue we recognize from our paid accounts and excludes prepaid service revenue and NRE service revenue from strategic partners.

The ARR for the comparative period presented was derived following the same methodology.

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.

COVID-19 Update

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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.

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.

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Also, as a result of the COVID-19 pandemic, our supply chain partners are limited by production capacity, constrained by material availability, labor shortages, factory uptime and freight capacity, each of which constrains our ability to capitalize fully on end market demand.

As of June 27, 2021, international freight capacity has dropped, causing air and ocean freight rates to materially increase.

As of October 3, 2021, international freight capacity has dropped, causing air and ocean freight rates to materially increase.

Furthermore, transit times have also increased, causing us to rely more on air freight in order to meet our customers' demands.

For the three and six months ended June 27, 2021, we saw an 89% increase in freight-in expense compared to the prior year periods, respectively, as a result of the higher sea and air freight rates and component shortages which necessitated use of air freight to meet customer requested delivery dates.

We expect supply chain constraints to exist through 2021 and potentially beyond.

While we have been successful in navigating COVID-19 related challenges to date, any further disruptions brought about by the COVID-19 pandemic to our supply chain and operations could have a significant negative impact on our net revenue, gross and operating margin performance.

For the three and nine months ended October 3, 2021, we saw a 244% and 134% increase in freight-in expense compared to the prior year periods, respectively, as a result of the higher sea and air freight rates and component shortages which necessitated use of air freight to meet customer requested delivery dates.

We expect supply chain constraints to persist through 2021 and to continue into 2022.

While we have been broadly successful in navigating COVID-19 related challenges to date, any further disruptions brought about by the COVID-19 pandemic to our supply chain and operations could have a significant negative impact on our net revenue, gross and operating margin performance.

In addition, as a result of the COVID-19 pandemic, 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 our hedging instruments, among others.

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This evaluation included the decision to sublease our office space in San Jose, California.

As a result, we recorded an impairment charge of $9.1 million, which includes $6.8 million associated with the right-of-use assets and $2.3 million associated with other lease related property and equipment assets, for the three and six months ended June 27, 2021.

Refer to Note 4, Balance Sheet Components , for further information about the impairment of the right-of-use asset and long-lived assets.

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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

2021 June 28,

2020 June 27,

2021 June 28,

Three Months Ended Nine Months Ended

2021 September 27,

2020 October 3,

2021 September 27,

(In thousands, except percentage data)

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Loss from operations (15,615) (14.0) % (17,961) (16.3) % (52,908) (18.1) % (89,195) (36.8) %

Interest income 3 — % 151 0.2 % 27 — % 686 0.5 %

Interest income (expense), net (1) — % 74 0.1 % 26 — % 760 0.3 %

Other income (expense), net 599 0.5 % 543 0.5 % 4,170 1.4 % 2,837 1.3 %

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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 first generation camera products under our old business model come with a prepaid service that provides users with rolling seven-day cloud video storage, the ability to connect up to five cameras and 90 days of customer support.

Our second generation camera, doorbell and floodlight products under our new business model come with a prepaid service that includes a one-year free trial period of Arlo Smart bundled with our Arlo Ultra products launched in early 2019, and a three-month free trial period of Arlo Smart bundled with our products launched after September 2019.

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 first generation camera products come with a prepaid service that provides users with rolling seven-day cloud video storage, the ability to connect up to five cameras and 90 days of customer support.

Our second generation camera, doorbell and floodlight products under our new business model come with a prepaid service that includes a one-year free trial period of Arlo Secure bundled with our Arlo Ultra products launched in early 2019, and a three-month free trial period of Arlo Secure bundled with our products launched after September 2019.

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 services also include certain development services provided to Verisure under an NRE arrangement as part of the disposal of our commercial operations in Europe in the fourth quarter of 2019.

Our services also include certain development services provided to Verisure and other customers under NRE arrangements.

In the third quarter of 2021, we introduced Arlo Secure, our new service plan with coverage for unlimited cameras and an enhanced Emergency Response solution.

Arlo Secure replaced Arlo Smart, our previous service plan.

Existing Arlo Smart customers are entitled to either retain their existing plans or upgrade to the new Arlo Secure plan of their choosing.

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.

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During the five-year period commencing January 1, 2020, Verisure has an aggregate product purchase commitment of $500.0 million.

As of June 27, 2021, $89.7 million of the purchase commitment has been fulfilled.

As of October 3, 2021, $114.9 million of the purchase commitment has been fulfilled.

The Supply Agreement also provides for certain NRE services to Verisure, including developing certain custom products specified by Verisure in exchange for an aggregate of $13.5 million, payable in installments upon meeting certain development milestones.

