What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-11 compared with 2021-11-10 · 90 added, 175 removed, 202 unchanged (57% of the section changed)

15 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 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;

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

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 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.

Since the launch of our first product in December 2014, we have shipped over 23.9 million smart connected devices, and as of April 3, 2022, Arlo platform had approximately 6.4 million cumulative registered accounts across more than 100 countries around the world.

We conduct business across three geographic regions—(i) the Americas;

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

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

International revenue was 47.7% and 40.0% of our revenue for the three months ended April 3, 2022 and March 28, 2021, respectively.

For the three months ended April 3, 2022 and March 28, 2021, we generated revenue of $124.8 million and $82.6 million, respectively, representing a year-over-year increase of 51.1%.

Loss from operations were $8.7 million and $11.5 million for the three months ended April 3, 2022 and March 28, 2021, 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.

We believe that the growth of our business is dependent on many factors, including our ability to innovate and launch successful new products on a timely basis and grow our installed base, to increase subscription-based recurring revenue, to invest in brand awareness and channel partnerships and to continue our global expansion.

We expect to maintain our investment in research and development going forward as we continue to introduce new and innovative products and services to enhance the Arlo platform.

We expect to increase our investment in research and development going forward as we continue to introduce new and innovative products and services to enhance the Arlo platform and compete for engineering talent.

We also expect to significantly increase our Sales and Marketing expense as we invest in new campaigns to increase awareness of and preference for the Arlo brand.

Key Business Metrics

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

October 3, 2021 % Change September 27, 2020

April 3, 2022 % Change March 28, 2021

(In thousands, except percentage data)

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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.

Recurring paid service revenue represents the revenue we recognize from our paid accounts and excludes prepaid service revenue and Non-Recurring Engineering ("NRE") service revenue from strategic partners.

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

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COVID-19 Update

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.

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 component shortages, extended transit times, labor shortages, factory uptime, freight capacity, inflated freight pricing and increased component and finished goods costs;

• 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 continue to closely monitor developments and are taking steps to mitigate the potential risks related to the COVID-19 pandemic to us, our employees and our customers.

The extent of the impact of the COVID-19 pandemic on our business operations will depend on future developments, including the duration of the pandemic, the broader implications of the macro-economic recovery and the impact on overall customer demand, all of which are uncertain and cannot be predicted.

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

Our priorities and actions during the COVID-19 pandemic continue to be focused on protecting the health and

safety of all those we serve, our employees, our customers, our suppliers and our communities, including implementing continuous updates to our health and safety policies and processes and progress made through vaccinations.

We continue to instruct all but a limited number of our global workforce to work remotely as a precautionary measure intended to minimize the risk of the virus to them and the communities in which we operate, while we continue to focus 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 presented by the COVID-19 pandemic.

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

For example, increased demand for electronics as a result of the COVID-19 pandemic, effects of the U.S.

trade war with China, increased demand for chips in the automotive industry and certain other factors have led to a global shortage of semiconductors.

For example, increased demand for electronics as a result of the COVID-19 pandemic increased demand for chips in the automotive industry and certain other factors have led to a global shortage of semiconductors.

As a result, we have experienced component shortages, including longer lead times for components and supply constraints that have affected both our ability to meet scheduled product deliveries and worldwide demand for our products.

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

As of April 3, 2022, international freight capacity has dropped, causing air and ocean freight rates to materially increase compared to pre-pandemic levels.

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 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.

For the three months ended April 3, 2022, we saw a 606% increase in freight-in expense compared to the prior year period 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 2022.

While we believe 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.

During the second quarter of 2021, we evaluated our existing real estate lease portfolio in light the COVID-19 pandemic and its impact on the changing nature of office space use by our workforce.

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, in the second quarter of 2021.

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

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

During the first quarter of 2022, we remained focused on navigating these on-going challenges presented by the COVID-19 pandemic through preserving our liquidity and managing our cash flow through taking preemptive action to enhance our ability to meet our short-term liquidity needs.

