What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-07 compared with 2022-03-02 · 561 added, 1057 removed, 513 unchanged (76% of the section changed)

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We have audited the accompanying consolidated balance sheets of Arlo Technologies, Inc.

and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”).

and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of comprehensive loss, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinion

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Cash and cash equivalents $ 84,024 $ 175,749

Short-term investments (amortized cost of $ — and $ 19,996 )

Accounts receivable, net (net of allowance for credit losses of $ 337 and $ 519 )

79,564 77,643

Short-term investments 29,700 —

Accounts receivable, net 65,960 79,564

Inventories 46,554 38,390

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Accrued liabilities 98,855 97,389

Income tax payable 12 267

Total current liabilities 162,278 210,929

Non-current deferred revenue 1,344 16,563

Non-current operating lease liabilities 19,279 21,470

Non-current income taxes payable 94 104

Other non-current liabilities 2,949 2,439

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Additional paid-in capital 433,138 401,367

Accumulated other comprehensive income — 3

Accumulated other comprehensive loss ( 107 ) —

Accumulated deficit ( 345,425 ) ( 288,799 )

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ARLO TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

Year Ended December 31,

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General and administrative 55,932 49,489 51,096

Restructuring charges 1,805 — —

Impairment charges — 9,116 —

Separation expense 1,596 248 1,913

Gain on sale of business — ( 292 ) ( 54,881 )

Others 387 1,596 ( 44 )

Total operating expenses 192,914 168,173 160,253

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Diluted 87,173 82,688 78,084

The accompanying notes are an integral part of these consolidated financial statements.

ARLO TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Year Ended December 31,

2021 2020 2019

(In thousands)

Net loss $ ( 56,029 ) $ ( 101,251 ) $ ( 85,951 )

Other comprehensive income (loss), before and after tax:

Unrealized gain (loss) on derivative instruments ( 2 ) 27 ( 27 )

Unrealized gain (loss) on available-for-sale securities ( 1 ) ( 22 ) 25

Total other comprehensive income (loss), before tax ( 3 ) 5 ( 2 )

Total other comprehensive income (loss), net of tax ( 3 ) 5 ( 2 )

Comprehensive loss:

Net loss $ ( 56,626 ) $ ( 56,029 ) $ ( 101,251 )

Other comprehensive income (loss), net of tax ( 107 ) ( 3 ) 5

Total comprehensive loss $ ( 56,733 ) $ ( 56,032 ) $ ( 101,246 )

The accompanying notes are an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total

Year Ended December 31,

2022 2021 2020

(In thousands)

Balance as of December 31, 2018 74,247 $ 74 $ 315,277 $ — $ ( 45,849 ) $ 269,502

Cumulative-effect adjustment from adoption of ASC 842, net of tax — — — — 281 281

Net loss — — — — ( 85,951 ) ( 85,951 )

Stock-based compensation expense — — 19,582 — — 19,582

Total stockholders' equity, beginning balances $ 112,652 $ 133,767 $ 203,376

Common stock:

Beginning balances $ 84 $ 79 $ 76

Issuance of common stock under stock-based compensation plans 6 8 3

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Restricted stock unit withholdings ( 3 ) ( 3 ) ( 1 )

Change in unrealized gains on available-for-sale securities, net of tax — — — 25 — 25

Change in unrealized losses on derivatives, net of tax — — — ( 27 ) — ( 27 )

Balance as of December 31, 2019 75,786 76 334,821 ( 2 ) ( 131,519 ) 203,376

Net loss — — — — ( 101,251 ) ( 101,251 )

Ending balances $ 89 $ 84 $ 79

Additional paid-in capital:

Beginning balances $ 401,367 $ 366,455 $ 334,821

Stock-based compensation expense 36,985 24,792 27,418

Settlement of liability classified restricted stock unit — — 4,242 — — 4,242

Settlement of liability classified restricted stock units 8,733 15,095 4,242

Issuance of common stock under stock-based compensation plans 1,419 5,261 1,727

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Restricted stock unit withholdings ( 18,199 ) ( 13,198 ) ( 4,777 )

Change in unrealized losses on available-for-sale securities, net of tax — — — ( 22 ) — ( 22 )

Change in unrealized gains on derivatives, net of tax — — — 27 — 27

Balance as of December 31, 2020 79,336 79 366,455 3 ( 232,770 ) 133,767

Ending balances $ 433,138 $ 401,367 $ 366,455

Accumulated deficit:

Beginning balances $ ( 288,799 ) $ ( 232,770 ) $ ( 131,519 )

Net loss ( 56,626 ) ( 56,029 ) ( 101,251 )

Stock-based compensation expense — — 24,792 — — 24,792

Settlement of liability classified restricted stock unit — — 15,095 — — 15,095

Ending balances $ ( 345,425 ) $ ( 288,799 ) $ ( 232,770 )

Accumulated other comprehensive income (loss):

Beginning balances $ — $ 3 $ ( 2 )

Other comprehensive income (loss), net of tax ( 107 ) ( 3 ) 5

Ending balances $ ( 107 ) $ — $ 3

Total stockholders' equity, ending balances $ 87,695 $ 112,652 $ 133,767

Common stock shares:

Beginning balances 84,453 79,336 75,786

Issuance of common stock under stock-based compensation plans 6,155 6,538 3,720

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Restricted stock unit withholdings ( 2,330 ) ( 2,023 ) ( 1,280 )

Change in unrealized losses on available-for-sale securities, net of tax — — — ( 1 ) — ( 1 )

Change in unrealized losses on derivatives, net of tax — — — ( 2 ) — ( 2 )

Balance as of December 31, 2021 84,453 $ 84 $ 401,367 $ — $ ( 288,799 ) $ 112,652

Ending balances 88,887 84,453 79,336

The accompanying notes are an integral part of these consolidated financial statements.

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Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization 5,975 10,206 10,681

Stock-based compensation expense 48,476 38,030 35,247

Impairment charges — 9,116 —

Depreciation and amortization 4,768 5,975 10,206

Allowance for credit losses and inventory reserves ( 190 ) ( 3,125 ) 964

Gain on sale of business — ( 292 ) ( 54,881 )

Deferred income taxes 181 ( 296 ) 50

Premium amortization (discount accretion) on investments, net ( 3 ) 54 ( 461 )

Others 24 ( 3 ) ( 238 )

Changes in assets and liabilities:

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Deferred revenue ( 19,281 ) ( 38,919 ) 3,607

Accrued liabilities ( 24,158 ) ( 8,901 ) ( 34,714 )

Net cash provided by (used in) operating activities ( 23,197 ) ( 46,530 ) 9,171

Accrued and other liabilities 149 ( 24,158 ) ( 8,901 )

Net cash used in operating activities ( 45,962 ) ( 23,197 ) ( 46,530 )

Cash flows from investing activities:

Purchases of property and equipment ( 2,010 ) ( 2,268 ) ( 3,892 )

Proceeds from sale of business — — 52,694

Purchases of short-term investments ( 69,305 ) — ( 50,083 )

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Cash flows from financing activities:

Restricted stock unit withholdings ( 13,201 ) ( 4,778 ) ( 1,875 )

Proceeds related to employee benefit plans 4,260 8,231 4,755

Restricted stock unit withholdings ( 18,202 ) ( 13,201 ) ( 4,778 )

Net cash used in financing activities ( 13,942 ) ( 4,970 ) ( 23 )

Net increase (decrease) in cash and cash equivalents and restricted cash ( 10,435 ) ( 50,528 ) 85,395

Cash and cash equivalents and restricted cash, at beginning of period 190,291 240,819 155,424

Cash and cash equivalents and restricted cash, at end of period $ 179,856 $ 190,291 $ 240,819

Non-cash investing and financing activities:

Purchases of property and equipment included in accounts payable and accrued liabilities $ 379 $ 564 $ 1,086

De-recognized fair value of build-to-suit lease $ — $ — $ ( 21,610 )

Net decrease in cash, cash equivalents, and restricted cash ( 91,677 ) ( 10,435 ) ( 50,528 )

Cash, cash equivalents, and restricted cash, at beginning of period 179,856 190,291 240,819

Cash, cash equivalents, and restricted cash, at end of period $ 88,179 $ 179,856 $ 190,291

Reconciliation of cash, cash equivalents, and restricted cash to Consolidated Balance Sheets

Cash and cash equivalents $ 84,024 $ 175,749 $ 186,127

Restricted cash 4,155 4,107 4,164

Total cash, cash equivalents, and restricted cash $ 88,179 $ 179,856 $ 190,291

Supplemental cash flow information:

Cash paid for income taxes, net $ 415 $ 964 $ 5,614

Non-cash investing activities:

Purchases of property and equipment included in accounts payable and accrued liabilities $ 946 $ 379 $ 564

The accompanying notes are an integral part of these consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company and Basis of Presentation

Description of Business and Basis of Presentation

Description of Business

Arlo Technologies, Inc.

("Arlo" or "the Company") combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle.

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

The Company's 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.

The Company conducts business across three geographic regions - Americas;

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

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

The Company's corporate headquarters is located in Carlsbad, California with other satellite offices across North America and various global locations.

(“Arlo”) combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle.

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

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

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

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

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

Our corporate headquarters is located in Carlsbad, California with other satellite offices across North America and various other global locations.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.

All periods presented have been accounted for in conformity with U.S.

We prepare our consolidated financial statements in conformity with U.S.

Generally Accepted Accounting Principles (“U.S.

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Securities and Exchange Commission (“SEC”).

The consolidated financial statements include the accounts of Arlo and its wholly-owned subsidiaries.

All intercompany balances and transactions have been eliminated.

Fiscal periods

The Company’s fiscal year begins on January 1 of the year stated and ends on December 31 of the same year.

The Company reports its results on a fiscal quarter basis rather than on a calendar quarter basis.

Our fiscal year begins on January 1 of the year stated and ends on December 31 of the same year.

We report the results on a fiscal quarter basis rather than on a calendar quarter basis.

Under the fiscal quarter basis, each of the first three fiscal quarters ends on the Sunday closest to the calendar quarter end, with the fourth quarter ending on December 31.

Reclassification

Certain prior periods amounts have been reclassified to conform to the current period’s presentation.

None of these reclassifications had a material impact to the consolidated financial statements.

Use of estimates

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Actual results could differ materially from those estimates and operating results for the year ended December 31, 2022 are not necessarily indicative of the results that may be expected for any future period.

Summary of Significant Accounting Policies

Cash and cash equivalents

The Company considers all highly liquid investments with an original maturity or a remaining maturity at the time of purchase of three months or less to be cash equivalents.

The Company deposits cash and cash equivalents with high credit quality financial institutions.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Restricted cash

The Company maintains certain cash balances restricted as to withdrawal or use.

Restricted cash is comprised primarily of cash used as a collateral for a letter of credit associated with the Company’s lease agreement for office space in San Jose, California.

The Company deposits restricted cash with high credit quality financial institutions.

The following table shows reconciliation of cash and cash equivalents and restricted cash within the consolidated balance sheets to the amounts shown in the statements of cash flows:

As of December 31,

2021 2020 2019

(In thousands)

Summary of Significant Accounting Policies

Cash and cash equivalents

We invest excess cash primarily in government securities and money market funds and consider all highly liquid investments with an original maturity or a remaining maturity at the time of purchase of three months or less to be cash equivalents.

We deposit cash and cash equivalents with high credit quality financial institutions.

Restricted cash

Total as presented on the consolidated statements of cash flows $ 179,856 $ 190,291 $ 240,819

We maintain certain cash balances restricted as to withdrawal or use.

Restricted cash is comprised primarily of cash used as a collateral for a letter of credit associated with our lease agreement for office space in San Jose, California.

We deposit restricted cash with high credit quality financial institutions.

Short-term investments

Short-term investments are comprised of marketable securities that consist of 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 the Company’s name with a high quality financial institution, which acts as the Company’s custodian and investment manager.

These marketable securities are classified as available-for-sale securities in accordance with the provisions of the authoritative guidance for investments and are carried at fair value with unrealized gains and losses reported as a separate component of stockholders’ equity.

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

These marketable securities are classified as available-for-sale securities in accordance with the provisions of the authoritative guidance for investments and are carried at fair value with unrealized gains and losses are included in accumulated other comprehensive income (loss), net of tax, which is reported on consolidated statements of stockholders’ equity.

Fair value measurements

The carrying amounts of the Company’s financial instruments, including cash equivalents, restricted cash, short-term investments, accounts receivable, and accounts payable approximate their fair values due to their short maturities.

Foreign currency forward contracts are recorded at fair value based on observable market data.

The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair values due to their short maturities.

Short-term investments are recognized or disclosed at fair value in the financial statements on a recurring basis.

The fair value of assets and liabilities is measured based on a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement.

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Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Derivative financial instruments

The Company’s subsidiaries have had, and will continue to have material future cash flows, including revenue and expenses, which are denominated in currencies other than the Company’s functional currency.

The Company and all its subsidiaries designate the U.S.

dollar as the functional currency.

Changes in exchange rates between the Company’s functional currency and other currencies in which the Company transacts business will cause fluctuations in cash flow

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

expectations and cash flow realized or settled.

Accordingly, the Company uses derivatives to mitigate its business exposure to foreign exchange risk.

The Company enters into foreign currency forward contracts in Australian dollars and Canadian dollars to manage its exposure to foreign exchange risk related to expected future cash flows on certain forecasted revenue, cost of revenue, operating expenses and existing assets and liabilities.

The Company’s foreign currency forward contracts do not contain any credit risk-related contingent features.

The Company is exposed to credit losses in the event of nonperformance by the counter-parties of its forward contracts.

The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any one counter-party.

In addition, the derivative contracts typically mature in less than six months and the Company continuously evaluates the credit standing of its counter-party financial institutions.

The counter-parties to these arrangements are large highly rated financial institutions and the Company does not consider non-performance a material risk.

The Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, materiality, accounting considerations or the prohibitive economic cost of hedging particular exposures.

There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign exchange rates.

The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with the authoritative guidance for derivatives and hedging.

The Company records all derivatives on the balance sheets at fair value.

Cash flow hedge gains and losses are recorded in other comprehensive income (“OCI”) until the hedged item is recognized in earnings.

Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in Other income (expense), net in the consolidated statements of operations .

Cash flow hedges

To help manage the exposure of operating margins to fluctuations in foreign currency exchange rates, the Company hedges a portion of its anticipated foreign currency revenue, cost of revenue and certain operating expenses.

These hedges are designated at the inception of the hedge relationship as cash flow hedges.

The effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) (“AOCI”) in stockholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.

The ineffective portion of the gain or loss on the derivative instrument is recognized in current earnings.

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur within the designated hedge period or if not recognized within 60 days following the end of the hedge period.

Deferred gains and losses in AOCI with such derivative instruments are reclassified immediately into earnings through Other income (expense), net.

Any subsequent changes in fair value of such derivative instruments also are reflected in current earnings unless they are re-designated as hedges of other transactions.

Non-designated hedges

The Company enters into non-designated hedges under the authoritative guidance for derivatives and hedging to manage the exposure of non-functional currency monetary assets and liabilities held on its financial statements to fluctuations in foreign currency exchange rates, as well as to reduce volatility in other income and expense.

The non-designated hedges are generally expected to offset the changes in value of its net non-functional currency asset and liability position resulting from foreign exchange rate fluctuations.

Foreign currency denominated accounts receivable and payable are hedged with non-designated hedges when the related anticipated foreign revenue and expenses are recognized in the Company’s financial statements.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Trade accounts receivable

The Company is exposed to credit losses primarily through sales of products and services.

The Company's allowance for current estimated credit losses for trade accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables.

We are exposed to credit losses primarily through sales of products and services.

Allowance for current estimated credit losses for trade accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers’ trade accounts receivables.

Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers.

Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default.

The Company’s monitoring activities include timely and regular account reconciliations, dispute resolution, payment confirmation, review of customers' financial condition and macroeconomic conditions.

Monitoring activities include dispute resolution, payment confirmation, review of customers’ financial condition and macroeconomic conditions.

Balances are written off when determined to be uncollectible.

The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of credit losses was not significantly impacted.

Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables.

Concentration of credit risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of principally investments, derivative financial instruments, and accounts receivable.

The Company believes that there is minimal credit risk associated with the investment of its cash and cash equivalents, restricted cash, and short-term investments, due to the restrictions placed on the type of investment that can be entered into under the Company’s investment policy.

The Company’s short-term investments consist of investment-grade securities, and the Company’s cash and investments are held and managed by high credit quality financial institutions.

The Company is exposed to credit loss in the event of nonperformance by counterparties to the foreign currency forward contracts used to mitigate the effect of foreign currency exchange rate changes.

The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any counterparty.

The Company’s foreign currency forward contracts do not contain any credit-risk-related contingent features.

In addition, the derivative contracts typically mature in less than six months and the Company continuously evaluates the credit standing of its counterparty financial institutions.

The counterparties to these arrangements are large highly rated financial institutions and the Company does not consider non-performance a material risk.

The Company believes the counterparties for its outstanding contracts are large, financially sound institutions and thus, the Company does not anticipate nonperformance by these counterparties.

The Company’s customers are primarily retailers, wholesale distributors and security solution providers who sell or distribute the products to a large group of end-users.

The Company regularly performs credit evaluations of the Company’s customers’ financial condition and performance and considers factors such as historical experience, credit quality, age of the accounts receivable balances, geographic or country-specific risks and current economic conditions that may affect customers’ ability to pay.

