What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-10 compared with 2022-05-11 · 113 added, 87 removed, 205 unchanged (49% 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 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.

Since the launch of our first product in December 2014, we have shipped over 25.1 million smart connected devices, and as of July 3, 2022, the Arlo platform had approximately 6.6 million cumulative registered accounts across more than 100 countries around the world.

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

1 unchanged sentence

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.

International revenue was 49.6% and 32.5% of our revenue for the three months ended July 3, 2022 and June 27, 2021, respectively, and 48.6% and 35.9% of our revenue for the six months ended July 3, 2022 and June 27, 2021, respectively.

For the three months ended July 3, 2022 and June 27, 2021, we generated revenue of $119.0 million and $98.6 million, respectively, representing a year-over-year increase of 20.7%.

For the six months ended July 3, 2022 and June 27, 2021, we generated revenue of $243.7 million and $181.1 million, respectively, representing a year-over-year increase of 34.6%.

Loss from operations were $11.3 million and $25.8 million for the three months ended July 3, 2022 and June 27, 2021, respectively.

Loss from operations were $20.0 million and $37.3 million for the six months ended July 3, 2022 and June 27, 2021, respectively.

On November 4, 2019, we concurrently entered into an Asset Purchase Agreement (the “Purchase Agreement”) and Supply Agreement (the “Supply Agreement” and together with the Purchase Agreement, the “Verisure Agreements”) with Verisure.

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

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 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 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.

6 unchanged sentences

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

April 3, 2022 % Change March 28, 2021

July 3, 2022 % Change June 27, 2021

(In thousands, except percentage data)

18 unchanged sentences

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

Impact of COVID-19, Global Geopolitical, Economic and Business Conditions

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.

3 unchanged sentences

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

As of July 3, 2022, international freight capacity remains depressed compared to pre-pandemic levels, and this has caused, and continues to cause, 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 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.

For the three and six months ended July 3, 2022, we saw a 27% and 176% 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 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 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.

While we believe we have been broadly successful in navigating COVID-19 related challenges to date, any further disruptions 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, ongoing conflict in Ukraine, supply chain disruptions, inflation, lower consumer confidence and rising interest rates, 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 first half of 2022, we remained focused on navigating these on-going challenges 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.

We continue to monitor this rapidly developing situation and may, as necessary, reduce expenditures further, borrow under our revolving credit facility, or pursue other sources of capital that may include other forms of external financing in order to maintain our cash position and preserve financial flexibility in response to the uncertainty in the United States and global markets resulting from the COVID-19 pandemic.

Results of Operations

1 unchanged sentence

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

2022 March 28,

Three Months Ended Six Months Ended

2022 June 27,

(In thousands, except percentage data)

11 unchanged sentences

General and administrative 13,149 11.1 % 13,559 13.8 % 25,770 10.6 % 24,786 13.7 %

Impairment charges — — % 9,116 9.2 % — — % 9,116 5.0 %

Separation expense 25 0.0 % 605 0.6 % 104 0.0 % 659 0.4 %

6 unchanged sentences

Net loss $ (11,557) (9.7) % $ (23,320) (23.7) % $ (20,036) (8.2) % $ (34,039) (18.8) %

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

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

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 second generation camera, doorbell and floodlight products 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 economic life of the device or free trial period, as applicable.

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

5 unchanged sentences

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

Under the Supply Agreement that we entered into with Verisure in 2019 (the "Supply Agreement"), Verisure became the exclusive distributor of our products in Europe for all channels, and will non-exclusively distribute our products through its direct channels globally for an initial term of five years.

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

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

As of April 3, 2022, $205.5 million of the purchase commitment has been fulfilled.

As of July 3, 2022, $255.6 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 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.

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

For the three months ended July 3, 2022 and June 27, 2021, we recognized service revenue of $0.2 million and $2.0 million, respectively, for these NRE services.

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

2022 % Change March 28,

Three Months Ended Six Months Ended

2022 % Change June 27,

(In thousands, except percentage data)

6 unchanged sentences

Total revenue $ 118,979 20.7 % $ 98,571 $ 243,730 34.6 % $ 181,127

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.

Revenue for the three and six months ended July 3, 2022 increased 20.7% and 34.6%, compared to the prior year periods, respectively, primarily due to higher product sales and service revenue.

Product revenue increased by $12.9 million, or 17.6% and $47.9 million, or 36.0% for the three and six months ended July 3, 2022 compared to the prior year periods, respectively, primarily driven by an increase in product shipments in EMEA due to stronger customer demand and the launch of a customized camera in the Verisure Security channel, partially offset by decrease in product sales in Americas and APAC, and higher provisions for sales returns in Americas due to higher return rates in the current period that are deemed to be a reduction of revenue.