As of June 27, 2021, Verisure has paid $11.8 million for these NRE services.

For the three and six months ended June 27, 2021, the Company recognized service revenue of $2.0 million and $3.5 million, respectively, for these NRE services.

For the three and six months ended June 28, 2020, the Company recognized service revenue of $2.3 million and $3.2 million, respectively, for these NRE services.

As of October 3, 2021, Verisure has paid $11.8 million for these NRE services.

For the three and nine months ended October 3, 2021, the Company recognized service revenue of $1.3 million and $4.8 million, respectively, for these NRE services.

For the three and nine months ended September 27, 2020, the Company recognized service revenue of $2.3 million and $5.5 million, respectively, for these NRE services.

We conduct business across three geographic regions:

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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 Six Months Ended

2021 % Change June 28,

2020 June 27,

2021 % Change June 28,

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

(In thousands, except percentage data)

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Total revenue $ 111,149 0.8 % $ 110,236 $ 292,276 20.6 % $ 242,318

Revenue for the three and six months ended June 27, 2021 increased 47.9% and 37.1%, compared to the prior year periods, respectively.

The increase was primarily driven by an increase in product shipments, 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 $8.2 million, or 48.3%, and $16.3 million, or 51.3%, for the three and six months ended June 27, 2021 compared to the prior year periods, respectively, primarily due to increased paid accounts.

Revenue for the three and nine months ended October 3, 2021 increased 0.8% and 20.6%, compared to the prior year periods, respectively, primarily due to higher service revenue.

Product revenue decreased by $7.1 million, or 7.8% for the three months ended October 3, 2021 compared to the prior year period, primarily driven by a decrease in product shipments in Americas and APAC, partially offset by less provisions for sales returns, price protection and marketing expenditures that are deemed to be a reduction of revenue.

Product revenue increased by $25.6 million, or 13.4% for the nine months ended October 3, 2021 compared to the prior year period, primarily driven by an increase in product shipments in EMEA and less provisions for sales returns, price protection and marketing expenditures that are deemed to be a reduction of revenue, partially offset by decreased product shipments in Americas and APAC.

Service revenue

increased by $8.0 million, or 42.4% and $24.3 million, or 48.0% for the three and nine months ended October 3, 2021 compared to the prior year periods, respectively, primarily due to an increase in paid accounts.

Cost of Revenue

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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, 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:

vendor rebates, cloud platform costs, warranty and overhead costs, inbound freight and duty product conversion costs, charges for excess or obsolete inventory, and amortization of acquired intangibles.

product mix, sales channel mix, registered accounts' acceptance of paid subscription service offerings, fluctuation in foreign exchange rates and changes in our cost of goods sold due to fluctuations in prices paid for components, net of vendor rebates, cloud platform costs, warranty and overhead costs, inbound freight and duty product conversion costs, charges for excess or obsolete inventory, and amortization of acquired intangibles.

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 services costs and gross margin.

We believe this outsourcing strategy allows us to better manage our product and service costs and gross margin.

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

Three Months Ended Six Months Ended

2021 % Change June 28,

2020 June 27,

2021 % Change June 28,

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

(In thousands, except percentage data)

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Total cost of revenue $ 86,806 (2.3) % $ 88,827 $ 215,957 2.1 % $ 211,467

Cost of products revenue increased for the three and six months ended June 27, 2021, primarily due to the increase in product revenue, partially offset by a decrease in warranty costs and excess and obsolete inventory provision, compared to the prior year periods.

Cost of product revenue decreased for the three months ended October 3, 2021 compared to the prior year period, primarily due to the decrease in product revenue and excess and obsolete inventory provision, partially offset by an increase in freight-in cost as a result of COVID-19 related supply chain disruption.

The decrease in excess and obsolete inventory provision is due to more effective inventory management.

Cost of product revenue increased for the nine months ended October 3, 2021 compared to the prior year period, primarily due to the increase in product revenue and freight-in cost as a result of COVID-19 related supply chain disruption, partially offset by a decrease in warranty cost and excess and obsolete inventory provision.

The decrease in warranty cost is a result of a lower scrap rate driven by increased refurbished product sales, lower returns and fewer product transitions.

The decrease in excess and obsolete inventory provisions is due to fewer product transitions and more effective inventory management.

Cost of services revenue stayed relatively flat for the three and six months ended June 27, 2021 compared to the prior year periods despite service revenue increasing, due to cost optimizations implemented on our platform and growth in paid service revenue which has a higher gross margin than the other components of service revenue.

Cost of service revenue increased for the three and nine months ended October 3, 2021 compared to the prior year periods, in line with the respective service revenue growth.

