What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-08-10 · 129 added, 143 removed, 175 unchanged (61% of the section changed)

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

Since the launch of our first product in December 2014, we have shipped 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.

Since the launch of our first product in December 2014, we have shipped over 26.3 million smart connected devices, and as of October 2, 2022, the Arlo platform had approximately 6.9 million cumulative registered accounts across more than 100 countries around the world.

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

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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 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.

International revenue was 44.6% and 33.0% of our revenue for the three months ended October 2, 2022 and October 3, 2021, respectively, and 46.3% and 34.7% of our revenue for the nine months ended October 2, 2022 and October 3, 2021, respectively.

For the three months ended October 2, 2022 and October 3, 2021, we generated revenue of $128.2 million and $111.1 million, respectively, representing a year-over-year increase of 15.3%.

For the nine months ended October 2, 2022 and October 3, 2021, we generated revenue of $371.9 million and $292.3 million, respectively, representing a year-over-year increase of 27.2%.

Loss from operations were $14.4 million and $15.6 million for the three months ended October 2, 2022 and October 3, 2021, respectively.

Loss from operations were $34.5 million and $52.9 million for the nine months ended October 2, 2022 and October 3, 2021, respectively.

(" Verisure").

Under the Supply Agreement, Verisure became the exclusive distributor of our products in Europe for all channels, and non-exclusively distributes 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.

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

July 3, 2022 % Change June 27, 2021

October 2, 2022 % Change October 3, 2021

(In thousands, except percentage data)

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We believe that our ability to increase our user base is an indicator of our market penetration and growth of our business as we continue to expand and innovate our Arlo platform.

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

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

We changed our definition from registered users to registered accounts starting in the fourth quarter of 2019 due to the Verisure transaction.

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

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

The number of registered accounts does not necessarily reflect the number of end-users on the Arlo platform as one registered account may be used by multiple end-users to monitor the devices attached to that household.

Cumulative Paid Accounts.

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

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.

Paid accounts are defined as any account worldwide where a subscription to a paid service is being collected (either by us or by our customers or channel partners, including Verisure), plus paid service plans of a duration of more than three months bundled with products (such bundles being counted as a paid account after 90 days have elapsed from the date of registration).

Annual Recurring Revenue ("ARR") .

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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.

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 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 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 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 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.

During the nine months ended October 2, 2022, we remained focused on navigating COVID-19 related challenges, the ongoing conflict in Ukraine, supply chain disruptions, inflation, lower consumer confidence and rising interest rates by preserving our liquidity and managing our cash flow by taking preemptive action to enhance our ability to meet our short-term liquidity needs.

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, the ongoing conflict in Ukraine, supply chain disruptions, inflation, lower consumer confidence and rising interest rates.

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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

2022 June 27,

Three Months Ended Nine Months Ended

2022 October 3,

2021 October 2,

2022 October 3,

(In thousands, except percentage data)

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Interest income (expense), net 290 0.2 % (1) — % 414 0.1 % 26 — %

Other income (expense), net (116) (0.1) % 2,662 2.7 % 295 0.1 % 3,571 2.1 %

Other income, net 19 0.0 % 599 0.5 % 314 0.1 % 4,170 1.5 %

Loss before income taxes (14,131) (11.1) % (15,017) (13.5) % (33,726) (9.1) % (48,712) (16.6) %

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Net loss $ (14,435) (11.3) % $ (15,198) (13.7) % $ (34,471) (9.3) % $ (49,237) (16.8) %

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

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

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 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.

Upon device shipment, we attribute a portion of the sales price as 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.

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.

Our services also include certain development services provided to strategic partners under NRE arrangements.

Our revenue consists of gross revenue, less end-user customer rebates and other channel sales incentives, allowances for estimated sales returns, price protection, and net changes in deferred revenue.

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.

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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 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 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.

As of October 2, 2022, $304.3 million of the purchase commitment has been fulfilled.

The Supply Agreement also provided for certain NRE services, including developing certain custom products specified by Verisure in exchange for an aggregate of $13.5 million, which Verisure fully paid in 2021.

For the three months ended October 2, 2022 and October 3, 2021, we recognized service revenue of $0.5 million and $1.3 million, respectively, for these NRE services.

We conduct business across three geographic regions:

Americas, EMEA, and APAC.

the Americas, EMEA, and APAC.

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

2022 % Change June 27,

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

(In thousands, except percentage data)

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Total revenue $ 128,157 15.3 % $ 111,149 $ 371,887 27.2 % $ 292,276

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.

Revenue for the three and nine months ended October 2, 2022 increased 15.3% and 27.2%, compared to the prior year periods, respectively, primarily due to higher product sales mainly the increase in volume and service revenue.

Product revenue increased by $8.6 million, or 10.2% and $56.5 million, or 26.0% for the three and nine months ended October 2, 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 a decrease in product sales in the Americas and APAC.