The Company does not require collateral from its customers.

Historically, a substantial portion of the Company’s revenue has been derived from a limited number of retailers and wholesale distribution partners.

As of December 31, 2021, three customers accounted for 35.3 %, 20.1 % and 10.1 % of the Company's total accounts receivable, net.

As of December 31, 2020, three customers accounted for 32.7 %, 18.5 % and 15.3 % of the Company’s total accounts receivable, net.

No other customers accounted for 10% or greater of the Company's total accounts receivable, net.

Although we have historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade accounts receivable.

Concentrations of risk and other uncertainties

Financial instruments that are potentially subject us to a concentration of credit risk mainly consist of cash equivalents, short term investments and accounts receivable.

We believe that there is minimal credit risk associated with the investments of cash equivalents and short-term investments due to the restrictions placed on the type of investment that can be entered into under our investment policy.

Our cash equivalents and short-term investments primarily consist of government securities and money market funds which are held and managed by high credit quality financial institutions.

Our customers are primarily retailers, wholesale distributors and security solution providers who sell or distribute our products to a large group of end-users.

We regularly perform credit evaluations of our customers’ financial condition and performance and consider factors such as historical experience, credit quality, age of the accounts receivable balances, geographic or country-specific risks and current economic conditions that may affect our customers’ ability to pay.

We do not require collateral from our customers.

Historically, a substantial portion of revenue has been derived from a limited number of retailers and wholesale distribution partners.

As of December 31, 2022 and 2021, four customers accounted for 28.4 %, 26.8 %, 16.6 % and 13.3 %, and three customers accounted for 35.3 %, 20.1 % and 10.1 % of the total accounts receivable, net, respectively.

No other customers accounted for 10% or greater of the total accounts receivable, net.

During the year ended December 31, 2022, 2021 and 2020, one customer accounted for 40.1 %, two customers accounted for 30.8 %, and 13.0 %, and four customers accounted for 20.6 %, 17.3 %, 14.6 % and 12.2 % of the total revenue, respectively.

No other customers accounted for 10% or greater of the total revenue.

Additionally, we receive certain of our components from a limited number of suppliers and rely on a limited number of third parties to manufacture all of our products.

If any of the third-party manufacturers cannot or will not manufacture our products in required volumes, on a cost-effective basis, in a timely manner or at all, we will have to secure additional manufacturing capacity.

Any interruption or delay in manufacturing could materially and adversely affect our business, results of operations and financial condition.

At the date of issuance of our financial statements, we are not aware of any event which could cause the severe impact in a near term.

Our products are concentrated in the connected lifestyle solution industries, which are characterized by rapid technological advances, changes in customer requirements and evolving regulatory requirements and industry standards.

Our success depends on management’s ability to anticipate and/or to respond quickly and adequately to such changes.

Any significant delays in the development or introduction of products and services could materially and adversely affect our business, results of operations and financial condition.

ARLO TECHNOLOGIES, INC.

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Inventories consist of finished goods which are valued at the lower of cost or net realizable value, with cost being determined using the first-in, first-out method.

The Company writes down its inventories based on estimated excess and obsolete amounts, determined primarily based on demand forecasts, but takes into account market conditions, product development plans, product life expectancy and other factors.

We write down inventories based on estimated excess and obsolete amounts, determined primarily based on demand forecasts, but takes into account market conditions, product development plans, product life expectancy and other factors.

At the point of loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase of the newly established cost basis.

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The carrying value of the asset is reviewed on a regular basis for the existence of facts, both internal and external, that may suggest impairment.

Goodwill pertains to the acquisitions of Avaak, Inc.

and Placemeter, Inc.

Goodwill represents the amount by which the purchase price exceeds estimated fair value of net assets of businesses acquired in a business combination.

The Company performs an annual impairment assessment of goodwill at the reporting unit level on the first day of the fourth fiscal quarter.

The Company identified that it has one reporting unit for the purpose of goodwill impairment testing and the reporting unit is at the same level as its operating segment and reportable segment.

The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment.

Should certain events or indicators of impairment occur between annual impairment tests, the Company will perform the impairment test as those events or indicators occur.

Examples of such events or circumstances include a significant decline in the Company’s expected future cash flows, a sustained, significant decline in the Company’s stock price and market capitalization, a significant adverse change in the business climate and slower growth rates.

Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of the reporting unit is less than its carrying amount.

The qualitative assessment considers macroeconomic conditions, industry and market considerations, cost factors, overall company financial performance, events affecting the reporting units, and changes in the Company’s stock price.

If the reporting unit does not pass the qualitative assessment, the Company estimates its fair value and compares the fair value with the carrying amount of its reporting unit, including goodwill.

If the fair value is greater than the carrying amount of its reporting unit, no impairment is recorded.

If the fair value is less than the carrying amount, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to

Operating leases

Our operating leases comprised of offices, data centers, and other equipment.

We determine if an arrangement is a lease at inception.

Operating leases are included in operating lease right-of-use assets, net, accrued liabilities, and non-current operating lease liabilities on the consolidated balance sheets.

Leases with an initial term of 12 months or less are expensed as incurred and recorded on the consolidated statements of comprehensive loss.

The lease expense for fixed lease payments is recorded on the consolidated statements of comprehensive loss on a straight-line basis over the lease term and variable lease payments are included in the lease expense when the obligation for those payments is incurred.

Operating lease assets represent our right to use an underlying asset over the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

As most of the leases do not provide an implicit rate, the incremental borrowing rate based on the information available is used at commencement date in determining the present value of lease payments.

We use the implicit rate when readily determinable.

The operating lease asset also includes any lease payments made before the lease commencement date less any lease incentives received.

The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise the options.

The lease agreements with lease and non-lease components are generally accounted as a single component.

In addition, certain lease agreements contain tenant improvement allowances (“TIA”) from the landlords.

We record lessee-owned improvements as leasehold improvements within property and equipment, net on our consolidated balance sheets and the TIA as a reduction to the lease asset with the impact of the decrease recognized prospectively over the

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

that reporting unit.

The impairment charge, if any, would be recorded to earnings in the consolidated statements of operations.

remaining lease term.

We record lessor-owned improvements as prepaid rent within prepaid expenses and other current assets on our consolidated balance sheets and the TIA as a reduction to prepaid rent.

Sublease income from our sublet office space in San Jose, California is recognized on a straight-line basis over the term of the sublease and is recorded as a reduction of lease expense.

We perform an annual impairment assessment of goodwill at the reporting unit level on the first day of the fourth fiscal quarter.

We operate as one operating and reportable segment and identify that one reporting unit for the purpose of goodwill impairment testing, which is at the same level as our operating and reportable segment.

The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment.

Should certain events or indicators of impairment occur between annual impairment tests, we will perform the impairment test as those events or indicators occur.

Examples of such events or circumstances include a significant decline in the expected future cash flows, a sustained, significant decline in our stock price and market capitalization, a significant adverse change in the business climate and slower growth rates.

The qualitative assessment considers macroeconomic conditions, industry and market considerations, cost factors, overall company financial performance, and events affecting our stock price.

If the reporting unit does not pass the qualitative assessment, we estimate the fair value using a discounted cash flow method and compare the fair value with the carrying amount of our reporting unit, including goodwill.

If the fair value is greater than the carrying amount of our reporting unit, no impairment is recorded.

If the fair value is less than the carrying amount, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to our reporting unit.

The impairment charge, if any, would be recorded to earnings in the consolidated statements of comprehensive loss.

Revenue recognition

Revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The majority of revenue comes from sales of hardware products to customers (retailers, distributors, security solution providers, service providers, and individual consumers through Arlo's direct to consumer store).

Revenue is recognized at a point in time when control of the goods is transferred to the customer, generally occurring upon shipment or delivery, dependent upon the terms of the underlying contract.

The amount recognized reflects the consideration the Company expects to be entitled to in exchange for the transferred goods.

The Company sells paid subscription services to its end user customers where it provides customers access to its cloud services.

Revenue for subscription sales is generally recognized on a ratable basis over the contract term, beginning on the date that the service is made available to the customers at the time of registration.

The subscription contracts are generally 30 days or 12 months in length, billed in advance.

All such service or support sales are typically recognized using an output measure of progress by looking at the time elapsed, as the contracts generally provide the customer equal benefit throughout the contract period.

In addition to selling paid subscriptions, the Company also sells services bundled with hardware products and accounts for these sales in line with the multiple performance obligations guidance.

Revenue from all sales types is recognized at transaction price, which is the amount the Company expects to be entitled to in exchange for transferring goods or providing services.

Revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Our product revenue is recognized at a point in time when control of the goods is transferred to the customer, generally occurring upon shipment or delivery, dependent upon the terms of the underlying contract.

Our paid subscription services are billed in advance of the start of the monthly subscription and revenues are recognized ratably over subscription period, generally 30 days or 12 months in length.

Revenue from all sales types is recognized at the transaction price, which is the amount we expect to be entitled to in exchange for transferring goods or providing services.

Transaction price is calculated as selling price net of variable consideration which may include estimates for future returns, sales incentives, and price protection related to current period product revenue.

The Company’s standard obligation to its direct customers generally provides for a full refund in the event that such product is not merchantable or is found to be damaged or defective.

In determining estimates for future returns, management analyzes historical sales and returns data, channel inventory levels, current economic trends, and changes in customer demand for the Company’s products.

Our standard obligation to our direct customers generally provides for a full refund in the event that such product is not merchantable or is found to be damaged or defective.

In determining estimates for future returns, management analyzes historical sales and returns data, channel inventory levels, current economic trends, and changes in customer demand for our products.

Sales incentives and price protection are determined based on a combination of the actual amounts committed and estimated future expenditure based upon historical customary business practice.

Typically variable consideration does not need to be constrained as estimates are based on predictive historical data or future commitments that are planned and controlled by the Company.

However, the Company continues to assess variable consideration estimates such that it is probable that a significant reversal of revenue will not occur.

Typically variable consideration does not need to be constrained as estimates are based on predictive historical data or future commitments that we plan and control.

However, we continue to assess variable consideration estimates such that it is probable that a significant reversal of revenue will not occur.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Contracts with multiple performance obligations

Some of the Company’s contracts with customers contain multiple promised goods or services.

Some of our contracts with customers contain multiple promised goods or services.

Such contracts include hardware products with bundled services, various subscription services, and support.

For these contracts, the Company accounts for the promises separately as individual performance obligations if they are distinct.

Performance obligations are determined to be considered distinct if they are both capable of being distinct and distinct within the context of the contract.

In determining whether performance obligations meet the criteria for being distinct, the Company considers a number of factors, such as the degree of interrelation and interdependence between obligations, and whether or not the good or service significantly modifies or transforms another good or service in the contract.

For these contracts, we account for the promises separately as individual performance obligations if they are distinct.

Performance obligations are determined to be distinct if they are both capable of being distinct or separately identifiable within the context of the contract.

In determining whether performance obligations meet the criteria for being distinct, we consider a number of factors, such as the degree of interrelation and interdependence between obligations, and whether or not the good or service significantly modifies or transforms another good or service in the contract.

The embedded software in most of the hardware products is not considered distinct and therefore the combined hardware and incidental software are treated as one performance obligation and recognized at the point in time when control of product transfers to the customer.

Services that are included with certain hardware products are considered distinct and therefore the hardware and service are treated as separate performance obligations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

After identifying the separate performance obligations, the transaction price is allocated to the separate performance obligations on a relative stand-alone selling price basis.

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Long-term Supply Arrangement - Verisure

The Company has entered into a Supply Agreement as part of the disposal of the Company's commercial operations in Europe as discussed in Note 4, Disposal of Business , where Verisure prepays future product purchases with a minimum product purchase commitment also required.

The Supply Agreement includes product purchases, paid subscription services, basic services, and an option for Verisure to acquire development services by submitting a statement of work (“SOW”).

We have entered into a Supply Agreement which includes product purchases, paid subscription services, and an option for Verisure S.à.r.l.

(“Verisure”) to acquire development services by submitting a statement of work (“SOW”).

Products sold come with a standard twelve months warranty.

Verisure assumes responsibilities for all warranty claims, returns of products and certain technical support provided to the end users.

The Company provides technical support for paid subscription services where Verisure cannot resolve the issue.

Verisure is responsible for any marketing and promotion of the Company's products and services sold in Europe.

Products are priced at a cost plus markup based on markups specified in the Supply Agreement and that price varies based on the cost of the product.

The paid subscription services and basic services pricing is based on the number of users monthly and is priced at a cost plus markup specified in the Supply Agreement, which varies based on the user and service type.

We provide technical support for paid subscription services where Verisure cannot resolve the issue.

Verisure is responsible for any marketing and promotion of our products and services sold in Europe.

We concluded that we are acting as the principal in the Supply Agreement and determined that revenue should be presented gross.

Products are priced at a cost plus markup as specified in the Supply Agreement.

The paid subscription services is billed based on the number of active cameras monthly and is priced at a cost plus markup specified in the Supply Agreement.

T he transaction price for products and paid subscription services is entirely variable because the consideration is dependent on the actual costs.

The Company allocates variable consideration specified for products entirely to products, and variable consideration specified for the paid subscription services entirely to the paid subscription services.

For development services, no contract exists until an SOW is submitted and approved by both parties.

For products, since quantity and product types are not specified in the agreement, contracts are not deemed to exist until the Company receives and accepts the customer purchase order ("PO").

For products, since quantity and product types are not specified in the agreement, contracts are not deemed to exist until we receive and accept the customer purchase order (“PO”).

Each product with a valid PO is considered a single performance obligation.

The Company recognizes variable consideration for products upon delivery and for services when the monthly service is rendered for paid subscription service and basic service.

The non-refundable product prepayments do not relate to future goods or services, as such no further assessment of material rights is required.

Further, as the transfer of products is at the discretion of the customer (i.e.

when Verisure issues a PO), a significant financing component does not exist as it relates to product prepayments.

The Company also expects that the product prepayments will be fully utilized by Verisure within 12 to 18 months, hence, no additional accounting consideration is necessary for breakage.

The Company also concluded that it is acting as the principal in the Supply Agreement and determined that revenue should be presented gross.

NRE Arrangement - Verisure

The Supply Agreement also provides for certain development services under an SOW to Verisure ("NRE arrangement") as part of the disposal of the Company's commercial operations in Europe as discussed in Note 4, Disposal of Business .

In the NRE arrangement, Verisure pays non-refundable installments upon the commencement of agreed-upon milestones.

The Supply Agreement also provides for certain development services under an SOW to Verisure (“NRE arrangement”), which Verisure pays non-refundable installments upon the commencement of agreed-upon milestones.

There is a single performance obligation as the distinct goods and services promised under the SOW are highly interdependent or interrelated inputs that produce a single combined output given the nature of such arrangements.

The output (or work-in-progress of such output) typically has no alternative use to the Company given the customized nature of the arrangement and the Company has enforceable rights given that the non-refundable milestone payments are prepayments in nature;

control for NRE development services therefore transfers over time.

The output (or work-in-progress of such output) typically has no alternative use to us given the customized nature of the arrangement and we have

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company determined that the most appropriate measure of progress for revenue recognition is the input method based on cost because the Company can reasonably estimate the total costs for the NRE, and the costs incurred reasonably reflects the Company’s efforts to satisfy the performance obligation.

enforceable rights given that the non-refundable milestone payments are prepayments in nature;

control for NRE development services therefore transfers over time.

We determined that the most appropriate measure of progress for revenue recognition is the input method based on cost because we can reasonably estimate the total costs for the NRE, and the costs incurred reasonably reflect our efforts to satisfy the performance obligation.

The NRE costs include labor, material, overhead as well as the use of outside services.

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Sales incentives

The Company accrues for sales incentives offered to customers as a marketing expense if it receives an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit received;

otherwise, it is recorded as a reduction to revenue.

As a consequence, the Company records a substantial portion of its channel marketing costs as a reduction of revenue.

The Company records estimated reductions to revenue for sales incentives when the related revenue is recognized or ahead of customer or end customer commitment if customary business practice creates an implied expectation that such activities will occur in the future.

We accrue for sales incentives offered to our customers as a marketing expense if we receive an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit received;

otherwise, it is recorded as a contra revenue.

As a consequence, we record a substantial portion of the channel marketing costs as a reduction of revenue.

We record estimated reductions to revenue for sales incentives when the related revenue is recognized or ahead of customer or end customer commitment if customary business practice creates an implied expectation that such activities will occur in the future.

Shipping and handling costs

The Company includes shipping and handling fees billed to customers in Revenue.

We include shipping and handling fees billed to customers in Revenue.

Shipping and handling costs associated with inbound freight are included in Cost of revenue.

In cases where the Company gives a freight allowance to the customer for their own inbound freight costs, such costs are appropriately recorded as a reduction in Revenue.

In cases where we give a freight allowance to the customer for their own inbound freight costs, such costs are appropriately recorded as a reduction in Revenue.

Shipping and handling costs associated with outbound freight are included in sales and marketing expenses.

The Company has elected to account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products.

We have elected to account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products.

Shipping and handling costs associated with outbound freight totaled $ 3.4 million, $ 2.9 million and $ 2.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Contract costs

The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that otherwise would have been recognized is one year or less.

These costs are included in sales and marketing and general and administrative expenses.

We recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that otherwise would have been recognized is one year or less.

These costs are included in operating expenses of sales and marketing and general and administrative on the consolidated statements of comprehensive loss.