Service revenue increased by $7.5 million, or 29.8% and $14.7 million, or 30.5% for the three and six months ended July 3, 2022 compared to the prior year periods, respectively, primarily due to an increase in paid accounts, partially offset by a decrease in Verisure NRE revenue recognition.

Cost of Revenue

1 unchanged sentence

Product costs primarily consist of:

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

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.

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 and other NRE arrangements.

the cost of finished products from our third-party manufacturers and overhead costs, including personnel expense for operation staff, purchasing, product planning, inventory control, warehousing and distribution logistics, third-party software licensing fees, inbound freight, IT and facilities overhead, warranty costs associated with returned goods, write-downs for excess and obsolete inventory and excess components, and royalties to third parties.

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

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.

2 unchanged sentences

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

Three Months Ended

2022 % Change March 28,

Three Months Ended Six Months Ended

2022 % Change June 27,

(In thousands, except percentage data)

3 unchanged sentences

Total cost of revenue $ 85,239 17.7 % $ 72,402 $ 176,415 36.6 % $ 129,151

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.

Cost of product revenue increased 19.0% and 41.6% for the three and six months ended July 3, 2022 compared to the prior year periods, respectively, primarily due to increases in gross shipments plus the increases in costs of materials and components of our products and freight cost.

Cost of service revenue increased 9.9% and 9.2% for the three and six months ended July 3, 2022 compared to the prior year periods, respectively, 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,

Three Months Ended Six Months Ended

2022 % Change June 27,

(In thousands, except percentage data)

7 unchanged sentences

Total gross margin percentage 28.4 % 26.6 % 27.6 % 28.7 %

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.

Gross profit increased 28.9% and 29.5% for the three and six months ended July 3, 2022, compared to the prior year periods, respectively, 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 and lower provisions for marketing expenditures that are deemed to be reductions of revenue, partially offset by higher product costs and provision for sale returns.

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

Operating Expenses

1 unchanged sentence

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.

recognize research and development expense as it is incurred.

We recognize research and development expenses as they are 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 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

2022 % Change March 28,

Three Months Ended Six Months Ended

2022 % Change June 27,

(In thousands, except percentage data)

Research and development expense $ 17,402 7.1 % $ 16,251 $ 33,781 8.8 % $ 31,042

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.

Research and development expense increased $1.2 million for the three months ended July 3, 2022, compared to the prior year period, primarily due to an increase of $0.8 million in outside professional services and an increase in certain research and development expenses amounting to $0.8 million, as result of a reduction in the amount of work performed on Verisure NRE projects classified as a cost of service revenue, partially offset by a decrease of $0.4 million in IT and facility overhead and other expenses.

Research and development expense increased $2.7 million for the six months ended July 3, 2022, compared to the prior year period, primarily due to an increase of $1.7 million in outside professional services and an increase in certain research and development expenses amounting to $1.4 million, as a result of a reduction in the amount of work performed on Verisure NRE projects which are classified as cost of service revenue, partially offset by a decrease of $0.4 million in other expenses.

Sales and Marketing

8 unchanged sentences

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

Three Months Ended

2022 % Change March 28,

Three Months Ended Six Months Ended

2022 % Change June 27,

(In thousands, except percentage data)

Sales and marketing expense $ 14,506 16.4 % $ 12,459 $ 27,674 16.9 % $ 23,666

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.

Sales and marketing expense increased $2.0 million for the three months ended July 3, 2022, compared to the prior year period, primarily due to increases of $1.4 million in marketing expenditures, primarily for the production of creative content and other preparatory work for our upcoming awareness advertising campaign, $0.6 million in personnel-related expenses and $0.4 million in credit card processing fees, partially offset by a decrease of $0.3 million in outside professional services.

Sales and marketing expense increased $4.0 million for the six months ended July 3, 2022, compared

to the prior year period, primarily due to increases of $2.3 million in marketing expenditures, primarily for the production of creative content and other preparatory work for our upcoming awareness advertising campaign, $1.4 million in personnel-related expenses, $0.8 million in credit card processing fees, $0.2 million in IT and facility overhead and $0.2 million in sales freight-out expenses, partially offset by decreases of $0.9 million in outside professional services.

General and Administrative

2 unchanged sentences

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

Three Months Ended

2022 % Change March 28,

Three Months Ended Six Months Ended

2022 % Change June 27,

(In thousands, except percentage data)

General and administrative expense $ 13,149 (3.0) % $ 13,559 $ 25,770 4.0 % $ 24,786

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.