The following table presents gross margin for the periods indicated:

Three Months Ended Six Months Ended

2021 % Change June 28,

2020 June 27,

2021 % Change June 28,

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

(In thousands, except percentage data)

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Total gross profit percentage 21.9 % 19.4 % 26.1 % 12.7 %

Gross margin increased for the three and six months ended June 27, 2021 compared to the prior year periods, due to a combination of both product and service margin increases.

Gross margin increased for the three months ended October 3, 2021, compared to the prior year period, primarily driven by the increased service margin, offset by a decrease in product margin.

The service margin increase is primarily due to growth in paid service revenue and cost optimizations implemented.

The product margin decrease is primarily driven by higher freight-in costs as a result of COVID-19 related supply chain disruption, and other overhead costs.

Gross margin increased for the nine months ended October 3, 2021 compared to the prior year periods, due to a combination of both product and service margin increases.

The product margin increase is primarily due to decreased provisions for price protection, sales returns and marketing expenditures that are deemed to be reductions of revenue, decreased warranty costs and a lower excess and obsolete inventory provision.

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

Three Months Ended Six Months Ended

2021 % Change June 28,

2020 June 27,

2021 % Change June 28,

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

(In thousands, except percentage data)

Research and development expense $ 14,377 (6.9) % $ 15,436 $ 45,419 1.2 % $ 44,871

Research and development expense increased for the three months ended June 27, 2021, compared to the prior year period, primarily due to an increase of $2.2 million in personnel-related expenses.

Research and development expense increased for the six months ended June 27, 2021, compared to the prior year period, primarily due to an increase of $3.0 million in personnel-related expenses, partially offset by a decrease of $1.6 million in corporate IT and facility overhead.

Also, certain research and development expenses amounting to $1.0 million and $2.1 million, respectively, for the three and six months ended June 27, 2021, and $1.2 million and $1.8 million, respectively, for the three and six months ended June 28, 2020 were attributed to the Verisure NRE arrangement, and are classified as cost of service revenue.

Research and development expense decreased for the three months ended October 3, 2021, compared to the prior year period, primarily due to a decrease of $0.9 million in personnel-related expenses.

Research and development expense increased for the nine months ended October 3, 2021, compared to the prior year period, primarily due to an increase of $2.2 million in personnel-related expenses and an increase of $0.3 million in outside professional services, partially offset by a decrease of $2.1 million in corporate IT and facility overhead.

Also, certain research and development expenses

amounting to $0.7 million and $2.8 million, respectively, for the three and nine months ended October 3, 2021, and $1.2 million and $3.1 million, respectively, for the three and nine months ended September 27, 2020 were attributed to the Verisure NRE arrangement, and are classified as cost of service revenue.

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

2021 % Change June 28,

2020 June 27,

2021 % Change June 28,

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

(In thousands, except percentage data)

Sales and marketing expense $ 12,779 0.5 % $ 12,720 $ 36,445 2.7 % $ 35,471

Sales and marketing expense increased for the three months ended June 27, 2021, compared to the prior year period, primarily due to an increase of $0.5 million in personnel-related expenses and an increase of $0.3 million in credit card processing fees.

Sales and marketing expense increased for the six months ended June 27, 2021, compared to the prior year period, primarily due to an increase of $1.2 million in personnel-related expenses and an increase of $0.6 million in credit card processing fees, partially offset by a decrease of $0.8 million in marketing expenditures.

Sales and marketing expense marginally increased for the three months ended October 3, 2021, compared to the prior year period, primarily due to an increase of $0.6 million in personnel-related expenses and an increase of $0.5 million in credit card processing fees, partially offset by a decrease of $1.1 million in outside professional services.

Sales and marketing expense increased for the nine months ended October 3, 2021, compared to the prior year period, primarily due to an increase of $1.7 million in personnel-related expenses and an increase of $1.1 million in credit card processing fees, partially offset by a decrease of $1.1 million in outside professional services and a decrease of $0.9 million in marketing expenditures.

General and Administrative

General and administrative expense consists primarily of personnel-related expense for certain executives, finance and accounting, investor relations, human resources, legal, information technology, professional fees, corporate IT and facilities overhead, strategic initiative expense and other general corporate expense.

We expect our general and administrative expense to stay relatively flat in absolute dollars but to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense.

We expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense.

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

Three Months Ended Six Months Ended

2021 % Change June 28,

2020 June 27,

2021 % Change June 28,

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

(In thousands, except percentage data)

General and administrative expense $ 12,119 8.8 % $ 11,137 $ 36,905 (7.2) % $ 39,758

General and administrative expense increased for the three months ended June 27, 2021, compared to the prior year period, primarily due to an increase of $4.1 million in personnel-related expenditures, partially offset by a decrease of $0.3 million in corporate IT and facility overhead.