The increase for the nine months ended October 2, 2022 was also partially offset by higher provisions for sales returns and sales incentives in the Americas that are deemed to be reductions of revenue.

Service revenue increased by $8.4 million, or 31.3% and $23.1 million, or 30.8% for the three and nine months ended October 2, 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

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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:

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.

product mix, sales channel mix, registered accounts' acceptance of paid subscription service offerings, 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, and charges for excess or obsolete inventory.

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 service costs and gross margin.

We believe this outsourcing strategy allows

us to better manage our product and service costs and gross margin and allows us to adapt to changing market dynamics and supply chain constraints.

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

Three Months Ended Six Months Ended

2022 % Change June 27,

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

(In thousands, except percentage data)

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Total cost of revenue $ 91,407 5.3 % $ 86,806 $ 267,822 24.0 % $ 215,957

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.

Cost of product revenue increased 4.9% and 26.6% for the three and nine months ended October 2, 2022 compared to the prior year periods, respectively, primarily due to increases in gross shipments plus increases in costs of materials and components of our products mainly as the result of inflation.

The cost of product revenue increase for the three months ended October 2, 2022 was partially offset by a decrease in freight cost from the prior year period as a result of COVID-19 related supply chain disruption.

Cost of service revenue increased 8.1% and 8.8% for the three and nine months ended October 2, 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 Six Months Ended

2022 % Change June 27,

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

(In thousands, except percentage data)

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Services 66.1 % 58.8 % 65.5 % 58.6 %

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

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.

Total gross margin 28.7 % 21.9 % 28.0 % 26.1 %

Gross profit increased 51.0% and 36.4% for the three and nine months ended October 2, 2022, compared to the prior year periods, respectively, due to a combination of both product and service revenue increases.

The product gross profit increase for the three months ended October 2, 2022 was primarily due to an increase in product shipments and lower provisions for sales returns that are deemed to be reductions of revenue, partially offset by higher product costs.

The product gross profit increase for the nine months ended October 2, 2022 was primarily due to an increase in product shipments, partially offset by higher product costs and higher provisions of sales returns and marketing expenditures that are deemed to be reductions of revenue.

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.

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

Three Months Ended Six Months Ended

2022 % Change June 27,

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

(In thousands, except percentage data)

Research and development expense $ 16,471 14.6 % $ 14,377 $ 50,252 10.6 % $ 45,419

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.

Research and development expense increased by $2.1 million for the three months ended October 2, 2022, compared to the prior year period, primarily due to increases of $1.2 million in outside professional services for the development of Arlo Safe and the Arlo Security System which will be released in the fourth quarter of 2022 and $1.1 million in personnel-related expenses mainly due to the increase in headcount, partially offset by a decrease of $0.4 million in IT and facility overhead.

Research and development expense increased $4.8 million for the nine months ended October 2, 2022, compared to the prior year period, primarily due to increases of $2.9 million in outside professional services for the development of Arlo Safe and the Arlo Security System which will be released in the fourth quarter of 2022 and $1.4 million in personnel-related expenses mainly due to the increase in headcount, partially offset by a decrease of $0.6 million in IT and facility overhead and other expenses.

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

2022 % Change June 27,

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

(In thousands, except percentage data)

Sales and marketing expense $ 22,193 73.7 % $ 12,779 $ 49,867 36.8 % $ 36,445

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.

Sales and marketing expense increased $9.4 million for the three months ended October 2, 2022, compared to the prior year period, primarily due to an increase of $9.0 million in media spend for our brand awareness advertising campaign.

Sales and marketing expense increased $13.4 million for the nine months ended October 2, 2022, compared to the prior year period, primarily due to increases of $11.3 million in marketing expenditures, primarily for the production of creative content and media spend for our brand awareness advertising campaign, $1.4 million in personnel-related

expenses, and $1.1 million in credit card processing fees, partially offset by a decrease of $1.2 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 Six Months Ended

2022 % Change June 27,

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

(In thousands, except percentage data)

General and administrative expense $ 12,253 1.1 % $ 12,119 $ 38,023 3.0 % $ 36,905

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.

General and administrative expense increased $0.1 million for the three months ended October 2, 2022, compared to the prior year period, primarily due to an increase of $1.4 million in personnel-related expenses mainly from the increase in stock-based compensation, partially offset by decreases of $0.7 million in legal and professional services and $0.6 million in IT and facility overhead.

General and administrative expense increased $1.1 million for the nine months ended October 2, 2022, compared to the prior year period, primarily due to an increase of $3.9 million in personnel-related expenses mainly from the increase in stock-based compensation, partially offset by decreases of $1.4 million in legal and professional services and $1.2 million in IT and facility overhead.