General and administrative expense decreased $0.4 million for the three months ended July 3, 2022, compared to the prior year period, primarily due to an increase of $0.7 million in personnel-related expenses, offset by decreases of $0.7 million in legal and professional services, $0.3 million in IT and facility overhead, and $0.1 million in other expenses.

General and administrative expense increased $1.0 million for the six months ended July 3, 2022, compared to the prior year period, primarily due to an increase of $2.5 million in personnel-related expenses, partially offset by decreases of $0.7 million in legal and professional services, $0.6 million in IT and facility overhead, and $0.2 million in other expenses.

Impairment Charges

The following table presents impairment charges for the periods indicated:

Three Months Ended Six Months Ended

2022 % Change June 27,

(In thousands, except percentage data)

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

Separation Expense

1 unchanged sentence

The following table presents separation expense for the periods indicated:

Three Months Ended

2022 % Change March 28,

Three Months Ended Six Months Ended

2022 % Change June 27,

(In thousands, except percentage data)

2 unchanged sentences

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

Three Months Ended

2022 % Change March 28,

Three Months Ended Six Months Ended

2022 % Change June 27,

(In thousands, except percentage data)

3 unchanged sentences

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 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.

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

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") 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.

We have also included reimbursements under the Verisure Transition Service Agreement ("Verisure 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 $2.8 million for the three months ended July 3, 2022, compared to the prior year period, primarily due to a decrease of $1.8 million in ERC under the CARES Act, which was recognized as Other income in the second quarter of 2021, and a decrease of $0.8 million in Verisure TSA related income.

Other income (expense), net decreased $3.3 million for the six months ended July 3, 2022, compared to the prior year period, primarily due to a decrease of $1.8 million in ERC under the CARES Act, which was recognized as Other income in the second quarter of 2021, and a $1.5 million decrease in Verisure TSA related income.

Provision for Income Taxes

Three Months Ended

2022 % Change March 28,

Three Months Ended Six Months Ended

2022 % Change June 27,

(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 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.

The increase in provision for income taxes for the three and six months ended July 3, 2022, compared to the prior year periods, was primarily due to higher foreign earnings in the second quarter of 2022 and first half of 2022, respectively.

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

2 unchanged sentences

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

As of April 3, 2022, our accumulated deficit was $297.3 million.

As of July 3, 2022, our accumulated deficit was $308.8 million.

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

Short-term investments are marketable government securities with an original maturity or a remaining maturity at the time of purchase of greater than three months and no more than 12 months.

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

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

As of July 3, 2022, we had cash, cash equivalents and short-term investments totaling $135.3 million.

34.6% 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.

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

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

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

1 unchanged sentence

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.

Based on our current plans, the Loan and Security 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.

However, the COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets, which have also been impacted by ongoing supply chain disruptions, rising interest rates, lower consumer confidence and inflation.

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

2 unchanged sentences

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

Three Months Ended

2022 March 28,

Six Months Ended

2022 June 27,

(In thousands)

1 unchanged sentence

Net cash provided by (used in) investing activities (50,429) 18,934

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

Net cash used in financing activities (10,384) (2,948)

Net cash decrease $ (90,194) $ (7,480)

Operating activities

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.

Net cash used in operating activities increased by $5.9 million for the six months ended July 3, 2022 compared to the prior year period.

This increase comprised an increase in working capital used in operations of $13.3 million, offset by a $7.4 million reduction in adjusted net loss reconciled to net cash used in operating activities.

The increase in working capital used in operations was mainly driven by lower collections from customers primarily as a result of a change in customer mix and associated payment terms and higher inventory purchases, partially offset by lower payments to suppliers.

Our days' sales outstanding (“DSO”) increased to 57 days as of July 3, 2022 compared to 50 days as of December 31, 2021, primarily as a result of changes in customer mix and associated payment terms.

Inventory increased marginally to $39.2 million as of July 3, 2022 from $38.4 million as of December 31, 2021, due to higher inventory purchases in line with product shipments.

Our ending inventory turns were 7.5x in the three months ended July 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 $77.4 million as of July 3, 2022 from $84.1 million as of December 31, 2021, primarily due to timing of supplier payments.

Investing activities

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.

Net cash used in investing activities increased by $69.4 million for the six months ended July 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 $5.3 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.

Net cash used in financing activities was $10.4 million for the six months ended July 3, 2022, representing tax withholdings from restricted stock unit releases of $13.6 million, offset by proceeds from ESPP contributions and exercises of stock options of $3.2 million.

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.

Contractual Obligations

4 unchanged sentences

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 three months ended April 3, 2022, other than as discussed in Note 2.

There have been no material changes to our critical accounting policies and estimates during the six months ended July 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.

Quantitative and Qualitative Disclosures About Market Risk

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.

During the six months ended July 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