General and administrative expense decreased for the six months ended June 27, 2021, compared to the prior year period, primarily due to a decrease of $2.1 million in personnel-related expenditures partially brought about by the one-time charge for stock-based compensation expense recognized in the first quarter of 2020 upon the voluntary forfeiture of our CEO's stock options in January 2020, $0.8 million of Verisure transaction costs recognized in the first half of 2020, and a decrease of $0.5 million in corporate IT and facility overhead.

General and administrative expense increased for the three months ended October 3, 2021, compared to the prior year period, primarily due to an increase of $1.0 million in legal and professional services.

General and administrative expense decreased for the nine months ended October 3, 2021, compared to the prior year period, primarily due to a decrease of $2.1 million in personnel-related expenditures partially brought about by the one-time charge for stock-based compensation expense recognized in the first quarter of 2020 upon the voluntary forfeiture of our CEO's stock options in January 2020, $0.8 million of Verisure transaction costs recognized in the first half of 2020, and a decrease of $0.5 million in corporate IT and facility overhead, partially offset by an increase of $0.8 million in legal and professional services.

Impairment Charges

The following table presents impairment charges for the periods indicated:

Three Months Ended Six Months Ended

2021 % Change June 28,

2020 June 27,

2021 % Change June 28,

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

(In thousands, except percentage data)

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The following table presents separation expense for the periods indicated:

Three Months Ended Six Months Ended

2021 % Change June 28,

2020 June 27,

2021 % Change June 28,

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

(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 Six Months Ended

2021 % Change June 28,

2020 June 27,

2021 % Change June 28,

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

(In thousands, except percentage data)

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

Three Months Ended Six Months Ended

2021 % Change June 28,

2020 June 27,

2021 % Change June 28,

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

(In thousands, except percentage data)

Interest income 3 ** 151 27 ** 686

Interest income (expense), net (1) ** 74 26 ** 760

Other income (expense), net 599 ** 543 4,170 ** 2,837

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

Interest income decreased for the three and six months ended June 27, 2021, compared to the prior year periods, primarily due to the decrease in our short-term investments and cash and cash equivalents as we funded our operations, and a decline in interest rates.

Interest income decreased for the three and nine months ended October 3, 2021, compared to the prior year periods, primarily due to the decrease in our short-term investments and cash and cash equivalents as we funded our operations and a decline in interest rates.

Other income (expense), net primarily represents gains and losses on transactions denominated in foreign currencies, foreign currency contract gain (loss), net, and other miscellaneous income and expense.

We have also included reimbursements for the Verisure Transition Service Agreement ("TSA") in Other income.

Other income (expense), net, increased for the three and six months ended June 27, 2021, compared to the prior year periods, primarily due to the Employee Retention Credit ("ERC") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") for qualified wages amounting to $1.8 million, which was recognized as Other income in the second quarter of 2021, partially offset by decreases in Verisure TSA related income.

Other income (expense), net stayed relatively flat for the three months ended October 3, 2021 compared to the prior year period.

Other income (expense), net, increased for the nine months ended October 3, 2021, compared to the prior year period, primarily due to the Employee Retention Credit ("ERC") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") for qualified wages amounting to $1.8 million, which was recognized as Other income in the second quarter of 2021, partially offset by decreases in Verisure TSA related income.

The CARES Act was signed into law on March 27, 2020 in response to the COVID-19 pandemic.

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Provision for Income Taxes

Three Months Ended Six Months Ended

2021 % Change June 28,

2020 June 27,

2021 % Change June 28,

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

(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 provision for income taxes for the three months ended June 27, 2021 was slightly lower than the same period in the prior year primarily due to a decrease in foreign earnings in the second quarter of 2021.

The provision for income taxes for the six months ended June 27, 2021, was slightly higher than the same period in the prior year primarily due to an increase in foreign earnings in the first half of 2021.

The increase in provision for income taxes for the three and nine months ended October 3, 2021, compared to the prior year periods, was primarily due to higher foreign earnings in fiscal 2021.

Losses incurred predominantly in the U.S.

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

As of June 27, 2021, our accumulated deficit was $266.8 million.

As of October 3, 2021, our accumulated deficit was $282.0 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 June 27, 2021, we had cash, cash equivalents and short-term investments totaling $178.7 million.

As of October 3, 2021, we had cash, cash equivalents and short-term investments totaling $166.1 million.

9.1% 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 June 27, 2021, 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 October 3, 2021, we have not borrowed against this credit facility.