If the incremental costs of obtaining a contract, which consist of sales commissions, relate to a service recognized over a period longer than one year, costs are deferred and amortized in line with the related services over the period of benefit.

Deferred commissions are classified as non-current based on the original amortization period of over one year.

There were no deferred commissions as of December 31, 2021 and 2020.

Deferred commissions are

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

classified as non-current based on the original amortization period of over one year.

There were no deferred commissions as of December 31, 2022 and 2021.

Contract balances

The Company records accounts receivable when it has an unconditional right to consideration.

Contract liabilities are recorded when cash payments are received or due in advance of performance.

Contract liabilities consist of advance payments and deferred revenue, where the Company has unsatisfied performance obligations.

Contract liabilities are classified as Deferred revenue on the consolidated balance sheets.

Contract assets are recorded as accounts receivable, net on the consolidated balance sheets when we have an unconditional right to consideration.

Contract liabilities are recorded as deferred revenue on the consolidated balance sheets when cash payments are received or due in advance of performance.

Contract liabilities consist of advance payments and customer billings in advance of revenue recognition from subscription contracts where we have unsatisfied performance obligations.

Advance payments include prepayments for NRE services under the Supply Agreement with Verisure.

Payment terms vary by customer.

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For certain products or services and customer types, payment is required before the products or services are delivered to the customer.

Refer to Note 3, Deferred Revenue for detailed disclosures regarding changes in contract balances for the years ended December 31, 2021 and 2020.

Performance obligations represent the transaction price allocated that are unsatisfied or partially unsatisfied as of the end of the reporting period.

Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities.

Research and development

Costs incurred in the research and development of new products are expensed as incurred.

Software development costs

We expense software development costs, including costs to develop software products or the software component of products to be sold, leased, or marketed to external users, before technological feasibility is reached.

Technological feasibility is typically reached shortly before the release of such products.

As a result, development costs that meet the criteria for capitalization were $ 1.8 million for the year ended December 31, 2022.

There was no capitalized development costs for the years ended 2021 and 2020.

We capitalize software development costs related to those software applications to be used solely to meet internal needs during the application development stage.

Capitalized software development costs are amortized using the straight-line amortization method over the estimated useful life of the applicable software.

Costs capitalized for developing such software applications were not material as of December 31, 2022 and 2021.

Advertising costs

Advertising costs are expensed as incurred.

Total advertising and promotional expenses were $ 9.6 million, $ 12.7 million and $ 12.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Advertising costs are expensed when incurred and included in sales and marketing on the consolidated statements of comprehensive loss.

Total advertising costs were $ 27.1 million, $ 9.6 million and $ 12.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Stock-based compensation

The Company’s employees have historically participated in NETGEAR’s stock-based compensation plans.

The Company’s consolidated statements of operations reflect compensation expense for the stock-based plans associated with the portion of NETGEAR’s plans in which Arlo employees participated.

Equity awards granted by the Company under its own stock-based compensation plans are comprised of stock options, restricted stock units ("RSUs"), performance RSUs ("PSUs"), and market-based performance RSUs ("MPSUs").

The Company measures stock-based compensation costs at the grant date based on the fair value of the award.

We measure stock-based compensation at the grant date based on the fair value of the award.

The fair value of stock options is estimated on the grant date using the Black-Scholes option pricing model.

The fair value of RSUs and PSUs is measured on the grant date based on the closing fair market value of the Company’s common stock.

The Company utilizes a Monte Carlo pricing model customized to the specific provisions of the 2018 Plan to value the MPSUs awards on the grant date.

The fair value determined using the Monte Carlo simulation model varies based on the assumptions used for the expected stock price volatility, the correlation coefficient between the Company and Russell 2000 Index, risk-free interest rates, and dividend yield.

The Company recognizes this compensation expense generally on a straight-line basis over the requisite service period, usually the vesting period, which is generally four years for stock options and three to four years for RSUs.

For PSUs, stock-based compensation expense associated with individual performance milestones is recognized over the expected performance achievement period when the achievement becomes probable.

For MPSUs, stock-based compensation expense is recognized ratably over the performance period subject to achievement of market conditions.

The Company records forfeitures as they occur.

The Company's 2018 Employee Stock Purchase Plan (“ESPP”) is intended to provide employees with the opportunity to purchase the Company's common stock through accumulated payroll deductions at the end of specified purchase period.

Eligible employees may contribute up to 15 % of compensation, subject to certain income limits, to purchase shares of the Company's common stock.

The terms of the plan include a look-back feature that enables employees to purchase stock semi-annually at a price equal to 85 % of the lesser of the fair market value at the beginning of the offering period or the purchase date.

The duration of each purchasing period is generally six months .

The Company determines the fair value using the Black-Scholes Model using various inputs, including its estimate of expected volatility, term, dividend yield and risk-free interest rate.

The Company recognizes compensation costs for the ESPP on a straight-line basis over the requisite service period of the award.

The fair value of restricted stock units (“RSUs”) and performance-based restricted stock units is measured on the grant date based on the closing fair market value of our common stock.

We utilize a Monte Carlo pricing model customized to the specific provisions to value the market-based restricted stock units on the grant date.

The fair value determined using the Monte Carlo simulation model varies based on the assumptions used for the expected stock price volatility, the correlation coefficient between Arlo and Russell 2000 Index, risk-free interest rates, and dividend yield.

Forfeitures are accounted for as they occur.

Our Employee Stock Purchase Plan (“ESPP”) is intended to provide employees with the opportunity to purchase our common stock through accumulated payroll deductions at the end of specified purchase period.

Eligible employees may contribute up to 15 % of compensation, subject to certain income limits, to purchase our common stock.

The terms of the plan

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Effective January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No.

2016-02, Leases (Topic 842) utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of the first fiscal quarter of 2019.

The Company determines if an arrangement is a lease at inception.

Under the new standard, operating leases are included in operating lease right-of-use (“ROU”) assets, accrued liabilities, and non-current operating lease liabilities in the consolidated balance sheets.

Leases with an initial term of 12 months or less are not recorded on the balance sheet.

Lease expense for fixed lease payments are recognized in the consolidated statements of operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

ROU assets represent the Company’s right to use an underlying asset over the lease term and lease liabilities represent its obligation to make lease payments arising from the lease.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

The Company uses the implicit rate when readily determinable.

The operating lease ROU asset also includes any lease payments made before the lease commencement date less any lease incentives received.

The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise the options.

The lease agreements with lease and non-lease components are generally accounted as a single component.

In addition, certain operating lease agreements contain tenant improvement allowances ("TIA") from the landlords.

The Company records lessee-owned improvements as leasehold improvements within Property and equipment, net on its consolidated balance sheets and the TIA as a reduction to the ROU asset with the impact of the decrease recognized prospectively over the remaining lease term.

The Company records lessor-owned improvements as a prepaid rent within Prepaid expenses and other current assets on its consolidated balance sheets and the TIA as a reduction to prepaid rent.

Sublease revenue from the Company's sublet office space in San Jose, California is recognized on a straight-line basis over the term of the sublease and is recorded as a reduction of rental expense.

include a look-back feature that enables employees to purchase stock semi-annually at a price equal to 85 % of the lesser of the fair market value at the beginning of the offering period or the purchase date.

The duration of each purchasing period is generally six months .

We determine the fair value using the Black-Scholes Model using various inputs, including its estimate of expected volatility, term, dividend yield and risk-free interest rate.

The risk-free interest rate of the purchase rights granted under the ESPP is based on the implied yield currently available on U.S.

Treasury securities, with a remaining term commensurate with the estimated expected term.

Expected volatility of the purchase rights granted under the ESPP is based on historical volatility over the most recent period commensurate with the estimated expected term.

We recognize compensation costs for RSUs.

stock options, and ESPP on a straight-line basis over the requisite service period of the award, usually the vesting period, which is generally four years for stock options and three to four years for RSUs.

For performance-based RSUs, compensation costs associated with individual performance milestones is recognized over the period when the performance conditions achievement become probable.

In addition, we evaluate the probability of achieving the performance conditions at the end of each reporting period and record the related stock-based compensation expense based on performance to date over the service period.

For market-based RSUs, stock-based compensation expense is recognized ratably over the performance period subject to achievement of market conditions.

Foreign currency

Our functional currency is the U.S.

Foreign currency transactions of international subsidiaries are re-measured into U.S.

dollars at the end-of-period exchange rates for monetary assets and liabilities, and at historical exchange rates for non-monetary assets and liabilities.

Revenue is re-measured at average exchange rates in effect during each period.

Expenses are re-measured at average exchange rates in effect during each period, except for expenses related to non-monetary assets and liabilities, which are re-measured at historical exchange rates.

Gains and losses arising from foreign currency transactions are included in other income, net on the consolidated statements comprehensive loss.

Net loss per share

4 unchanged sentences

Segment Information

The Company operates as one operating and reportable segment.

The Company has identified its CEO as the Chief Operating Decision Maker (“CODM”).

The CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Comprehensive income (loss)

Comprehensive income consists of net income (loss) and other gains and losses affecting stockholders’ equity that the Company excluded from net income (loss), including unrealized gains and losses related to fair value of short-term investments and the effective portion of cash flow hedges that were outstanding at the end of the year.

Foreign currency translation and re-measurement

The Company’s functional currency is the U.S.

Foreign currency transactions of international subsidiaries are re-measured into U.S.

dollars at the end-of-period exchange rates for monetary assets and liabilities, and at historical exchange rates for non-monetary assets and liabilities.

Revenue is re-measured at average exchange rates in effect during each period.

Gains and losses arising from foreign currency transactions are included in Other income (expense), net on the consolidated statements of operations.

The Company records its provision for income taxes in its consolidated financial statements using the asset and liability method.

Under this method, the Company recognizes income tax liabilities or receivable for the current year.

The Company also recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards.

We operate as one operating and reportable segment.

Our Chief Executive Officer (“CEO”) is identified as the Chief Operating Decision Maker (“CODM”), who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.

We record the provision for income taxes in the consolidated financial statements using the asset and liability method.

Under this method, we recognize income tax liabilities or receivables for the current year.

We also recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled.

The Company records a valuation allowance to reduce its deferred tax assets to the net amount that it believes is more likely than not to be realized.

The Company's assessment considers the recognition of deferred tax assets on a jurisdictional basis.

Accordingly, in assessing the Company's future taxable income on a jurisdictional basis, the Company considers the effect of its transfer pricing policies on that income.

The Company has placed a valuation allowance against U.S.

federal and state deferred tax assets and certain foreign tax attribute carryforwards since it does not anticipate to realize the benefits of deferred tax assets.

The Company recognizes tax benefits from uncertain tax positions only if it believes that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.

As the Company expands internationally, it will face increased complexity in determining the appropriate tax jurisdictions for revenue and expense items.

The Company's policy is to adjust these unrecognized tax benefits in the period when facts and circumstances change, such as the closing of a tax audit, the expiration of statute of limitation for a relevant taxing authority to examine a tax position, or when additional information becomes available.

To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on the Company's financial condition and operating results.

The provision for income taxes includes the effects of any accruals that the Company believes are appropriate, as well as the related interest and penalties.

The Tax Act introduced the GILTI provisions effective in 2018, which generally impose a tax on the net income earned by foreign subsidiaries of a U.S company in excess of a deemed return on their tangible assets.

The Company recognizes the tax on GILTI as a period cost when the tax is incurred.

We record a valuation allowance to reduce deferred tax assets to the net amount that we believe is more likely than not to be realized.

Our assessment considers the recognition of deferred tax assets on a jurisdictional basis.

Accordingly, in assessing the future taxable income on a jurisdictional basis, we consider the

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Certain risks and uncertainties

The Company’s products are concentrated in the connected lifestyle solution industries, which are characterized by rapid technological advances, changes in customer requirements and evolving regulatory requirements and industry standards.

The success of the Company depends on management’s ability to anticipate and/or to respond quickly and adequately to such changes.

Any significant delays in the development or introduction of products and services could materially adversely affect the Company’s business, results of operations and financial condition.

The Company relies on a limited number of third parties to manufacture all of its products.

If any of the Company’s third-party manufacturers cannot or will not manufacture its products in required volumes, on a cost-effective basis, in a timely manner or at all, the Company will have to secure additional manufacturing capacity.

Any interruption or delay in manufacturing could materially adversely affect the Company’s business, results of operations and financial condition.

effect of the transfer pricing policies on that income.

We have recorded a valuation allowance against U.S.

federal and state deferred tax assets and certain foreign tax attribute carryforwards since we do not anticipate to realize the benefits of these deferred tax assets.

We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.

As we expand internationally, we will face increased complexity in determining the appropriate tax jurisdictions for revenue and expense items.

Our policy is to adjust these unrecognized tax benefits in the period when facts and circumstances change, such as the closing of a tax audit, the expiration of statute of limitation for a relevant taxing authority to examine a tax position, or when additional information becomes available.

The provision for income taxes includes the effects of any accruals that we believe are appropriate, as well as the related interest and penalties.

Legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act introduced the global intangible low-taxed income (“GILTI”) provisions effective in 2018, which generally impose a tax on the net income earned by foreign subsidiaries of a U.S company in excess of a deemed return on their tangible assets.

We recognize the tax on GILTI as a period cost when the tax is incurred.

Recent accounting pronouncements

Emerging Growth Company Status

As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless the Company otherwise irrevocably elects not to avail itself of this exemption.

The Company did not make such an irrevocable election and has not delayed the adoption of any applicable accounting standards.

As an emerging growth company (“EGC”), we may, under the Jumpstart Our Business Startups Act, delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless we otherwise irrevocably elect not to avail ourselves of this exemption.

We did not make such an irrevocable election and have not delayed the adoption of any applicable accounting standards.

Accounting Pronouncements Recently Adopted

There were no accounting pronouncements adopted during the year ended December 31, 2021.

In 2022, we adopted Accounting Standards Update (“ASU”) 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting .

The ASU intended to provide temporary optional expedients and exceptions to the U.S.

GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”).

The adoption of this guidance did not have a material impact on our financial statements and related disclosures.

Accounting Pronouncements Not Yet Effective

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

The ASU is intended to provide temporary optional expedients and exceptions to the U.S.

GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates.

This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022.

The Company is currently evaluating the impact this guidance may have on its financial statements and related disclosures.

With the exception of the new standard discussed above, there have been no other new accounting pronouncements that have significance, or potential significance, to the Company’s financial position, results of operations, or cash flows.

Deferred Revenue

Deferred revenue consists of advance payments and deferred revenue, where the Company has unsatisfied performance obligations.

Deferred revenue consists of prepaid services and customer billings in advance of revenues being recognized from the Company's subscription contracts.

Advance payments include prepayments for products and NRE services under the Supply Agreement with Verisure.

Refer to Note 4, Disposal of Business for a complete discussion of the Verisure transaction.

We have considered all recent accounting pronouncements issued, but not yet effective, and do not expect any to have a material effect on our financial statements and related disclosures.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Transaction Price Allocated to the Remaining Performance Obligations

Remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period.

Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities, in-transit orders with destination terms, and non-cancellable backlog.

Non-cancellable backlog includes goods and services for which customer purchase orders have been accepted and that are scheduled or in the process of being scheduled for shipment.

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2021:

1 year 2 years Greater than 2 years Total

(In thousands)

Performance obligations $ 36,028 $ 1,165 $ 191 $ 37,384

The performance obligation greater than one year pertains to revenue deferral from prepaid services.

Contract Balances

The following table reflects the changes in contract balances for the year ended December 31, 2021 and 2020:

The following table reflects the changes in contract balances for the years ended December 31, 2022 and 2021:

Balance Sheet Location December 31, 2022 December 31, 2021

2 unchanged sentences

Contract liabilities - current Deferred revenue $ 11,291 $ 29,442 $ ( 18,151 ) ( 61.7 ) %

Contract liabilities - non-current Non-current deferred revenue $ 1,344 $ 16,563 $ ( 15,219 ) ( 91.9 ) %

For the year ended December 31, 2021, compared to the previous year, Accounts receivable, net increased, primarily driven by an increase in revenue in the fourth quarter of 2021, current portion of deferred revenue decreased, primarily due to utilization of Verisure prepayment for product purchases and Verisure NRE installment payments and recognition of prepaid service revenue;

and Non-current deferred revenue decreased due to recognition of prepaid service revenue and utilization of Verisure prepayment for product purchases.

For the years ended December 31, 2021 and 2020, $ 88.7 million and $ 90.9 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue and Verisure prepayments for product purchases, and $ 96.5 million and $ 67.3 million of revenue was recognized for the satisfaction of performance obligations over time, respectively.

$ 22.9 million and $ 26.2 million of this recognized revenue was included in the contract liability balance at the beginning of the period.

There were no significant changes in estimates during the period that would affect the contract balances.

Disaggregation of Revenue

The Company conducts business across three geographic regions:

Americas, EMEA, and APAC.

Sales and usage-based taxes are excluded from revenue.

Refer to Note 14, Segment and Geographic Information for revenue by geography.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Disposal of Business

On November 4, 2019, the Company and Verisure 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”).

The Verisure Agreements created a strategic partnership that leverages both the Company and Verisure’s capabilities to create incremental scale to address the ever-growing demand for residential and commercial security.

The strategic partnership will combine the Company’s innovative connected cameras and cloud services platform with Verisure’s professionally monitored security solutions to provide a new level of smart security for European customers.