These actions include, but are not limited to, proactively managing working capital by closely monitoring customers' credit and collections, renegotiating payment terms with third-party manufacturers and key suppliers, closely monitoring inventory levels and purchases against forecasted demand, reducing or eliminating non-essential spending, subleasing excess office space, and deferment of hiring.

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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 Nine Months Ended

2021 September 27,

2020 October 3,

2021 September 27,

Three Months Ended

2022 March 28,

(In thousands, except percentage data)

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General and administrative 12,621 10.1 % 11,227 13.6 %

Impairment charges — 0.0 % — — % 9,116 3.1 % — — %

Separation expense 79 0.1 % 54 0.1 %

Gain on sale of business — — % — — % — — % (292) — %

Total operating expenses 42,247 33.9 % 37,279 45.2 %

6 unchanged sentences

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.

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.

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

As of April 3, 2022, $205.5 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 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.

As of April 3, 2022, Verisure has paid the full cash consideration of $13.5 million for these NRE services.

For the three months ended April 3, 2022 and March 28, 2021, the Company recognized service revenue of $0.1 million and $1.5 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 Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

Three Months Ended

2022 % Change March 28,

(In thousands, except percentage data)

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Total revenue $ 124,751 51.1 % $ 82,556

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.

Revenue for the three months ended April 3, 2022 increased 51.1%, compared to the prior year period, primarily due to higher product sales and service revenue.

Product revenue increased by $35.1 million, or 58.7% for the three months ended April 3, 2022 compared to the prior year period, primarily driven by an increase in product shipments in Americas and EMEA due to stronger customer demand, partially offset by higher provisions for sales returns and marketing expenditures that are deemed to be a reduction of revenue.

Service revenue increased by $7.1 million, or 31.3% for the three months ended April 3, 2022 compared to the prior year period, primarily due to an increase in paid accounts, partially offset by a decrease in Verisure NRE revenue recognition.

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, IT and facilities overhead, warranty costs associated with returned goods, write-downs for excess and obsolete inventory, royalties to third parties;

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

and amortization expense of certain acquired intangibles.

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Our cost of revenue as a percentage of revenue can vary based upon a number of factors, including those that may affect our revenue set forth above and factors that may affect our cost of revenue, including, without limitation:

product mix, sales channel mix, registered accounts' acceptance of paid subscription service offerings, 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.

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.

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

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

Three Months Ended

2022 % Change March 28,

(In thousands, except percentage data)

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Total cost of revenue $ 91,176 60.7 % $ 56,749

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 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 Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

Cost of product revenue increased for the three months ended April 3, 2022 compared to the prior year period, primarily due to increases in product revenue and freight-in expense as a result of COVID-19 related supply chain disruption and price inflation.

Cost of service revenue increased for the three months ended April 3, 2022 compared to the prior year period, as a result of service revenue growth, offset by cost optimizations.

The following table presents gross profit for the periods indicated:

Three Months Ended

2022 % Change March 28,

(In thousands, except percentage data)

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Total gross profit $ 33,575 30.1 % $ 25,807

Gross profit percentage:

Gross margin percentage:

Products 14.8 % 21.1 %

Services 65.3 % 57.9 %

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

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.

The service margin increase is primarily due to an increase in paid service revenue coupled with various cost optimizations implemented.

Total gross margin percentage 26.9 % 31.3 %

Gross profit increased for the three months ended April 3, 2022, compared to the prior year period, due to a combination of both product and service revenue increases.

The product gross profit increase is primarily due to an increase in product revenue, partially offset by higher freight-in costs as a result of COVID-19 related supply chain disruption.

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

Product gross margin reduced for the three months ended April 3, 2022, compared to the prior year period, due to higher warranty expense and higher freight-in costs as a result of COVID-19 related supply chain disruption.

Service gross margin increased for the three months ended April 3, 2022, compared to the prior year period, due to cost optimizations and a higher mix of recurring paid service revenue.