Impairment Charges

The following table presents impairment charges for the periods indicated:

Three Months Ended Six Months Ended

2022 % Change June 27,

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

(In thousands, except percentage data)

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

**Percentage change not meaningful.

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.

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 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 assets and long-lived assets.

Separation Expense

Separation expense consists primarily of costs of legal and professional services for IPO-related litigation associated with our separation from NETGEAR.

Separation expense consists primarily of costs of legal and professional services for IPO-related litigation associated with our separation from NETGEAR, Inc.

The following table presents separation expense for the periods indicated:

Three Months Ended Six Months Ended

2022 % Change June 27,

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

(In thousands, except percentage data)

Separation expense $ 273 (60.0) % $ 683 $ 377 (71.9) % $ 1,342

Interest Income and Other Income (Expense), Net

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

Three Months Ended Six Months Ended

2022 % Change June 27,

Interest Income (Expense) and Other Income, Net

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

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, net primarily represents miscellaneous income and expense, which includes 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.

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

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

(In thousands, except percentage data)

Interest income (expense), net $ 290 ** $ (1) 414 ** 26

Other income (expense), net $ (116) ** $ 2,662 295 ** 3,571

Other income, net $ 19 (96.8) % $ 599 314 (92.5) % 4,170

**Percentage change not meaningful.

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

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 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.

Other income, net decreased $0.6 million for the three months ended October 2, 2022, compared to the prior year period, primarily due to decreases of $0.2 million in ERC under the CARES Act and $0.5 million in Verisure TSA related income.

Other income, net decreased $3.9 million for the nine months ended October 2, 2022, compared to the prior year period, primarily due to decreases of $2.0 million in ERC under the CARES Act and $2.0 million in Verisure TSA related income.

Provision for Income Taxes

Three Months Ended Six Months Ended

2022 % Change June 27,

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

(In thousands, except percentage data)

1 unchanged sentence

Effective tax rate (2.2) % (1.2) % (2.2) % (1.1) %

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 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.

Our 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 2, 2022, compared to the prior year periods, was primarily due to higher foreign earnings.

Consistent with the prior year, we maintained a valuation allowance against our 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.

1 unchanged sentence

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

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

As of October 2, 2022, our accumulated deficit was $323.3 million.

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

1 unchanged sentence

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.

Starting in 2018, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) impact on the repatriation of foreign earnings is generally immaterial.

The cash and cash equivalents balance outside of the U.S.

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

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

1 unchanged sentence

Refer to Note 6.

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

Revolving Credit Facility for further information about the terms and structure of the credit facility.

Material Cash Requirements

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, 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.

We have no commitments to obtain such additional financing and cannot assure you that additional financing will be available at all or, if available, that such financing would be obtainable on terms favorable to us and would not be dilutive.

Leases and Contractual Commitments

Our operating lease obligations mostly include offices, equipment, data centers, and distribution centers.

Our contractual commitments are primarily inventory-related purchase obligations with suppliers.

Contingencies

We are involved in disputes, litigation, and other legal actions.

We evaluate whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies.

Significant judgment is required to determine both the probability and the estimated amount of loss.

In such cases, we accrue for the amount or, if a range, we accrue the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within litigation reserves, net.

Refer to Note 7.

Commitments and Contingencies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for further information

We have no commitments to obtain such additional financing and cannot provide assurance that additional financing will be available at all or, if available, that such financing would be obtainable on terms favorable to us and would not be dilutive.

Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products, the growth in our service revenue, as well as the ability to increase our gross margin dollars and continue to maintain controls over our operating expenditures.

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

Six Months Ended

2022 June 27,

Nine Months Ended

2022 October 3,

(In thousands)

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Operating activities

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.

Net cash used in operating activities increased by $2.1 million for the nine months ended October 2, 2022 compared to the prior year period.

This increase comprised an increase in working capital used in operations of $14.0 million, offset by a $11.8 million reduction in net loss adjusted for non-cash items.

The increase in working capital used in operations was mainly driven by higher inventory purchases as a result of the seasonal restocking in anticipation of the holiday consumer purchasing pattern coupled with our internal objective to maintain more appropriate inventory levels to support consumer demand in the fourth quarter of 2022 and early 2023.

Investing activities

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.

Net cash used in investing activities increased by $63.6 million for the nine months ended October 2, 2022 compared to the prior year period, primarily due to purchases of short-term investments.

Financing activities

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

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

Refer to Note 9.

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

Net cash used in financing activities increased by $9.1 million for the nine months ended October 2, 2022 compared to the prior year period, primarily due to the increase in tax withholding from restricted stock unit releases and the decrease in proceeds from exercises of stock options.

Critical Accounting Policies and Estimates

For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2021.

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.

There have been no material changes to our critical accounting policies and estimates during the nine months ended October 2, 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 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.

During the nine months ended October 2, 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