The Purchase Agreement provided that, upon the terms and subject to the conditions set forth in the Purchase Agreement, the Company transferred, sold and assigned to Verisure certain assets (the "Assets") related to the Company’s commercial operations in Europe (the "Business") to Verisure for $ 50.0 million in cash plus additional cash for certain inventory.

The Purchase Agreement contains customary representations and warranties regarding Verisure, the Business and the Assets, indemnification provisions, termination rights and other customary provisions.

The Company has agreed not to engage in any business that competes with the Business for a period of three years .

The transaction closed on December 30, 2019 pursuant to which the Company received $ 52.7 million including working capital adjustments, which resulted in a pretax gain of $ 54.9 million in the fourth fiscal quarter of 2019.

In the first fiscal quarter of 2020, the Company recorded an additional gain of $ 292 thousand that was recorded in Gain on sale of business in the Company's unaudited condensed consolidated statements of operations as a result of the final working capital adjustment.

As part of the transaction, certain employees were transferred to Verisure.

These employees hold Company RSU awards, and the terms of the RSU awards were modified such that the RSU awards will continue to vest and settle after closing of the transaction in accordance with the original terms and conditions of RSU awards.

Refer to Note12, Employee Benefit Plans for further detail relating to this modification.

The assets and liabilities sold and assigned to Verisure were determined to have met the criteria to be classified as held for sale as of November 4, 2019, the execution date of the Purchase Agreement.

The transaction contemplated by the Purchase Agreement did not meet the criteria for discontinued operations as the Company is expected to have continued involvement in Europe through manufacturing and shipping of products to the region through sales to Verisure as part of the Supply Agreement and therefore no significant change in revenue from the region is expected;

it was determined the transaction did not represent a strategic shift.

The Company also assessed whether a loss is needed to be recorded upon initial classification of the assets and liabilities as held for sale to adjust its carrying amount to the fair value less cost to sell.

As the carrying amount of the assets and liabilities was lower than fair value less cost to sell, no adjustment was necessary.

As of the closing date of December 30, 2019, the Company concluded that no impairment exists for the assets and no adjustment was necessary for the liabilities.

Further, the Company reassessed the fair value and cost to sell, and noted that they did not change since the initial classification of the assets and liabilities as held for sale.

Given such, no loss adjustment was necessary.

Pursuant to the terms and subject to the conditions set forth in the Supply Agreement, Verisure is the exclusive distributor of Company products in Europe for all channels, and will non-exclusively distribute the Company's products through its direct channels globally for an initial terms 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 December 31, 2021, $ 160.1 million of the product purchase commitment has been fulfilled.

In 2019 and 2020, Verisure prepaid the Company $ 20.0 million for product purchases in fiscal 2020 and $ 40.0 million for product purchases in fiscal 2021 and fiscal 2022, respectively.

The Supply Agreement also provides certain NRE service to Verisure, including developing certain custom products specified by Verisure in exchange for an aggregate of $ 10.0 million, payable in installments upon meeting certain development milestones.

In the second fiscal quarter of 2020, an additional $ 3.5 million was added to the contract price as a result of a modification to Verisure's specification for an Outdoor Custom Camera being developed under the Verisure Agreements.

As of December 31, 2021, Verisure has paid $ 13.5 million for this NRE service.

For the years ended December 31, 2021 and 2020, the Company has recognized service revenue of $ 5.9 million and $ 7.9 million, respectively, for this NRE service.

Contract liabilities - non-current Other non-current liabilities $ 212 $ 1,344 $ ( 1,132 ) ( 84.2 ) %

For the year ended December 31, 2022, compared to the previous year, accounts receivable, net decreased, primarily driven by the decrease in revenue in the fourth quarter of 2022, current portion of deferred revenue decreased, primarily due to utilization of Verisure prepayments for product purchases, Verisure NRE installment payments and recognition of prepaid service revenue, and non-current deferred revenue decreased due to the recognition of prepaid service revenue.

For the years ended December 31, 2022 and 2021, $ 29.4 million and $ 53.1 million, respectively, of the recognized revenue was included in the contract liability balance at the beginning of the periods.

There were no significant changes in estimates during the periods that would affect the contract balances.

Refer to Note 4, Balance Sheet Components for further details of accounts receivable, net.

Performance Obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied and partially unsatisfied as of December 31, 2022

1 year 2 years Greater than 2 years Total

(In thousands)

Performance obligations $ 11,291 $ 202 $ 10 $ 11,503

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

As of December 31, 2022, $ 336.7 million of the purchase commitment has been fulfilled with a backlog of $ 97.9 million.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As part of the Purchase Agreement, the Company also entered into a Transition Services Agreement with Verisure (“Verisure TSA”) to assist Verisure with the transition of the Company’s European commercial operations.

These transition services primarily include IT support and other services, including sales and marketing, operations and supply chain, finance, legal, and human resources.

As compensation for these transition services, the Company will be reimbursed by Verisure based on actual direct costs plus allocation of overhead.

For the years ended December 31, 2021 and 2020, the Company charged Verisure $ 2.8 million and $ 4.0 million, respectively, for Verisure TSA services which was recorded as Other income, given such services are not related to the primary business in which the Company operates.

The related Verisure TSA expenses in the same amount were recognized as incurred and reported under their natural expense classification.

Disaggregation of Revenue

We disaggregate our revenue into three geographic regions:

the Americas, EMEA, and APAC, where we conduct our business.

The following table presents revenue by geography.

Year Ended December 31,

2022 2021 2020

(In thousands)

Americas $ 273,981 $ 271,182 $ 269,395

EMEA 196,465 134,232 61,832

APAC 19,968 29,723 25,927

Total $ 490,414 $ 435,137 $ 357,154

Balance Sheet Components

Available-for-sale short-term investments

Short-term investments

As of December 31, 2022 As of December 31, 2021

Cost Unrealized Gains Unrealized Losses Estimated Fair Value Cost Unrealized Gains Unrealized Losses Estimated Fair Value

Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value

(In thousands)

Treasuries $ 29,849 $ — $ ( 149 ) $ 29,700 $ — $ — $ — $ —

The Company’s short-term investments are classified as available-for-sale and consist of government securities with an original maturity or remaining maturity at the time of purchase of greater than three months and no more than twelve months.

Accordingly, none of the available-for-sale securities have unrealized losses greater than twelve months.

The Company did not recognize any other-than-temporary impairment losses related to available-for-sale short-term investments for the year ended December 31, 2019.

During the years ended December 31, 2021 and 2020, the Company did not recognize any allowance for credit losses related to available-for-sale short-term investments.

Accounts receivable, net

3 unchanged sentences

Allowance for credit losses ( 423 ) ( 337 )

Total accounts receivable, net $ 79,564 $ 77,643

Total $ 65,960 $ 79,564

The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected.

3 unchanged sentences

Balance at the beginning of the period $ 337 $ 519 $ 609

Adoption of ASU 2016-13, cumulative-effect adjustment to retained earnings — — —

Provision for (release of) expected credit losses 86 ( 182 ) 186

4 unchanged sentences

Property and equipment, net

The components of property and equipment are as follows:

As of December 31,

10 unchanged sentences

_________________________

(1) $ 2.4 million property and equipment, net was included in the sublease arrangement for the San Jose office building as of December 31, 2021.

No property and equipment, net was included in the sublease arrangement for the San Jose office building as of December 31, 2020 as the sublease agreement became effective in the third quarter of 2021.

(1) $ 1.7 million and $ 2.4 million property and equipment, net was included in the sublease arrangement for the San Jose office building as of December 31, 2022 and 2021, respectively.

Depreciation expense pertaining to property and equipment was $ 4.8 million, $ 5.9 million and $ 8.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Long-lived Assets and Right-of-use Assets Impairment

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

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

This change in the use of the San Jose office space led management to test the recoverability of the carrying amount of the asset group related to the sublease.

On May 25, 2021, the carrying amount of the asset group exceeded the Company's anticipated undiscounted value of the sublease income over the sublease term.

Accordingly, the Company reviewed certain of its right-of-use assets and other lease related assets including leasehold improvements, furniture, fixtures and equipment under the sublease asset group for impairment in accordance with Accounting Standards Codification ("ASC") 360 "Property, Plant, and Equipment".

As a result of the evaluation, the Company recorded an impairment charge of $ 9.1 million, which included $ 6.8 million associated with the right-of-use assets and $ 2.3 million associated with other lease related property and equipment, in the second quarter of 2021.

The assets found to be impaired were written down to their fair value calculated using a discounted cash flow method (income approach).

The fair value of the asset group was determined by utilizing projected cash flows from the sublease, discounted by a risk-adjusted discount rate that reflects the level of risk associated with receiving future cash flows.

The inputs utilized in the analyses were classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement".

Refer to Note 6, Fair Value Measurements, for additional information about the fair value measured on a non-recurring basis and Note 11, Commitments and Contingencies , for further information about the sublease.

There was no change in the carrying amount of goodwill during the year ended December 31, 2021, and the goodwill as of December 31, 2021 and December 31, 2020 was $ 11.0 million .

Goodwill Impairment

On the first day of the fourth quarter of 2021, the Company performed an annual assessment of goodwill at the reporting unit level.

The Company operates as one operating and reportable segment.

A qualitative assessment was performed

Long-lived assets

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

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

This change in the circumstances for the San Jose office space use led management to test the recoverability of the carrying amount of the asset group related to the sublease.

On May 25, 2021, the carrying amount of the asset group exceeded the anticipated undiscounted value of the sublease income over the sublease term.

Accordingly, we reviewed our operating lease right-of-use assets and other lease related assets including leasehold improvements, furniture, fixtures and equipment under the sublease asset group for impairment in accordance with Accounting Standards Codification ( “ ASC”) 360 Property, Plant, and Equipment .

As a result of the evaluation, we recorded an impairment charge of $ 9.1 million, which included $ 6.8 million associated with operating lease right-of-use assets and $ 2.3 million associated with lease related property and equipment.

The assets were written down to fair value as calculated using a discounted cash flow method (income approach) with unobservable inputs when are classified as Level 3 within the fair value hierarchy.

The fair value of the asset group was determined by utilizing projected cash flows from the sublease, discounted by a risk-adjusted discount rate of 8.0 % that reflects the level of risk associated with receiving future cash flows.

We have determined that there was no event occurred or circumstances changed during the year ended December 31, 2022 that would more likely than not reduce the fair value below the carrying amount.

No goodwill impairment was recognized in the years ended December 31, 2022, 2021 and 2020 and the goodwill as of December 31, 2022 and 2021 was $ 11.0 million .

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

in consideration of macroeconomic conditions, industry and market conditions, cost factors, overall company financial performance, and changes in the Company's stock price.

The Company did not believe it is more likely than not that the fair value of the reporting unit is less than its carrying amount and therefore performing the next step of impairment test was unnecessary.

No goodwill impairment was recognized in the years ended December 31, 2021, 2020 and 2019.

If there are events occurred or circumstances changed (i.e.

a decline in the Company’s stock price based on market conditions and deterioration of the Company’s business) that would more likely than not reduce the fair value of the Company below its carrying amount, the Company may have to record a charge to its earnings for the associated goodwill impairment of up to $ 11.0 million .

Other non-current assets

3 unchanged sentences

Sublease initial direct cost 777 1,471

Deposits 122 122

Other 1,920 1,278

Total other non-current assets $ 4,314 $ 2,399

Total $ 4,081 $ 4,314

Accrued liabilities

1 unchanged sentence

(In thousands)

Sales and marketing $ 31,417 $ 38,577

Sales incentives $ 35,681 $ 31,417

Sales returns

1 unchanged sentence

Accrued employee compensation 15,774 12,367

Operating lease liabilities 4,609 4,400

Cloud and other costs 11,154 10,759

Current operating lease liabilities 4,190 4,609

Professional services 3,703 2,505

Warranty obligations 1,174 1,330

Freight 1,050 8,086

Warranty obligation 1,330 2,451

Accrued restructuring charges 1,047 —

Other 6,426 6,356

Total accrued liabilities $ 97,377 $ 121,766

Total $ 98,855 $ 97,389

Other non-current liabilities

As of December 31,

(In thousands)

Non-current deferred revenue $ 212 $ 1,344

Non-current income taxes payable 77 94

Other 2,660 1,001

Total $ 2,949 $ 2,439

ARLO TECHNOLOGIES, INC.

2 unchanged sentences

Fair Value Measurements - Recurring Basis

The following tables summarize assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020:

The following tables summarize assets measured at fair value on a recurring basis:

As of December 31

Total Quoted market

prices in active

(Level 1) Significant

(In thousands)

2 unchanged sentences

$ 12,614 $ 21,935

Available-for-sale securities:

Treasuries (1)

Foreign currency forward contracts (2)

Total assets measured at fair value $ 22,000 $ 21,935 $ 65

Foreign currency forward contracts (3)

$ 47 $ — $ 47

Total liabilities measured at fair value $ 47 $ — $ 47

December 31, 2020

Total Quoted market

prices in active

(Level 1) Significant

(In thousands)

Cash equivalents:

Treasuries (<90 days)

$ 1,934 $ 1,934 $ —

Available-for-sale securities:

Treasuries (1)

19,997 19,997 —

Foreign currency forward contracts (2)

Total assets measured at fair value $ 21,955 $ 21,931 $ 24

Foreign currency forward contracts (3)

$ 199 $ — $ 199

Total liabilities measured at fair value $ 199 $ — $ 199

_________________________

(1) Included in Short-term investments on the Company’s consolidated balance sheets.

(2) Included in Prepaid expenses and other current assets on the Company’s consolidated balance sheets.

(3) Included in Accrued liabilities on the Company’s consolidated balance sheets .

The Company’s investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.

The Company enters into foreign currency forward contracts with only those counterparties that have long-term credit ratings of A-/A3 or higher.

The Company’s foreign currency forward contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that take into account the contract terms as well as currency rates and counterparty credit rates.

The Company verifies the reasonableness of these pricing models using observable market data for related inputs into such models.

Additionally, the Company includes an adjustment for non-performance risk in the recognized measure of fair value of derivative instruments.

As of December 31, 2021 and 2020 the adjustment for non-performance risk did not have a

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

material impact on the fair value of the Company’s foreign currency forward contracts.

The carrying value of non-financial assets and liabilities measured at fair value in the financial statements on a recurring basis, including accounts receivable and accounts payable, approximate fair value due to their short maturities.

As of December 31, 2021 and 2020, the Company has no Level 3 fair value assets or liabilities measured on a recurring basis.

Fair Value Measurements - Nonrecurring Basis

The Company measures the fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying amount the asset may not be recoverable.

In the second quarter of 2021, in connection with the long-lived assets and right-of-use assets impairment analysis, certain lease related property and equipment assets and right-of-use asset were measured and written down to fair value on a nonrecurring basis as a result of impairment.

The fair value measurements were determined using a discounted cash flow method with unobservable inputs and were classified within Level 3 of the fair value hierarchy.

The fair value of the asset group was calculated by utilizing projected cash flows from the sublease, discounted by a market derived discount rate of 8.0 %.

As of May 25, 2021, the date of measurement, the fair value of the right-of-use asset and other lease related property and equipment were $ 8.1 million and $ 2.8 million, respectively.

The Company recorded an impairment charge of $ 9.1 million on the assets measured at fair value on a non-recurring basis, which includes $ 6.8 million associated with the right-of-use assets and $ 2.3 million associated with other lease related property and equipment assets, in the second quarter of 2021.

Refer to Note 5, Balance Sheet Components , for further information about the impairment of the right-of-use assets and long-lived assets.

Derivative Financial Instruments

Fair value of derivative instruments

The fair values of the Company’s derivative instruments and the line items on the consolidated balance sheets to which they were recorded as of December 31, 2021 and 2020 are summarized as follows:

December 31, December 31,

Derivative Assets Balance Sheet

Location 2021 2020 Balance Sheet

Location 2021 2020

(In thousands) (In thousands)

Derivative assets not designated as hedging instruments Prepaid expenses and other current assets $ 65 $ 22 Other accrued liabilities $ 47 $ 199

Derivative assets designated as hedging instruments Prepaid expenses and other current assets — 2 Other accrued liabilities — —

Total $ 62,588 $ 21,935

Refer to Note 6, Fair Value Measurements for detailed disclosures regarding fair value measurements in accordance with the authoritative guidance for fair value measurements and disclosures.

Gross amounts offsetting of derivative instruments

The Company has entered into master netting arrangements which allow net settlements under certain conditions.

Although netting is permitted, it is currently the Company’s policy and practice to record all derivative assets and liabilities on a gross basis in the consolidated balance sheets.

The following tables set forth the offsetting of derivative assets and liabilities as of December 31, 2021 and 2020:

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 2021 Gross Amounts Not Offset in the Consolidated Balance Sheets

Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Assets Presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Pledged Net Amount

(In thousands)

Wells Fargo Bank $ 65 $ — $ 65 $ ( 47 ) $ — $ 18

As of December 31, 2021 Gross Amounts Not Offset in the Consolidated Balance Sheets

Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Liabilities Presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Pledged Net Amount

(In thousands)

Wells Fargo Bank $ 47 $ — $ 47 $ ( 47 ) $ — $ —

As of December 31, 2020 Gross Amounts Not Offset in the Consolidated Balance Sheets

(In thousands)

Wells Fargo Bank $ 24 $ — $ 24 $ ( 24 ) $ — $ —

As of December 31, 2020 Gross Amounts Not Offset in the Consolidated Balance Sheets

Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts of Assets Presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral Pledged Net Amount

(In thousands)

Wells Fargo Bank $ 199 $ — $ 199 $ ( 24 ) $ — $ 175

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Cash flow hedges

The Company typically hedges portions of its anticipated foreign currency exposure which generally are less than six months .