Operating Expenses

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Research and development expense consists primarily of personnel-related expense, safety, security, regulatory services and testing, other research and development consulting fees, and corporate IT and facilities overhead.

We recognize research and development expense as it is incurred.

recognize research and development expense as it is incurred.

We have invested in and expanded our research and development organization to enhance our ability to introduce innovative products and services.

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.

We expect research and development expense to increase in absolute dollars as we develop new product and service offerings and compete for engineering talent.

Research and development expense directly attributable to delivering the Verisure NRE is recognized in cost of service.

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

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

Three Months Ended

2022 % Change March 28,

(In thousands, except percentage data)

Research and development expense $ 16,379 10.7 % $ 14,791

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.

Research and development expense increased $1.6 million for the three months ended April 3, 2022, compared to the prior year period, primarily due to increases of $0.9 million in outside professional services and $0.2 million in personnel-related expenses and a decrease in certain research and development expenses amounting to $0.4 million, which were attributed to the Verisure NRE projects, and are classified as cost of service revenue.

Sales and Marketing

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and credit card processing fees.

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

We expect our sales and marketing expense to significantly increase in the future as we invest in marketing to drive awareness of our brand and drive demand for our products and services.

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

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

Three Months Ended

2022 % Change March 28,

(In thousands, except percentage data)

Sales and marketing expense $ 13,168 17.5 % $ 11,207

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.

Sales and marketing expense increased $2.0 million for the three months ended April 3, 2022, compared to the prior year period, primarily due to increases of $0.9 million in marketing expenditures, $0.8 million in personnel-related expenses, $0.5 million in credit card processing fees and $0.3 million in freight-out expenses, partially offset by a decrease of $0.6 million in outside professional services.

General and Administrative

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

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

Three Months Ended

2022 % Change March 28,

(In thousands, except percentage data)

General and administrative expense $ 12,621 12.4 % $ 11,227

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 Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

(In thousands, except percentage data)

Impairment charges $ — ** $ — $ 9,116 ** $ —

During the second quarter of 2021, we reviewed certain of our right-of-use assets and other lease-related assets for impairment in conjunction with our decision to sublease our office space in San Jose, California.

As a result, we recorded an impairment charge of $9.1 million, which includes $6.8 million associated with the right-of-use asset and $2.3 million associated with the leasehold improvements and furniture, fixtures and equipment included in the San Jose office asset group.

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

General and administrative expense increased $1.4 million for the three months ended April 3, 2022, compared to the prior year period, primarily due to an increase of $1.8 million in personnel-related expenses, partially offset by a decrease of $0.3 million in IT and facility overhead.

Separation Expense

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The following table presents separation expense for the periods indicated:

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

Three Months Ended

2022 % Change March 28,

(In thousands, except percentage data)

Separation expense $ 79 46.3 % $ 54

Gain on sale of business

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

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

(In thousands, except percentage data)

Gain on sale of business $ — ** $ — $ (292) ** $ —

**Percentage change not meaningful

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 $292 thousand as a result of the final working capital adjustment.

Interest Income and Other Income (Expense), Net

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

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

Three Months Ended

2022 % Change March 28,

(In thousands, except percentage data)

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Our interest income was primarily earned from our short-term investments and cash and cash equivalents.

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 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.

We expect our interest income in absolute dollars to stay relatively flat as we deploy our short-term investments and cash and cash equivalents to fund our operations, while interest rates are expected to increase.

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 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.

The ERC, as one of the provisions that provide economic relief for individuals and businesses under the CARES Act, is a refundable payroll tax credit that encouraged businesses to keep employees on the payroll during the COVID-19 pandemic.

We have also included reimbursements for the Verisure Transition Service Agreement ("TSA") and the Employee Retention Credit ("ERC") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") for qualified wages in Other income.