Refer to Note 8.

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.

On October 27, 2021, the Company terminated the credit facility that was reaching maturity with Western Alliance Bank.

the same day, the Company entered into a Loan and Security Agreement with Bank of America, N.A.

for a $40 million three-year revolving credit facility.

Refer to Note 14.

Subsequent Event for further information about the terms and structure of the credit facility.

Based on our current plans, business financing agreement with Bank of America, N.A, 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 than 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.

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

Six Months Ended

2021 June 28,

Nine Months Ended

2021 September 27,

(In thousands)

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Operating activities

Net cash used in operating activities decreased by $25.2 million for the six months ended June 27, 2021 compared to the prior year period.

This decrease comprised a $41.8 million reduction in adjusted net loss reconciled to net cash used in operating activities, offset by an increase in working capital used in operations of $16.6 million, mainly driven by a reduction in prepaid expenses and other assets.

Our days sales outstanding (“DSO”) decreased to 48 days as of June 27, 2021 compared to 64 days as of December 31, 2020, primarily as a result of in-quarter collections from our customers that were on seasonal dating terms and unpaid in the fourth quarter of 2020, as well as a change in customer mix and an increase in service revenue.

Net cash used in operating activities decreased by $26.7 million for the nine months ended October 3, 2021 compared to the prior year period.

This decrease comprised a $39.7 million reduction in adjusted net loss reconciled to net cash used in operating activities, offset by an increase in working capital used in operations of $13.1 million, mainly driven by an increase in accounts receivable, partially offset by a reduction in inventories, and decreased accounts payable.

The increased accounts receivable balance was mainly driven by product shipments being back-end loaded in the quarter as a result of the supply constraints brought about by COVID-19.

Our days sales outstanding (“DSO”) decreased to 62 days as of October 3, 2021 compared to 64 days as of December 31, 2020, primarily as a result of in-quarter collections from our customers that were on seasonal dating terms and unpaid in the fourth quarter of 2020, as well as a change in customer mix and an increase in service revenue.

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

Inventory decreased to $43.2 million as of June 27, 2021 from $64.7 million as of December 31, 2020, as we reduced our product purchases in line with the normal seasonality of our business and continued to focus on effective inventory management.

Our ending inventory turns were 5.7x in the three months ended June 27, 2021 up from 5.0x turns in the three months ended December 31, 2020, primarily as a result of effective inventory management.

Our accounts payable decreased to $42.9 million as of June 27, 2021 from $62.2 million as of December 31, 2020, primarily as a result of lower inventory purchases and payments to suppliers for the purchases made in the fourth quarter of 2020.

Inventory decreased to $39.8 million as of October 3, 2021 from $64.7 million as of December 31, 2020, mainly driven by the elongated lead time in production due to component shortages and supply chain disruptions, both of which were brought about by COVID-19-related issues.

Our ending inventory turns were 7.6x in the three months ended October 3, 2021 up from 5.0x turns in the three months ended December 31, 2020, primarily as a result of a lower inventory balance as previously discussed.

Our accounts payable marginally decreased to $61.7 million as of October 3, 2021 from $62.2 million as of December 31, 2020.

Investing activities

Net cash provided by investing activities increased by $20.2 million for the six months ended June 27, 2021 compared to the prior year period, primarily due to maturity of our of short-term investments.

Net cash provided by investing activities increased by $20.2 million for the nine months ended October 3, 2021 compared to the prior year period, primarily due to maturity of our of short-term investments.

Financing activities

Net cash used in financing activities was $2.9 million for the six months ended June 27, 2021, representing tax withholdings from restricted stock unit releases of $9.1 million, offset by proceeds from ESPP contributions and exercises of stock options of $6.1 million.

Net cash used in financing activities was $1.3 million for the six months ended June 28, 2020, representing tax withholdings from restricted stock unit releases of $3.1 million, offset by proceeds from ESPP contributions of $1.9 million.

Net cash used in financing activities was $5.5 million for the nine months ended October 3, 2021, representing tax withholdings from restricted stock unit releases of $12.9 million, offset by proceeds from ESPP contributions and exercises of stock options of $7.4 million.

Net cash used in financing activities was $1.6 million for the nine months ended September 27, 2020, representing tax withholdings from restricted stock unit releases of $4.6 million, offset by proceeds from ESPP contributions of $3.1 million.

Contractual Obligations

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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, 2020.

There have been no material changes to our critical accounting policies and estimates during the six months ended June 27, 2021, 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 October 3, 2021, 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 27, 2021, 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, 2020.

During the nine months ended October 3, 2021, 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, 2020.

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