The Company entered into two forward contracts related to its cash flow hedging program for the year ended December 31, 2021 with an average size of $ 2.2 million equivalent related to its cash flow hedging program.

The effects of the Company’s cash flow hedges on the consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019 are summarized as follows:

Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges

Year Ended December 31, 2021 Revenue Cost of revenue Research and development Sales and marketing General and administrative

(In thousands)

Statements of operations $ 435,137 $ 327,102 $ 59,063 $ 48,909 $ 49,489

Gains (losses) on cash flow hedge $ 134 $ ( 1 ) $ — $ ( 8 ) $ ( 1 )

Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges

Year Ended December 31, 2020 Revenue Cost of revenue Research and development Sales and marketing General and administrative

(In thousands)

Statements of operations $ 357,154 $ 301,765 $ 60,137 $ 49,064 $ 51,096

Gains (losses) on cash flow hedge $ ( 32 ) $ — $ 5 $ 4 $ —

Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges

Year Ended December 31, 2019 Revenue Cost of revenue Research and development Sales and marketing General and administrative

(In thousands)

Statements of operations $ 370,007 $ 334,203 $ 69,384 $ 56,985 $ 47,624

Gains (losses) on cash flow hedge $ 390 $ ( 3 ) $ ( 28 ) $ ( 44 ) $ ( 13 )

The Company expects to reclassify to earnings all of the amounts recorded in AOCI associated with its cash flow hedges over the next twelve months.

For information on the unrealized gains or losses on derivatives reclassified out of AOCI into the consolidated statements of operations, refer to Note 8, Accumulated Other Comprehensive Income (Loss).

The Company did not recognize any material net gains or losses related to the loss of hedge designation as there were no discontinued cash flow hedges during the year ended December 31, 2021, 2020 and 2019.

Non-designated hedges

The Company adjusts its non-designated hedges monthly and enters into about six non-designated derivative per quarter with an average size of $ 2.3 million USD equivalent.

The hedges range typically from 1 to 3 months in duration.

The effects of the Company’s non-designated hedge included in Other income (expense), net on the consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019 are as follows:

Derivatives Not Designated as

Hedging Instruments Location of Gains (Losses)

Recognized in Income on Derivative 2021 2020 2019

(In thousands)

Foreign currency forward contracts Other income (expense), net $ 116 $ ( 95 ) $ ( 24 )

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Accumulated Other Comprehensive Income (Loss)

The following table sets forth the changes in AOCI by component for the years ended December 31, 2021, 2020 and 2019:

Unrealized gains (losses) on available-for-sale securities Unrealized gains (losses) on derivatives Estimated tax benefit (provision) Total

(In thousands)

Balance as of December 31, 2018 $ ( 2 ) $ 2 $ — $ —

Other comprehensive income before reclassifications 25 275 — 300

Amount reclassified from accumulated other comprehensive income — 302 — 302

Net current period other comprehensive income (loss) 25 ( 27 ) — ( 2 )

Balance as of December 31, 2019 23 ( 25 ) — ( 2 )

Other comprehensive income (loss) before reclassifications ( 22 ) 4 — ( 18 )

Amount reclassified from accumulated other comprehensive loss — ( 23 ) — ( 23 )

Net current period other comprehensive income (loss) ( 22 ) 27 — 5

Balance as of December 31, 2020 1 2 — 3

Other comprehensive income (loss) before reclassifications ( 1 ) 122 — 121

Amount reclassified from accumulated other comprehensive income — 124 — 124

Net current period other comprehensive loss ( 1 ) ( 2 ) — ( 3 )

Balance as of December 31, 2021 $ — $ — $ — $ —

The following tables provide details about significant amounts reclassified out of each component of AOCI for the years ended December 31, 2021, 2020 and 2019:

Year Ended December 31, 2021 Year Ended December 31, 2020 Year Ended December 31, 2019

Gains (Losses) Recognized in OCI - Effective Portion Gains (Losses) Reclassified from OCI to Income - Effective Portion Gains (Losses) Recognized in OCI - Effective Portion Gains (Losses) Reclassified from OCI to Income - Effective Portion Gains (Losses) Recognized in OCI - Effective Portion Gains (Losses) Reclassified from OCI to Income - Effective Portion Affected Line Item in the Statements of Operations

(In thousands)

Gains (losses) on cash flow hedge:

Foreign currency contracts $ 122 $ 134 $ 4 $ ( 32 ) $ 275 $ 390 Revenue

Foreign currency contracts — ( 1 ) — — — ( 3 ) Cost of revenue

Foreign currency contracts — — — 5 — ( 28 ) Research and development

Foreign currency contracts — ( 8 ) — 4 — ( 44 ) Sales and marketing

Foreign currency contracts — ( 1 ) — — — ( 13 ) General and administrative

$ 122 $ 124 $ 4 $ ( 23 ) $ 275 $ 302 Total *

_________________________

* There is no tax impact on all hedging gains and losses from derivative contracts due to the Company’s full valuation allowance of its deferred tax assets.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Income (loss) before provision for income taxes consisted of the following:

Year Ended December 31,

2021 2020 2019

(In thousands)

United States $ ( 59,370 ) $ ( 104,551 ) $ ( 103,836 )

International 4,018 3,925 22,265

Total $ ( 55,352 ) $ ( 100,626 ) $ ( 81,571 )

Provision for income taxes consisted of the following:

Year Ended December 31,

2021 2020 2019

(In thousands)

Federal $ — $ — $ —

State 21 84 58

Foreign 989 438 4,524

1,010 522 4,582

Federal — — —

Foreign ( 333 ) 103 ( 202 )

( 333 ) 103 ( 202 )

Total $ 677 $ 625 $ 4,380

The effective tax rate differed from the U.S.

federal income tax rate as follows:

Year Ended December 31,

2021 2020 2019

Tax benefit at U.S.

federal income tax rate 21.0 % 21.0 % 21.0 %

State tax benefit, net of federal benefit 2.9 % 4.4 % 3.0 %

Impact of international operations 1.3 % 0.8 % 1.4 %

taxes on foreign entities ( 3.9 ) % 2.5 % ( 3.6 ) %

Stock-based compensation ( 3.0 ) % ( 4.2 ) % ( 2.6 ) %

federal tax credits 1.6 % 1.6 % 1.6 %

Change in valuation allowance ( 20.3 ) % ( 26.4 ) % ( 23.8 ) %

Non-deductible transaction costs ( 0.6 ) % ( 0.1 ) % ( 0.7 ) %

Goodwill derecognition — % — % ( 1.2 ) %

Other ( 0.2 ) % ( 0.2 ) % ( 0.5 ) %

Benefit (provision) for income taxes ( 1.2 ) % ( 0.6 ) % ( 5.4 ) %

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The significant components of net deferred tax assets consisted of the following:

As of December 31,

(In thousands)

Deferred Tax Assets:

Accruals and allowances $ 10,369 $ 14,389

Net operating loss carryforwards 26,236 22,216

Stock-based compensation 3,956 3,731

Lease liabilities 6,170 7,063

Deferred revenue 1,763 3,673

Tax credit carryforwards 8,100 6,311

Depreciation and amortization 3,989 2,810

Capitalized research and development expenses 26,186 17,376

Total deferred tax assets 86,769 77,569

Deferred Tax Liabilities:

Right-of-use assets ( 3,462 ) ( 5,804 )

Total deferred tax liabilities ( 3,462 ) ( 5,804 )

Valuation Allowance ( 81,742 ) ( 70,496 )

Net deferred tax assets $ 1,565 $ 1,269

Changes in valuation allowance for deferred tax assets were as follows:

Year Ended December 31,

2021 2020 2019

(In thousands)

Balance at the beginning of the period $ 70,496 $ 43,917 $ 24,477

Additions (1)

11,246 26,579 19,440

Deductions (2)

Balance at the end of the period $ 81,742 $ 70,496 $ 43,917

________________________

(1) The increases in valuation allowance were primarily due to the increases in tax attribute carryforwards and capitalized expenditures for income tax purposes.

(2) There were no deductions presented because there has not been a reduction in the valuation allowance .

The fiscal 2020 and 2019 additions and deductions to the deferred tax assets roll-forward have been recast to conform with the fiscal 2021 classification, which is based on each tax jurisdiction.

Prior to the recast, the additions and deductions in the deferred tax assets roll-forward were based on the positive and negative movements within the individual components of deferred tax assets.

Realization of the Company’s deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.

The Company does not anticipate to realize the net U.S.

federal and state deferred tax assets and certain foreign tax attributes, which have been fully offset by a valuation allowance.

As of December 31, 2021 and 2020, the valuation allowance was $ 81.7 million and $ 70.5 million, respectively.

The utilization of the Company's net operating loss and credit carryforwards may be subject to annual limitation due to the ownership changes provided by the Internal Revenue Code and similar state provisions.

Such an annual limitation could result in the expiration of portions of the net operating loss and tax credit carryforwards before utilization.

(1) Included in short-term investments on the consolidated balance sheets.

Our investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.

As of December 31, 2022 and 2021, assets and liabilities measured as Level 2 fair value were not material and there were no Level 3 fair value assets or liabilities measured on a recurring basis.

Fair Value Measurements - Nonrecurring Basis

We measure the fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying amount the asset may not be recoverable.

For the year ended December 31, 2022, we have no assets or liabilities measured on a non-recurring basis.

For the year ended December 31, 2021, in connection with the long-lived assets impairment analysis, we recorded an impairment charge of $ 9.1 million associated with our operating lease right-of-use assets and lease related property and equipment assets on a nonrecurring basis.

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

Restructuring

In November 2022, we initiated a restructuring plan to reduce our cost structure to better align the operational needs of the business to current economic conditions while continuing to support our long-term strategy.

This restructuring includes the reduction of headcount as well as the abandonment of certain lease contracts and the cancellation of contractual services arrangements with certain suppliers.

We expect the completion date to be in the third quarter of 2023 with the total estimated restructuring charges of $ 1.9 million.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 2021, net operating loss carryforwards consisted of the following:

Amount Beginning Year of Expiration

(in thousands)

$ 14,028 2031

federal (1)(2)

95,243 Indefinite

California 18,655 2040

Other states 43,804 2024

_________________________

(1) All of the losses are subject to annual usage limitations under Internal Revenue Code Section 382.

(2) All of the losses are subject to usage limitation of 80% of taxable income in a year when the losses will be utilized.

As of December 31, 2021, tax credit carryforwards consisted of the following:

Amount Beginning Year of Expiration

(in thousands)

federal $ 4,698 2040

California 3,848 Indefinite

Foreign 1,839 2042

As of December 31, 2021, withholding taxes and state income taxes expected to be incurred on the foreign subsidiaries’ earnings that are not indefinitely reinvested are immaterial.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits was as follows:

Year Ended December 31,

2021 2020 2019

The restructuring liabilities are included in accrued liabilities in the consolidated balance sheets.

Restructuring activities for the year ended December 31, 2022 are as follows:

Total Severance Expense Office Exit Expense Other Exit Expense

(In thousands)

Balance at the beginning of the period $ — $ — $ — $ —

Additions for tax positions taken during the current year 444 503 674

Additions (reductions) for tax positions taken during a prior year ( 58 ) 148 8

Reductions as a result of a lapse of the applicable statute of limitations ( 5 ) — —

Restructuring charges 1,805 798 928 79

Cash payments ( 588 ) ( 579 ) — ( 9 )

Non-cash and other adjustments 48 — 63 ( 15 )

Balance at the end of the period $ 1,265 $ 219 $ 991 $ 55

The total amount of unrecognized tax benefits, including immaterial interest and penalties, was $ 1.7 million and $ 1.4 million as of December 31, 2021 and 2020, respectively.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits as part of the provision for income taxes.

The Company files income tax returns in the U.S.

and numerous foreign jurisdictions.

The Company is subject to income tax examinations by taxing authorities globally for years ending or after December 31, 2018.

As a result of the spin-off of Arlo from NETGEAR in 2018, Arlo filed the consolidated U.S.

federal and various combined state income tax returns with NETGEAR for the calendar year ended December 31, 2018.

The IRS is currently examining NETGEAR’s U.S.

federal income tax return for the calendar year of 2018.

In addition, the California Franchise Tax Board began an examination of NETGEAR’s 2018 tax year.

The Company's estimate of the potential outcome of any uncertain tax positions is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time.

The Company believes that the estimate has adequately reflected these matters.

However, the Company's future results may include adjustments to estimates

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

in the period the audits will be resolved, which may impact the Company's effective tax rate.

The Company does not expect a significant change in unrecognized tax benefits within the next twelve months.

Total costs incurred inception to date $ 1,805 $ 798 $ 928 $ 79

Total expected expense to be incurred as of December 31, 2022 $ 137 $ 137 $ — $ —

Revolving Credit Facility

On October 27, 2021, the Company entered into a Loan and Security Agreement (the “Credit Agreement”) with Bank of America, N.A., a national banking association, as lender (the “Lender”).

On October 27, 2021, we entered into a Loan and Security Agreement (the “Credit Agreement”) with Bank of America, N.A., a national banking association, as lender (the “Lender”).

The Credit Agreement provides for a three-year revolving credit facility (the “Credit Facility”) that matures on October 27, 2024.

2 unchanged sentences

The Credit Agreement also includes a $ 5.0 million sublimit for the issuance by the Lender of letters of credit.

In addition, the Credit Agreement includes an uncommitted accordion feature that allows the Company to from time to time request that the Lender increase the aggregate revolving loan commitments by up to an additional $ 25.0 million in the aggregate, subject to the satisfaction of certain conditions, including obtaining the Lender’s agreement to participate in each increase.

In addition, the Credit Agreement includes an uncommitted accordion feature that allows us to request, from time to time, that the Lender increase the aggregate revolving loan commitments by up to an additional $ 25.0 million in the aggregate, subject to the satisfaction of certain conditions, including obtaining the Lender’s agreement to participate in each increase.

The proceeds of the borrowings under the Credit Facility may be used for working capital and general corporate purposes.

The obligations of the Company under the Credit Agreement are secured by substantially all of the Company’s domestic working capital assets, including accounts receivable, cash and cash equivalents, inventory, and other assets of the Company to the extent related to such working capital assets.

At the Company’s option, borrowings under the Credit Agreement will bear interest at a floating rate equal to:

(i) the Bloomberg Short-Term Bank Yield Index rate plus the applicable rate of 2.0 % to 2.5 % determined based on the Company’s average daily availability for the prior fiscal quarter, or (ii) the base rate plus the applicable rate of 1.0 % to 1.5 % based on the Company’s average daily availability for the prior fiscal quarter.

Among other fees, the Company is required to pay a monthly unused fee of 0.2 % per annum on the amount by which the Lender’s aggregate commitment under the Credit Facility exceeds the average daily revolver usage during such month.

Based on certain terms and conditions including eligible accounts receivable as of December 31, 2022, we had unused borrowing capacity of $ 22.2 million.

The obligations under the Credit Agreement are secured by substantially all of our domestic working capital assets, including accounts receivable, cash and cash equivalents, inventory, and other assets to the extent related to such working capital assets.

At our option, borrowings under the Credit Agreement will bear interest at a floating rate equal to:

(i) the Bloomberg Short-Term Bank Yield Index rate plus the applicable rate of 2.0 % to 2.5 % determined based on our average daily availability for the prior fiscal quarter, or (ii) the base rate plus the applicable rate of 1.0 % to 1.5 % based on our average daily availability for the prior fiscal quarter.

Among other fees, we are required to pay a monthly unused fee of 0.2 % per annum on the amount by which the Lender’s aggregate commitment under the Credit Facility exceeds the average daily revolver usage during such month.

The Credit Agreement contains events of default, representations and warranties, and affirmative and negative covenants customary for credit facilities of this type.

The Credit Agreement also contains financial covenants that require the Company to (a) until the Company achieves a fixed charge coverage ratio of at least 1.00 to 1.00 for two consecutive quarters, maintain minimum liquidity of not less than $ 20.0 million at all times and (b) thereafter, maintain a fixed charge coverage ratio, tested quarterly on a trailing twelve month basis, of at least 1.00 to 1.00 at any time a Financial Covenant Trigger Period (as defined in the Credit Agreement) is in effect.

As of December 31, 2021, the Company is in compliance with all the covenants of the Credit Agreement.

If an event of default under the Credit Agreement occurs, then the Lender may cease making advances under the Credit Agreement and declare any outstanding obligations under the Credit Agreement to be immediately due and payable.

In addition, if the Company files a bankruptcy petition, a bankruptcy petition is filed against the Company and is not dismissed or stayed within thirty days, or the Company makes a general assignment for the benefit of creditors, then any outstanding obligations under the Credit Agreement will automatically and without notice or demand become immediately due and payable.

No amounts had been drawn under the Credit Facility as of December 31, 2021.

On October 27, 2021, concurrent with completing the Credit Agreement with Bank of America, N.A., the credit agreement with Western Alliance Bank, an Arizona corporation, entered into on November 5, 2019, was terminated.

There was no amount drawn under this credit agreement at termination.