Other income (expense), net decreased for the three months ended April 3, 2022 compared to the prior year period, primarily due to a decrease of $0.8 million in Verisure TSA related income, partially offset by an increase of $0.3 million in foreign currency gains.

Provision for Income Taxes

Three Months Ended Nine Months Ended

2021 % Change September 27,

2020 October 3,

2021 % Change September 27,

Three Months Ended

2022 % Change March 28,

(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 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.

continue to be subject to a full valuation allowance.

The increase in provision for income taxes for the three months ended April 3, 2022, compared to the prior year period, was primarily due to higher foreign earnings in fiscal 2022.

Consistent with the prior year, the Company maintained a valuation allowance against its U.S.

federal and state deferred tax assets and did not record a tax benefit on these deferred tax assets since it is more likely than not that these deferred tax assets will not be realized.

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 October 3, 2021, our accumulated deficit was $282.0 million.

As of April 3, 2022, our accumulated deficit was $297.3 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 October 3, 2021, we had cash, cash equivalents and short-term investments totaling $166.1 million.

As of April 3, 2022, we had cash, cash equivalents and short-term investments totaling $145.5 million.

11.3% 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 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.

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.

On October 27, 2021, the Company entered into a Loan and Security Agreement with Bank of America, N.A.

for a $40.0 million three-year revolving credit facility.

Refer to Note 8.

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

Debt 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.

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

Nine Months Ended

2021 September 27,

Three Months Ended

2022 March 28,

(In thousands)

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Net cash provided by (used in) investing activities (44,938) 14,197

Net cash used in financing activities (5,535) (1,581)

Net cash provided by (used in) financing activities (5,272) 1,956

Net cash decrease $ (74,767) $ (14,015)

Operating activities

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 $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.

Net cash used in operating activities decreased by $5.6 million for the three months ended April 3, 2022 compared to the prior year period.

This decrease comprised a $3.8 million reduction in adjusted net loss reconciled to net cash used in operating activities and a decrease in working capital used in operations of $1.8 million, mainly driven by lower payments to suppliers primarily as a result of lower inventory purchases and an increase in accrued and other liabilities, partially offset by lower collections from customer primarily as a result of a change in customer's payment terms.

Our days sales outstanding (“DSO”) increased to 58 days as of April 3, 2022 compared to 50 days as of December 31, 2021, primarily as a result of changes in customer mix and payment terms.

Inventory decreased marginally to $37.0 million as of April 3, 2022 from $38.4 million as of December 31, 2021, as we continue to face COVID-19 related supply chain disruptions.

Despite a lower inventory level, our ending inventory turns were 8.7x in the three months ended April 3, 2022 down from 10.5x turns in the three months ended December 31, 2021, primarily as a result of the normal seasonality in our business.

Our accounts payable decreased to $68.3 million as of April 3, 2022 from $84.1 million as of December 31, 2021, in line with lower product purchases.

Investing activities

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.

Net cash used in investing activities increased by $59.1 million for the three months ended April 3, 2022 compared to the prior year period, primarily due to purchases of short-term investments.

Financing activities

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.

Net cash used in financing activities was $5.3 million for the three months ended April 3, 2022, representing tax withholdings from restricted stock unit releases of $6.7 million, offset by proceeds from exercises of stock options of $1.4 million.

Net cash provided by financing activities was $2.0 million for the three months ended March 28, 2021, representing proceeds from ESPP contributions and exercises of stock options of $6.1 million, offset by tax withholdings from restricted stock unit releases of $4.2 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, 2021.

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.

There have been no material changes to our critical accounting policies and estimates during the three months ended April 3, 2022, 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,

Recent Accounting Pronouncements

For a complete description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on financial condition and results of operations, refer to Note 2, Summary of Significant Accounting Policies and Recent Accounting Pronouncements , in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Quantitative and Qualitative Disclosures About Market Risk

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.

During the three months ended April 3, 2022, there were no material changes to our market risk disclosures as set forth in Part II Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2021.

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