The Credit Agreement also contains financial covenants that require us to (a) until we achieve a fixed charge coverage ratio of at least 1.00 to 1.00 for two consecutive quarters, maintain minimum liquidity of not less than $ 20.0 million at all times and (b) thereafter, if the Financial Covenant Trigger Period (as defined in the Credit Agreement) is in effect, maintain a fixed charge coverage ratio, tested quarterly on a trailing twelve month basis, of at least 1.00 to 1.00 at any time.

As of December 31, 2022, we are in compliance with all the covenants of the Credit Agreement.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In addition, if we file a bankruptcy petition, a bankruptcy petition is filed against us and is not dismissed or stayed within thirty days or we make a general assignment for the benefit of creditors, then any outstanding obligations under the Credit Agreement will automatically and without notice or demand become immediately due and payable.

No amounts had been drawn under the Credit Facility as of December 31, 2022.

Commitments and Contingencies

Operating Leases

The Company primarily leases office space, with various expiration dates through June 2029.

Some of the leases include options to extend such leases for up to five years , and some include options to terminate such leases within one year .

The terms of certain of the Company’s leases provide for rental payments on a graduated scale.

The Company recognizes lease expense on a straight-line basis over the lease term.

Gross lease expense was $ 7.0 million for each of the years ended December 31, 2021, 2020 and 2019, respectively.

The lease expense was recorded within Cost of revenue, Research and development, Sales and marketing, and General and administrative on the Company's consolidated statements of operations.

Short-term and variable lease costs were included in the lease expense and they were immaterial.

In connection with the leases for the Company's offices in San Jose, California and Richmond, Canada, the Company received tenant improvement allowances ("TIA") of $ 3.5 million and $ 450 thousand, respectively, in the second fiscal quarter of 2020 from lessors for certain improvements the Company made to the leased properties.

The improvement made to the leased property in San Jose, California is considered as lessee-owned, and the Company recorded the improvement as a leasehold improvement within property and equipment, net and the TIA as a reduction to the ROU asset with the impact of the decrease recognized prospectively over the remaining lease term.

The improvement made to the leased property in Richmond, Canada is considered as lessor-owned, and the Company recorded the improvement as a prepaid rent within prepaid expenses and other current assets and the TIA as a reduction to prepaid rent.

Our operating leases comprise offices, equipment, data centers, and distribution centers, with various expiration dates through June 2029.

Certain lease agreements include options to renew or terminate the lease, which are not reasonably certain to be exercised and therefore are not factored into our determination of lease payments.

The terms of certain leases provide for rental payments on a graduated scale.

Gross lease expense was $ 7.1 million, $ 7.0 million, and $ 7.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.

On June 29, 2021, we entered into a sublease agreement with Vocera Communications, Inc.

for approximately 78,000 rentable square feet of office space located at 3030 Orchard Parkway in San Jose, California.

The initial term of the sublease commenced on February 1, 2022, and will expire on June 30, 2029, unless earlier terminated in accordance with the sublease.

The sublease income was $ 2.0 million and $ 0.5 million as a reduction of lease expense for the years ended December 31, 2022 and 2021, respectively.

Supplemental cash flow information related to operating leases was as follows:

6 unchanged sentences

Operating leases $ 3,470 $ 1,646 $ 461

Other non-cash increases in operating right of use assets $ — $ — $ 788

Weighted average remaining lease term and weighted average discount rate related to operating leases were as follows:

2 unchanged sentences

Weighted average discount rate 5.69 % 5.77 %

The Company's future minimum undiscounted lease payments under operating leases and future non-cancelable rent payments from its subtenants for each of the next five years and thereafter as of December 31, 2021 were as follows:

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The future minimum undiscounted lease payments under operating leases and future non-cancelable rent payments from our subtenants for each of the next five years and thereafter as of December 31, 2022 were as follows:

Operating Lease Payments Sublease Payments Net

7 unchanged sentences

Total future lease payments $ 27,531 $ ( 13,852 ) $ 13,679

interest ( 4,062 )

Present value of future minimum lease payments $ 23,469

2 unchanged sentences

Total lease liabilities $ 23,469

________________________

(1) Leases that commenced before November 5, 2019 were calculated using the Company’s incremental borrowing rate on a collateralized basis plus LIBOR rate that closely matches contractual term of most leases.

Leases that commenced between November 5, 2019 and October 27, 2021 were calculated using the Company's borrowing rate defined in the credit agreement with Western Alliance Bank.

Leases that commenced after October 27, 2021 were calculated using the Company's borrowing rate defined in the Credit Agreement with Bank of America, N.A.

During the second quarter of 2021, the Company reviewed certain of its right-of-use assets and other lease related assets in conjunction with the evaluation of its real estate lease portfolio and recorded an impairment charge of $ 9.1 million, which included $ 6.8 million associated with the right-of-use asset and $ 2.3 million associated with other lease related property and equipment in the second quarter of 2021.

Subsequent to the impairment, lease expense for the lease payments related to the impaired right-of-use asset is no longer recognized on a straight-line basis.

The associated lease liability is amortized using the same effective interest method as before the impairment charge.

The impaired right-of-use asset, however, is subsequently amortized on a straight-line basis.

Refer to Note 5, Balance Sheet Components for further information about the impairment of the right-of-use asset and long-lived assets.

On June 29, 2021, the sublease agreement dated May 25, 2021 (the "Sublease"), by and between the Company and Vocera Communications, Inc.

(“Subtenant”) became effective whereby the Company agreed to sublease to Subtenant all of the approximately 78,000 rentable square feet of office space located at 3030 Orchard Parkway in San Jose, California.

The Company’s decision to enter into the Sublease is a continuance of its evaluation of its real estate lease portfolio in light of the COVID-19 pandemic and its impact on the changing nature of office space use by its workforce.

The initial term of the Sublease will commence on February 1, 2022, and will expire on June 30, 2029, unless earlier terminated in accordance with the Sublease.

The Subtenant will pay to the Company an escalating base rent over the life of the Sublease of approximately $ 167,000 to $ 206,000 per month.

In addition, the Subtenant will pay its pro rata portion of property expenses and operating expenses for the Subleased Premises.

The Company classifies the Sublease as an operating lease.

The accounting of the Sublease commenced on October 1, 2021.

Sublease income is recognized over the term of the sublease on a straight-line basis.

The Company recorded sublease income as reduction of lease expense, in the amount of $ 0.5 million for the year ended December 31, 2021.

Letters of Credit

In connection with the lease agreement for the Company's office space located in San Jose, California, the Company executed a letter of credit with the landlord as the beneficiary.

As of December 31, 2021, the Company had approximately $ 3.6 million of unused letters of credit outstanding, of which $ 3.1 million pertains to the lease arrangement in San Jose, California.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In connection with the lease agreement for our office space located in San Jose, California, we executed a letter of credit with the landlord as the beneficiary.

As of December 31, 2022, we have approximately $ 3.6 million of unused letters of credit outstanding, of which $ 3.1 million pertains to the lease arrangement in San Jose, California.

Purchase Obligations

The Company has entered into various inventory-related purchase agreements with suppliers.

Generally, under these agreements, 50 % of orders are cancelable by giving a 46 to 60 days notice prior to the expected shipment date and 25 % of orders are cancelable by giving a 31 to 45 days notice prior to the expected shipment date.

We have entered into various inventory-related purchase agreements with suppliers.

Generally, under these agreements, 50 % of orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25 % of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date.

Orders are non-cancelable within 30 days prior to the expected shipment date.

As of December 31, 2021, the Company had approximately $ 32.9 million in non-cancelable purchase commitments with suppliers.

As a result of the COVID-19 pandemic, the Company has experienced an elongation of the time from order placement to production primarily due to component shortages and supply chain disruptions.

In order to reduce manufacturing lead-times and to ensure an adequate supply of inventories, the Company has worked with its suppliers to place longer lead-time purchase orders to ensure availability of components and materials from its supply chain.

Under this circumstance, the Company may be obligated to purchase long lead-time component inventory procured in accordance with its forecasts.

The Company may become liable for non-cancellable material components, such as chipsets purchased by the supplier to meet its purchase order, even if it is subsequently cancelled.

The Company establishes a loss liability for all products it does not expect to sell for which it has committed purchases from suppliers.

As of December 31, 2021, the loss liability from committed purchases was $ 0.4 million.

From time to time the Company’s suppliers procure unique complex components on the Company’s behalf.

If these components do not meet specified technical criteria or are defective, the Company should not be obligated to purchase the materials.

As of December 31, 2022, we have approximately $ 44.3 million in non-cancelable purchase commitments with suppliers.

As of December 31, 2022, a further $ 14.8 million of purchase orders beyond contractual termination periods have been issued to supply chain partners in anticipation of demand requirements.

Consequently, we may incur expenses for the materials and components, such as chipsets already purchased by the supplier to fulfill our orders if the purchase order is cancelled.

Expenses incurred have historically not been significant relative to the original order value.

As of December 31, 2022, the loss liability from committed purchases was not material.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Warranty Obligations

Changes in the Company’s warranty liability, which is included in Accrued liabilities in the consolidated balance sheets, were as follows:

Changes in warranty obligations, which are included in accrued liabilities in the consolidated balance sheets, were as follows:

Year Ended December 31,

2 unchanged sentences

Balance at the beginning of the period $ 1,330 $ 2,451 $ 3,169

Provision for (release of) warranty obligation made during the period ( 655 ) — 260

Settlements made during the period ( 466 ) ( 718 ) ( 803 )

Provision for (release of) warranty obligations 145 ( 655 ) —

Settlements ( 301 ) ( 466 ) ( 718 )

Balance at the end of the period $ 1,174 $ 1,330 $ 2,451

Litigation and Other Legal Matters

We are involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below.

In all cases, at each reporting period, 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.

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 general and administrative expenses.

We monitor developments in these legal matters that could affect the estimate we had previously accrued.

In relation to such matters, we currently believe that there are no existing claims or proceedings that are likely to have a material adverse effect on our financial position within the next 12 months, or the outcome of these matters is currently not determinable.

There are many uncertainties associated with any litigation, and these actions or other third-party claims against us may cause us to incur costly litigation and/or substantial settlement charges.

In addition, the resolution of any intellectual property litigation may require us to make royalty payments, which could have an adverse effect in future periods.

If any of those events were to occur, our business, financial condition, results of operations, and cash flows could be adversely affected.

The actual liability in any such matters may be materially different from our estimates, which could result in the need to adjust the liability and record additional expenses.

Securities Class Action Lawsuits and Derivative Suit

The Company is involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below.

In all cases, at each reporting period, the Company evaluates 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.

In such cases, the Company accrues for the amount, or if a range, the Company accrues 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.

The Company monitors developments in these legal matters that could affect the estimate the Company had previously accrued.

In relation to such matters, the Company currently believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its financial position within the next 12 months, or the outcome of these matters is currently not determinable.

There are many uncertainties associated with any litigation, and these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges.

In addition, the resolution of any intellectual property litigation may require the Company to make royalty payments, which could have an adverse effect in future periods.

If any of those events were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected.

The actual liability in any such matters may be materially different from the Company's estimates, which could result in the need to adjust the liability and record additional expenses.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Beginning on December 11, 2018, purported stockholders of Arlo Technologies, Inc.

filed six putative securities class action complaints in the Superior Court of California, County of Santa Clara, and one complaint in the U.S.

District Court for the Northern District of California against the Company and certain of its executives and directors.

Some of these actions also name as defendants the underwriters in the Company’s initial public offering ("IPO") and NETGEAR, Inc.

The actions pending in state court are Aversa v.

Arlo Technologies, Inc., et al.

18CV339231, filed Dec.

Arlo Technologies, Inc.

19CV340741, filed January 9, 2019;

Arlo Technologies, Inc.

19CV340758, filed January 10, 2019;

NetGear, Inc.

19CV342071, filed February 1, 2019;

Arlo Technologies, Inc.

19CV342318, filed February 8, 2019;

Arlo Technologies, Inc.

19CV343033, filed February 22, 2019.

On April 26, 2019, the state court consolidated these actions as In re Arlo Technologies, Inc.

Shareholder Litigation , No.

18CV339231 (the “State Action").

The action in federal court is Wong v.

Arlo Technologies, Inc.

19-CV-00372 (the “Federal Action”).

The plaintiffs in the State Action filed a consolidated complaint on May 1, 2019.

The plaintiffs allege that the Company failed to adequately disclose quality control problems and adverse sales trends ahead of its IPO, violating the Securities Act of 1933, as amended (the "Securities Act").

On December 11, 2018, purported stockholders of Arlo Technologies, Inc.

filed six putative securities class action complaints in the Superior Court of California, County of Santa Clara (the “ State Action”), and one complaint in the U.S.

District Court for the Northern District of California (the “ Federal Action”) against us and certain of its executives and directors.

The plaintiffs in the State Action allege that we failed to adequately disclose quality control problems and adverse sales trends ahead of our initial public offering (the “ IPO”), violating the Securities Act of 1933, as amended (the “ Securities Act”).

The complaint seeks unspecified monetary damages and other relief on behalf of investors who purchased Company common stock issued pursuant and/or traceable to the IPO.

On June 21, 2019, the court stayed the State Action pending resolution of the Federal Action, given the substantial overlap between the claims.

In the Federal Action, the court appointed a shareholder named Matis Nayman as lead plaintiff.

On June 7, 2019, plaintiff filed an amended complaint.

Lead Plaintiff alleges violations of the Securities Act and the Securities Exchange Act of 1934, as amended, based on alleged materially false and misleading statements about the Company’s sales trends and products.

In the amended complaint, lead plaintiff sought to represent a class of persons who purchased or otherwise acquired the Company’s common stock (i) during the period between August 3, 2018 through December 3, 2018 and/or (ii) pursuant to or traceable to the IPO.

Lead plaintiff seeks class certification, an award of unspecified damages, an award of costs and expenses, including attorneys’ fees, and other further relief as the court may deem just and proper.

Lead plaintiff alleged violations of the Securities Act and the Securities Exchange Act of 1934, as amended, based on alleged materially false and misleading statements about our sales trends and products.

In the amended complaint, lead plaintiff sought to represent a class of persons who purchased or otherwise acquired our common stock (i) during the period between August 3, 2018 through December 3, 2018 and/or (ii) pursuant to or traceable to the IPO.

Lead plaintiff sought class certification, an award of unspecified damages, an award of costs and expenses, including attorneys’ fees, and other further relief as the court may deem just and proper.

On August 6, 2019, defendants filed a motion to dismiss.

The court granted that motion, and plaintiff filed a second amended complaint.

On June 12, 2020, plaintiff filed an unopposed motion for preliminary approval of a class action settlement for $ 1.25 million, which was also the amount that the Company had accrued for loss contingency.

The settlement remains subject to further court approval.

On September 24, 2020, the court entered an order preliminarily approving the settlement.

On February 5, 2021, plaintiff filed a motion for final approval of the settlement.

In October 2020, the Company made a $ 1.25 million payment an escrow account administered by the court and plaintiff’s counsel (the “Settlement Fund”).

The Settlement Fund shall be deemed to be in the custody of the court and shall remain subject to the jurisdiction of the court until such time as the Settlement Fund is distributed pursuant to the settlement agreement and/or further order of the court.

The federal court granted that motion, and lead plaintiff filed an amended complaint.

On June 12, 2020, lead plaintiff filed an unopposed motion for preliminary approval of a class action settlement for $ 1.25 million, which was also the amount that we had accrued for loss contingency.

In October 2020, we made a $ 1.25 million payment to an escrow account administered by the court and plaintiff’s counsel (the “Settlement

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Settlement Fund was deemed to be in the custody of the court and remained subject to the jurisdiction of the court until such time as the Settlement Fund was distributed pursuant to the settlement agreement and/or further order of the court.

On February 5, 2021, lead plaintiff filed a motion for final approval of the settlement.

In advance of the final approval hearing, three of the named plaintiffs in the State Action requested exclusion from the settlement.

The court held a final approval hearing on March 11, 2021, and, on March 25, 2021, entered an order and final judgment approving the settlement and, among other things, dismissing with prejudice all claims of lead plaintiff and the Settlement Class (as defined in the settlement agreement).

On April 19, 2021, the Court issued an amended order and corrected judgment to include defendant NETGEAR, who had been inadvertently omitted from the prior order and final judgment.

The court held a final approval hearing on March 11, 2021, and, on March 25, 2021, entered an order and final judgment approving the settlement and, among other things, dismissed with prejudice all claims of lead plaintiff and the Settlement Class (as defined in the settlement agreement).

The Federal Action is now closed.

In the State Action, on May 5, 2021, the court held a status conference.

At that conference, the state court instructed plaintiffs Perros, Patel, and Pham (“Plaintiffs”), who were the only Arlo stockholders to opt out of the federal settlement, to file an amended complaint by June 4, 2021.

Plaintiffs filed their second amended complaint on June 4, 2021, asserting their individual Securities Act claims, but also purporting to represent a new class of Arlo stockholders who purchased Arlo shares between December 3, 2018 and February 22, 2019 and fell outside the Settlement Class (as defined in the federal settlement).

In the State Action, on May 5, 2021, the court held a status conference and instructed plaintiffs Perros, Patel, and Pham (“Plaintiffs”), who were the only Arlo stockholders to opt out of the federal settlement, to file an amended complaint by June 4, 2021.

Plaintiffs filed their amended complaint, asserting their individual Securities Act claims, but also purporting to represent a new class of Arlo stockholders who purchased Arlo shares between December 3, 2018 and February 22, 2019.

On June 21, 2021, the Arlo defendants filed a motion to dismiss the State Action (for forum non conveniens) based on the federal forum provision in Arlo’s certificate of incorporation.

Plaintiffs opposed on July 28, 2021, and the Arlo defendants

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

replied on August 13, 2021.

On July 6, 2021, defendants filed multiple demurrers to the second amended complaint.

Plaintiffs filed their oppositions on August 12, 2021, and defendants filed their replies on August 27, 2021.

Plaintiffs opposed on July 28, 2021, and the Arlo defendants replied on August 13, 2021.

On September 9, 2021, the court issued an order granting the Arlo defendants’ forum non conveniens motion, and on September 17, 2021, the court issued a final judgment dismissing the State Action in its entirety.

1 unchanged sentence

The appeal is pending before the California Court of Appeal, Sixth Appellate District.

The court has not yet set a date for oral argument.

Plaintiffs-Appellants filed their opening brief on May 20, 2022.

Defendants-Respondents filed their responding brief on August 18, 2022, and Plaintiffs-Appellants filed their reply brief on September 7, 2022.

The oral arguments on the appeal originally set for February 16, 2023 were postponed and have not yet been rescheduled.

Arlo Technologies, Inc., et al.

3 unchanged sentences

19-CV-03354 (the “Derivative Action”).

The Derivative Action is brought on behalf of the Company against the majority of the Company’s current directors.

The Derivative Action is brought on behalf of us against the majority of our current directors.

The complaint is based on the same alleged misconduct as the securities class actions but asserts claims for breach of fiduciary duty, waste of corporate assets, and violation of the Securities Exchange Act of 1934, as amended.

5 unchanged sentences

On August 23, 2021, plaintiff filed a second amended complaint.

Defendants’ motion to dismiss the second amended complaint is due on December 17, 2021.

Plaintiff’s opposition is due January 31, 2022, and defendants’ reply is due on March 2, 2022.

Defendants moved to dismiss the second amended complaint on December 17, 2021.

Plaintiff filed his opposition on January 31, 2022, and defendants filed their reply on March 2, 2022.

On July 28, 2022, the Court heard defendants’ motion to dismiss.

At the hearing, the Court informed the parties that it was inclined to grant defendants’ motion to dismiss for lack of jurisdiction, and the Court’s corresponding written order dismissing the case followed on August 8, 2022.

Skybell Technologies, Inc.

Arlo Technologies, Inc.

On December 18, 2020, Skybell Technologies, Inc., SB IP Holdings, LLC, and Eyetalk365, LLC (collectively, “Complainants” or “Skybell”) filed a Section 337 complaint against the Company, Vivint Smart Home, Inc.

(“Vivint”), and SimpliSafe, Inc.

(“SimpliSafe”) (collectively “Respondents”) at the U.S.

On December 18, 2020, Skybell Technologies, Inc., SB IP Holdings, LLC, and Eyetalk365, LLC (collectively, “Skybell”) filed a Section 337 complaint against us, Vivint Smart Home, Inc.

and SimpliSafe, Inc.

(collectively “Respondents”) at the U.S.

International Trade Commission (“ITC”).

The action alleges that the Company’s cameras and video doorbell cameras infringe seven patents:

10,097,796 (“the ’796 patent”), 10,200,660 (“the ’660 patent”), 10,523,906 (“the ’906 patent”), 10,097,797 (“the ’797 patent”), 9,485,478 (“the ’478 patent”), 10,674,120 (“the ’120 patent”), and 9,432,638 (“the ’638 patent”) (collectively, “the Asserted Patents”) in violation of Section 337 of the Tariff Act of 1930.

The Asserted Patents are all from the same family and generally directed to detecting a person at a camera and communicating video and audio from the camera to a cell phone along with various other features.

The case was instituted on January 25, 2021 as Investigation No.

The action alleges that our cameras and video doorbell cameras infringe certain patents (the “Asserted Patents”).

On September 15, 2021, the Administrative Law Judge (“ALJ”) hearing the case at the ITC issued an Initial Determination (“ID”) ruling that all the Asserted Patents are invalid.

The ALJ agreed with Respondents’ contention that there was an impermissible break in priority chains of the applications of the Asserted Patents during their prosecution – meaning that certain of Skybell’s prior issued patents fully anticipated or invalidated all the Asserted Patents.

Therefore, the ALJ ruled that there can be no patent infringement or violation of Section 337 of the Tariff Act of 1930 by the Respondents.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Skybell appealed the ID by submitting its Petition for Review to the ITC on September 27, 2021, and the Respondents submitted their Response to the Petition to Review on October 4, 2021.

1 unchanged sentence

On January 9, 2022, Skybell filed its Notice of Appeal to the Federal Circuit to appeal the ITC’s rulings invalidating the Asserted Patents.

As of December 31, 2021, the Company is unable to predict the outcome of this matter, and, at this time, cannot reasonably estimate the possible loss or range of loss with respect to the legal proceeding discussed herein.

Indemnification of Directors and Officers

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company, as permitted under Delaware law and in accordance with its bylaws, has agreed to indemnify its officers and directors for certain events or occurrences, subject to certain conditions, while the officer or director is or was serving at the Company’s request in such capacity.

The term of the indemnification period is for the officer’s or director’s lifetime.

The maximum amount of potential future indemnification is unlimited;

however, the Company has a director and officer insurance policy that will enable it to recover a portion of any future amounts paid.

As a result of its insurance policy coverage, the Company believes the fair value of each indemnification agreement will be minimal.

The Company had no liabilities recorded for these agreements as of December 31, 2021 and 2020.

On June 23, 2022, Skybell and the Respondents stipulated to the dismissal of the Skybell’s appeal, and on June 27, 2022, the Federal Circuit correspondingly dismissed the appeal.

There was no material financial impact to us resulting from this litigation matter.

Indemnifications

Prior to the completion of the IPO, the Company historically participated in NETGEAR’s sales agreements.

In its sales agreements, NETGEAR typically agrees to indemnify its direct customers, distributors and resellers (the “Indemnified Parties”) for any expenses or liability resulting from claimed infringements by NETGEAR’s products of patents, trademarks or copyrights of third parties that are asserted against the Indemnified Parties, subject to customary carve-outs.

The terms of these indemnification agreements are generally perpetual after execution of the agreement.

The maximum amount of potential future indemnification is generally unlimited.

From time to time, the Company receives requests for indemnity and may choose to assume the defense of such litigation asserted against the Indemnified Parties.

The Company had no liabilities recorded for these agreements as of December 31, 2021 and 2020.

In connection with the Separation, and after July 1, 2018, certain sales agreements were transferred to the Company, and the Company has replaced certain shared contracts, which include similar indemnification terms.

In addition, pursuant to the master separation agreement and certain other agreements entered into with NETGEAR in connection with the Separation and the IPO, NETGEAR has agreed to indemnify the Company for certain liabilities.

The master separation agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of its business with the Company and financial responsibility for the obligations and liabilities of NETGEAR’s business with NETGEAR.

Under the intellectual property rights cross-license agreement entered into between the Company and NETGEAR, each party, in its capacity as a licensee, indemnifies the other party, in its capacity as a licensor, and its directors, officers, agents, successors and subsidiaries against any losses suffered by such indemnified party as a result of the indemnifying party’s practice of the intellectual property licensed to such indemnifying party under the intellectual property rights cross-license agreement.

Also, under the tax matters agreement entered into between the Company and NETGEAR, each party is liable for, and indemnifies the other party and its subsidiaries from and against any liability for, taxes that are allocated to the indemnifying party under the tax matters agreement.

In addition, the Company has agreed in the tax matters agreement that each party will generally be responsible for any taxes and related amounts imposed on it or NETGEAR as a result of the failure of the Distribution, together with certain related transactions, to qualify as a transaction that is generally tax-free, for U.S.

federal income tax purposes, under Sections 355 and 368(a)(1)(D) and certain other relevant provisions of the Code, to the extent that the failure to so qualify is attributable to actions, events or transactions relating to such party’s respective stock, assets or business, or a breach of the relevant representations or covenants made by that party in the tax matters agreement.

The transition services agreement generally provides that the applicable service recipient indemnifies the applicable service provider for liabilities that such service provider incurs arising from the provision of services other than liabilities arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement, and that the applicable service provider indemnifies the applicable service recipient for liabilities that such service recipient incurs arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement.

Pursuant to the registration rights agreement, the Company has agreed to indemnify NETGEAR and its subsidiaries that hold registrable securities (and their directors, officers, agents and, if applicable, each other person who controls such holder under Section 15 of the Securities Act) registering shares pursuant to the registration rights agreement against certain losses, expenses and liabilities under the Securities Act, common law or otherwise.

NETGEAR and its subsidiaries that hold registrable securities similarly indemnify the Company but such indemnification will be limited to an amount equal to the net proceeds received by such holder under the sale of registrable securities giving rise to the indemnification obligation.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Change in Control and Severance Agreements

The Company has entered into change in control and severance agreements with certain of its executive officers (the “Severance Agreements”).

Pursuant to the Severance Agreements, upon a termination without cause or resignation with good reason, the individual would be entitled to (1) cash severance equal to (a) the individual’s annual base salary and an additional amount equal to his or her target annual bonus (for the Chief Executive Officer) or (b) the individual’s annual base salary (for other executive officers), (2) 12 months of health benefits continuation, and (3) accelerated vesting of any unvested time-based equity awards that would have vested during the 12 months following the termination date.

Upon a termination without cause or resignation with good reason that occurs during the one month prior to or 12 months following a change in control, the individual would be entitled to (1) (a) cash severance equal to a multiple ( 2 times for the Chief Executive Officer and 1 times for other executive officers) of the sum of the individual’s annual base salary and target annual bonus, (2) a number of months of health benefits continuation ( 24 months for the Chief Executive Officer and 12 months for other executive officers) and (3) vesting of all outstanding, unvested equity awards (for the Chief Executive Officer) and the vesting of all outstanding, unvested time-based equity awards (for other executive officers).

Severance will be conditioned upon the execution and non-revocation of a release of claims.

The Company had no liabilities recorded for these agreements as of December 31, 2021.

On June 15, 2020 (the “Retirement Date”), Christine Gorjanc retired as the Chief Financial Officer, principal financial officer and principal accounting officer of the Company.

In connection with her retirement, the Company, NETGEAR and Ms.

Gorjanc entered into a Separation Agreement and Release (the “Separation Agreement”) pursuant to which Ms.

Gorjanc received a $ 15,000 cash payment and accelerated vesting of (i) 8,749 shares subject to Company stock options, (ii) 43,216 shares subject to Company restricted stock units, (iii) 2,897 shares subject to NETGEAR stock options and (iv) 15,000 shares subject to NETGEAR restricted stock units.

The Board of Directors of the Company appointed Gordon Mattingly as the Company's Chief Financial Officer, principal financial officer and principal accounting officer, effective as of the Retirement Date.

In connection with his appointment as the Company’s Chief Financial Officer, the Company entered into a confirmatory employment letter (the “Employment Agreement”) with Mr.

Pursuant to the Employment Agreement, Mr.

Mattingly receives an annual base salary of $ 500,000 and is eligible to receive an annual target bonus of 70 % of his annual base salary.

Mattingly will also continue to be eligible to participate in the Company’s equity compensation plans and employee benefit plans available to other employees of the Company.

The Company also entered into an updated change in control and severance agreement consistent with Mr.

Mattingly’s new role of Chief Financial Officer.

On May 2, 2019, the Company and Patrick J.

Collins III, the Company’s Senior Vice President of Products, entered into a Separation and Release Agreement (the “Separation Agreement”) regarding Mr.

Collins’ separation from the Company, effective May 1, 2019.

Pursuant to the Separation Agreement, Mr.

Collins received cash severance equal to his annual base salary, 12 months of health benefits continuation and accelerated vesting of any of his unvested equity awards that would have vested during the 12 months following the termination date.

Environmental Regulation

The Company is required to comply and is currently in compliance with the European Union (“EU”) and other Directives on the Restrictions of the use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”), Waste Electrical and Electronic Equipment (“WEEE”) requirements, Energy Using Product (“EuP”) requirements, the REACH Regulation, Packaging Directive and the Battery Directive.

The Company is subject to various federal, state, local, and foreign environmental laws and regulations, including those governing the use, discharge, and disposal of hazardous substances in the ordinary course of its manufacturing process.

The Company believes that its current manufacturing and other operations comply in all material respects with applicable environmental laws and regulations;

however, it is possible that future environmental legislation may be enacted or current environmental legislation may be interpreted to create an environmental liability with respect to its facilities, operations, or products.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, distributors, resellers, vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising from breach of such agreements or from intellectual property infringement claims made by third parties.

In addition, we have entered into indemnification agreements with members of its board of directors and certain of its executive officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers.

The maximum potential amount of future payments we could be required to make under these indemnification agreements is, in many cases, unlimited.

As of December 31, 2022 and 2021, there has not incurred any material costs as a result of such indemnifications and we are not currently aware of any indemnification claims.

Employee Benefit Plans

2018 Equity Incentive Plan

The Company grants options and RSUs under the 2018 Equity Incentive Plan (the "2018 Plan"), under which awards may be granted to all employees.

Award vesting periods for this plan are generally three to four years .

We grant options and restricted stock units (“RSUs”) under the 2018 Equity Incentive Plan (the “2018 Plan”), under which awards may be granted to all employees.

We also grant performance-based and market-based restricted stock units (“PSUs”) to our executive officers periodically.

Award vesting periods for the 2018 plan are generally three to four years .

As of December 31, 2022, approximately 4.2 million shares are available for future grants.

Options may be granted for periods of up to 10 years or such shorter term as may be provided in the agreement and at prices no less than 100 % of the fair market value of Arlo’s common stock on the date of grant.

Options granted under the 2018 Plan generally vest over four years , the first tranche at the end of 12 months and the remaining shares underlying the option vesting monthly over the remaining three years .

On July 28, 2021, the Compensation Committee of the Board of Directors (the “Committee”) unanimously approved an amendment to the 2018 Plan to, among other things, reserve an additional 1,500,000 shares of the Company’s common stock ("inducement pool") to be used exclusively for grants of awards to individuals who were not previously employees or non-employee directors of the Company (or following a bona fide period of non-employment with the Company), as an inducement material to the individual’s entry into employment with the Company within the meaning of Rule 303A.08 of the New York Stock Exchange (the “NYSE”) Listed Company Manual (“Rule 303A.08”).

During the years ended December 31, 2022 and 2021, the Compensation Committee of the Board of Directors (the “Committee”) unanimously approved amendments to the 2018 Plan to, among other things, reserve an additional 3,000,000 shares and 1,500,000 , respectively, of our common stock to be used exclusively for grants of awards to individuals who were not previously employees or non-employee directors (or following a bona fide period of non-employment), as an inducement material to the individual’s entry into employment with us within the meaning of Rule 303A.08 of the New York Stock Exchange (the “NYSE”) Listed Company Manual (“Rule 303A.08”).

The 2018 Plan was amended by the Committee without stockholder approval pursuant to Rule 303A.08.

On March 3, 2021, the Company registered an aggregate of up to 3,966,472 shares of the Company’s common stock on Registration Statement on Form S-8, including 3,173,178 shares issuable pursuant to the Company's 2018 Plan that were automatically added to the shares authorized for issuance under the 2018 Plan on January 1, 2021 pursuant to an “evergreen” provision contained in the 2018 Plan and 793,294 shares issuable pursuant to the ESPP that were automatically added to the shares authorized for issuance under the ESPP on January 1, 2021 pursuant to an “evergreen” provision contained in the ESPP.

The Company’s employees have historically participated in NETGEAR’s various stock-based plans, which are described below and represent the portion of NETGEAR’s stock-based plans in which Arlo employees participated as of December 31, 2021.

The Company’s consolidated statements of operations reflect compensation expense for these stock-based plans associated with the portion of NETGEAR’s plans in which Arlo employees participated.

The following table sets forth the available shares for future grants under the 2018 Plan as of December 31, 2021:

On January 21, 2022, we registered an aggregate of up to 4,222,270 shares of common stock on a Registration Statement on Form S-8, including 3,377,816 shares issuable pursuant to the 2018 Plan that were automatically added to the shares authorized for issuance under the 2018 Plan and 844,454 shares issuable pursuant to the Employee Stock Purchase Plan (“ESPP”) that were automatically added to the shares authorized for issuance on January 1, 2022, both pursuant to an “evergreen” provision contained in the respective plans.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table sets forth the available shares for grants as of December 31, 2022:

Number of Shares

2 unchanged sentences

Additional authorized shares 6,378

Granted ( 9,758 )

Forfeited/ cancelled 2,753

1 unchanged sentence

Shares available for grants as of December 31, 2022

_________________________

(1) Includes approximately 3.2 million shares authorized for issuance pursuant to the "evergreen" provision and 1.5 million shares authorized for issuance under the inducement pool.

(2) Includes approximately 1.0 million shares granted under the inducement pool.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Employee Stock Purchase Plan

The Company sponsors the ESPP, pursuant to which eligible employees may contribute up to 15 % of compensation, subject to certain income limits, to purchase shares of Arlo’s common stock.

The duration of each offering period is generally six months , with the first offering period having commenced on February 15, 2019 and ended on August 14, 2019.

We sponsor the ESPP to eligible employees.

As of December 31, 2022, approximately 1.6 million shares were available for issuance under the ESPP.

The following table sets forth the weighted average assumptions used to estimate the fair value of purchase rights granted under the ESPP.

2022 2021 2020

Expected life (in years) 0.5 0.5 0.5

Risk-free interest rate 3.29 % 0.07 % 0.84 %

Expected volatility 69.2 % 63.8 % 102.0 %

Option Activity

The Company’s stock option activity during the year ended of December 31, 2021 was as follows:

Stock option activity during the year ended of December 31, 2022 was as follows:

Number of Shares Weighted Average Exercise Price Per Share Weighted

Term Aggregate

(In thousands) (In dollars) (In years) (In thousands)

Outstanding as of December 31, 2021

2,574 $ 10.55

Exercised ( 209 ) 6.81

2 unchanged sentences

Outstanding as of December 31, 2022 2,082 $ 10.24 3.82 $ —

Vested and expected to vest as of December 31, 2021 2,574 $ 10.55 4.29 $ 4,333

Vested and expected to vest 2,082 $ 10.24 3.82 $ —

Exercisable Options as of December 31, 2022 2,082 $ 10.24 3.82 $ —

_________________________

(1) Representing the total pre-tax intrinsic values (the difference between the Company’s closing stock price on the last trading day of 2021 and the exercise price, multiplied by the number of shares underlying the in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2021.

This amount changes based on the fair market value of the Company’s stock.

Year Ended December 31,

2022 2021 2020

(In millions, except per share data)

(In millions)

Total intrinsic value of options exercised

1 unchanged sentence

Total fair value of options vested $ 2.3 $ 2.6 $ 1.0

Weighted-average grant date fair value per share of options granted NA NA $ 2.59

The following table summarizes significant ranges of outstanding the Company’s stock options as of December 31, 2021.

Options Outstanding

Options Exercisable

Range of Exercise Prices

(In thousands) (In years) (In dollars) (In thousands) (In dollars)

577 2.18 $ 6.59 574 $ 6.60

967 4.57 8.35 967 8.35

10.09 - 13.23

100 6.27 11.97 90 11.83

14.39 - 14.39

496 6.07 14.39 486 14.39

16.00 - 16.00

434 3.98 16.00 390 16.00

2,574 4.29 10.55 2,507 10.44

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table sets forth the weighted average assumptions used to estimate the fair value of the Company’s stock options granted using Black-Scholes option pricing model during the years ended December 31, 2021, 2020 and 2019 and purchase rights granted under the ESPP during the years ended December 31, 2021 and 2020:

Stock Options ESPP

2021 2020 2019 2021 2020 2019

Expected life (in years) NA NA 6.3 0.5 0.5 0.5

Risk-free interest rate NA NA 2.28 % 0.07 % 0.84 % 2.49 %

Expected volatility NA NA 73.0 % 63.8 % 102.0 % 97.6 %

Dividend yield NA NA — — — —

The Company’s common stock did not have sufficient history of being publicly traded at grant date, hence, the estimated term of the Company’s stock options granted was determined by a combination of using a simplified method, which is an average of the contractual term and vesting period of the stock options and using management best estimate of the expected term.

The risk-free interest rate of stock options granted was based on the implied yield currently available on U.S.

Treasury securities, with a remaining term commensurate with the estimated expected term.

The estimated volatility assumption was calculated based on a compensation peer group analysis of stock price volatility on the grant date.

The risk-free interest rate of the purchase rights granted under the ESPP is based on the implied yield currently available on U.S.

Treasury securities, with a remaining term commensurate with the estimated expected term.

Expected volatility of the purchase rights granted under the ESPP is based on historical volatility over the most recent period commensurate with the estimated expected term.

NETGEAR’s stock option activity for Company employees during the year ended December 31, 2021 was as follows:

Number of Shares Weighted Average Exercise Price Per Share Weighted

RSU activity, excluding PSU activity, during the year ended of December 31, 2022 was as follows:

Number of Shares Weighted Average Grant Date Fair Value Per Share Weighted

Term Aggregate

1 unchanged sentence

Outstanding as of December 31, 2021

Exercised ( 5 ) 27.49

Forfeited/cancelled — —

Outstanding as of December 31, 2021 11 $ 20.11 0.69 $ 98

Vested and expected to vest as of December 31, 2021 11 $ 20.11 0.69 $ 98

Exercisable options as of December 31, 2021 11 $ 20.11 0.69 $ 98

Year Ended December 31,

10,080 $ 5.73

(In thousands, except per share data)

Total intrinsic value of options exercised

$ 58 $ 634 $ 633

Total fair value of options vested $ 35 $ 42 $ 810

Weighted-average grant date fair value per share of NETGEAR’s stock options granted to employees specifically identifiable to Arlo NA NA NA

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes significant ranges of outstanding NETGEAR’s stock options as of December 31, 2021.

Options Outstanding

Options Exercisable

Range of Exercise Prices

(In thousands) (In years) (In dollars) (In thousands) (In dollars)

19.19 - 19.19

7 0.56 $ 19.19 7 $ 19.19

20.10 - 20.10

1 0.30 20.10 1 20.10

21.86 - 21.86

3 1.10 21.86 3 21.86

19.19 - 23.77

11 0.69 20.11 11 20.11

Arlo’s RSU activity, excluding PSU activity and MPSU activity, during the year ended of December 31, 2021 was as follows:

Number of Shares Weighted Average Grant Date Fair Value Per Share Weighted

(In thousands) (In dollars) (In years) (In thousands)

Outstanding as of December 31, 2020

Granted 6,811 7.23

10 unchanged sentences

$ 7.23 $ 7.32 $ 3.03

The Company grants restricted stock units to its NEOs periodically that vested based on the Company's attainment of cash balance goals as of December 31, 2020 and December 31, 2021 and the NEO's continued employment through the vesting dates ("PSUs").

The vesting periods for the PSUs are three or four years.

The maximum number of shares that NEOs can earn is 120 % of the target number of the PSUs.

The minimum number of shares that NEOs can earn is 75 % of the target number of the PSUs.

The Company determined the fair value of the PSUs using the closing price of the Company's common stock as of the grant date.

For PSUs, stock-based compensation expense of performance milestone is recognized over the expected performance achievement period when the achievement becomes probable.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company's PSU activity during the year ended of December 31, 2021 was as follows:

During the years ended December 31, 2022 and 2021, our executive officers were granted performance-based awards with vesting occurring at the end of a three or five-year period if performance conditions or market conditions are met.

The number of units earned and eligible to vest are determined based on the achievement of various performance conditions or market conditions, including the cumulative paid accounts targets, stock price, cash balances at reporting period, and the recipients’ continued services.

At the end of each reporting period, we evaluate the probability of achieving the performance or market conditions and record the related stock-based compensation expense based on the achievement over the service period.

PSU activity during the year ended of December 31, 2022 was as follows:

Number of Shares Weighted Average Grant Date Fair Value Per Share Weighted

Term Aggregate

(In thousands) (In dollars) (In years) (In thousands)

5 unchanged sentences

4,041 $ 6.22 1.12 $ 14,184

_________________________

(1) Includes 329,178 shares of PSUs for the 2020 performance period, achieved at 120 % of target, or 395,014 shares and vest over three years , and 197,823 shares of PSUs for the 2021 performance period, achieved at 120 % of target, or 237,388 shares and vest over four years .

Year Ended December 31,

2022 2021 2020

(In millions, except per share data)

Total intrinsic value of RSUs vested (the release date fair value)

Total fair value of RSUs vested (the grant date fair value) $ 0.54 NA

RSU granted weighted-average fair value per share

Total intrinsic value of PSUs vested (the release date fair value)

$ 4.8 $ 1.4 $ —

MPSU Activity

The Company grants restricted stock units to its NEOs that vest based on the Company's stock price performance relative to a broad-market index over a performance period of three to four years and the NEO's continued employment through the vesting date ("TSR MPSUs").

The TSR MPSUs will vest at the end of the three or four -year periods that begin on the TSR MPSUs' grant date based on performance of the Company's common stock relative to the Benchmark during the three or four -year periods from the grant dates.

A positive 3.3 x or negative 2.5 x multiplier will be applied to the total shareholder returns (“TSR”), such that the number of shares vested will increase by 3.3 % or decrease by 2.5 % of the target numbers, for each 1 % of positive or negative TSR relative to the Benchmark.

In the event the Company's common stock performance is below negative 30 % relative to the Benchmark, no shares will be vested.

In no event will the number of shares vested exceed 200 % of the target for that tranche.

The Company's TSR MPSU activity during the year ended of December 31, 2021 was as follows:

Number of Shares Weighted Average Grant Date Fair Value Per Share Weighted

(In thousands) (In dollars) (In years) (In thousands)

Outstanding as of December 31, 2020

Granted 198 11.77

Forfeited — —

Outstanding as of December 31, 2021

Total fair value of PSUs vested (the grant date fair value) $ 2.7 $ 0.6 $ —

PSU granted weighted-average fair value per share

$ 6.52 $ 6.74 $ 3.43

Stock-Based Compensation Expense

The following table sets forth the stock-based compensation expense included in our consolidated statements of comprehensive loss:

Year Ended December 31,

2022 2021 2020

(In thousands)

Cost of revenue $ 4,841 $ 3,917 $ 2,961

Research and development 12,317 10,865 9,055

Sales and marketing 6,290 5,392 4,106

General and administrative 25,028 17,856 19,125

Total $ 48,476 $ 38,030 $ 35,247

As of December 31, 2022, there was no unrecognized compensation cost related to stock options.

Approximately $ 74.1 million of unrecognized compensation cost related to unvested RSUs and PSUs is expected to be recognized over a weighted-average period of 1.9 years as of December 31, 2022.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

We have a 401(K) Plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code.

We match 50 % of contributions for employees up to a maximum of $ 2,000 in employee contributions per fiscal year.

During the years ended December 31, 2022, 2021 and 2020, we recognized expense of approximately $ 1.1 million, $ 1.1 million and $ 0.9 million, respectively.

Income (loss) before provision for income taxes consisted of the following:

Year Ended December 31,

2022 2021 2020

(In millions, except per share data)

Total intrinsic value of RSUs vested (the release date fair value)

Total fair value of RSUs vested (the grant date fair value) NA NA NA

RSU granted weighted-average fair value per share

(In thousands)

United States $ ( 60,374 ) $ ( 59,370 ) $ ( 104,551 )

International 4,723 4,018 3,925

Total $ ( 55,651 ) $ ( 55,352 ) $ ( 100,626 )

Provision for income taxes consisted of the following:

Year Ended December 31,

2022 2021 2020

The Company also grants restricted stock units to its CEO that vest based on the Company's achievement of its stock price performance targets and the CEO's continued employment through the vesting dates ("CEO MPSUs").

The CEO MPSUs will vest over four years in substantially equal quarterly installments that begin on the CEO MPSUs' grant date in five equal tranches based on the Company's achievement of certain average daily closing prices per share of the Company's common stock, as reported on the NYSE, for any 30 consecutive trading days on or prior to July 28, 2025 (the "Performance Period End Date"), with the first tranche target at $ 7.57 per share, with the second tranche target at $ 8.69 per share, with the third tranche target at $ 9.97 per share, with the fourth tranche target $ 11.44 per share and with the fifth tranche target at $ 13.20 per share.

To the extent that the stock price of the tranche does not achieve its corresponding price target prior to the Performance Period End Date, the CEO MPSUs expire or cancel.

On December 1 and 29, 2021, the stock price performance targets for the first and second tranches were achieved, respectively.

The Company's CEO MPSU activity during the year ended of December 31, 2021 was as follows:

Number of Shares Weighted Average Grant Date Fair Value Per Share Weighted

(In thousands) (In dollars) (In years) (In thousands)

Outstanding as of December 31, 2020

Granted 758 5.21

Vested ( 19 ) 5.64

Forfeited — —

Outstanding as of December 31, 2021

(In thousands)

Federal $ 166 $ — $ —

State 87 21 84

Foreign 601 989 438

854 1,010 522

Year Ended December 31,

(In millions, except per share data)

Total intrinsic value of RSUs vested (the release date fair value)

Total fair value of RSUs vested (the grant date fair value) $ 0.11

RSU granted weighted-average fair value per share

Federal — — —

Foreign 121 ( 333 ) 103

121 ( 333 ) 103

Total $ 975 $ 677 $ 625

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company utilized a Monte Carlo pricing model customized to the specific provisions of the 2018 Plan to value the MPSUs awards on the grant date.

The weighted average assumptions used in this model to estimate fair value at the grant date are as follows:

Year Ended December 31,

2021 2020 2019

Expected life 4.0 3.0 3.0

Risk-free interest rate 0.38 % 0.24 % 1.52 %

Expected volatility 69.5 % 69.3 % 65.1 %

Dividend yield — — —

Stock Beta 0.45 0.48 0.30

NETGEAR’s RSU activity for Company employees during the year ended December 31, 2021 was as follows:

Number of Shares Weighted Average Grant Date Fair Value Per Share Weighted

(In thousands) (In dollars) (In years) (In thousands)

Outstanding as of December 31, 2020 127 $ 37.81

Vested ( 76 ) 36.60

Forfeited ( 4 ) 38.83

Outstanding as of December 31, 2021 47 $ 39.67 0.20 $ 1,363

The effective tax rate differed from the U.S.

federal income tax rate as follows:

Year Ended December 31,

2022 2021 2020

(In millions, except per share data)

Total intrinsic value of RSUs vested (the release date fair value)

$ 2.9 $ 3.2 $ 5.8

Total fair value of RSUs vested (the grant date fair value) $ 2.8 $ 4.5 $ 5.6

RSU granted weighted-average fair value per share

Tax benefit at U.S.

federal income tax rate 21.0 % 21.0 % 21.0 %

State tax benefit, net of federal benefit 1.9 % 2.9 % 4.4 %

Impact of international operations 1.3 % 1.3 % 0.8 %

taxes on foreign entities — % ( 3.9 ) % 2.5 %

Stock-based compensation ( 7.3 ) % ( 3.0 ) % ( 4.2 ) %

federal tax credits 3.7 % 1.6 % 1.6 %

Change in valuation allowance ( 21.8 ) % ( 20.3 ) % ( 26.4 ) %

Non-deductible transaction costs ( 0.1 ) % ( 0.6 ) % ( 0.1 ) %

Other ( 0.5 ) % ( 0.2 ) % ( 0.2 ) %

Provision for income taxes ( 1.8 ) % ( 1.2 ) % ( 0.6 ) %

The significant components of net deferred tax assets consisted of the following:

As of December 31,

(In thousands)

Deferred Tax Assets:

Accruals and allowances $ 11,330 $ 10,369

Net operating loss carryforwards 22,622 26,236

Stock-based compensation 3,527 3,956

Lease liabilities 5,706 6,170

Deferred revenue 409 1,763

Tax credit carryforwards 11,510 8,100

Depreciation and amortization 3,307 3,989

Capitalized research and development expenses 40,016 26,186

Total deferred tax assets 98,427 86,769

Deferred Tax Liabilities:

Operating lease right-of-use assets ( 3,174 ) ( 3,462 )

Total deferred tax liabilities ( 3,174 ) ( 3,462 )

Valuation Allowance ( 93,869 ) ( 81,742 )

Net deferred tax assets $ 1,384 $ 1,565

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Stock-Based Compensation Expense

The Company's employees have historically participated in NETGEAR's various stock-based plans, which are described below and represent the portion of NETGEAR's stock-based plans in which Company employees participated.

The Company's consolidated statements of income reflect compensation expense for these stock-based plans associated with the portion of NETGEAR's plans in which Company employees participated.

The stock-based compensation expense for Company employees consist of Company RSUs, PSUs, MPSUs and stock options and NETGEAR RSUs and stock options granted to Company employees, employees' annual bonus in RSU form and the purchase rights under Company ESPP.

The following table sets forth the stock-based compensation expense included in the Company’s consolidated statements of operations during the periods indicated:

Changes in valuation allowance for deferred tax assets were as follows:

Year Ended December 31,

1 unchanged sentence

(In thousands)

Cost of revenue $ 3,917 $ 2,961 $ 2,013

Research and development 10,865 9,055 6,868

Sales and marketing 5,392 4,106 3,859

General and administrative 17,856 19,125 10,154

Total stock-based compensation expense (1)

Balance at the beginning of the period $ 81,742 $ 70,496 $ 43,917

Additions (1)

16,798 11,246 26,579

Deductions (2)

( 4,671 ) — —

(1) There was no tax benefit as a result of the Company's net operating loss position.

The Company recognizes these compensation expenses generally on a straight-line basis over the requisite service period of the award.

As part of the Verisure transaction in 2019, certain employees who held Company RSU awards granted under the 2018 Plan, were transferred to Verisure.

Such RSU awards continued to vest and settle after the closing of the transaction in accordance with the terms and conditions under the original award’s plan.

Management determined that the modification of the RSUs awards was a Type III modification (improbable-to-probable) under ASC 718, under which any compensation expense previously recognized was reversed and the total fair value of the modified awards was recognized as a liability in the Company’s consolidated balance sheets on the closing date.

Accordingly, the modification of the awards resulted in a liability of $ 859 thousand and total compensation expense of $ 623 thousand on the closing date in 2019.

In January 2020, the IPO Options granted to the CEO were voluntarily forfeited with no replacement award.

The cancellation was treated as a settlement for no consideration and all remaining unrecognized compensation cost of $ 7.4 million was accelerated and recognized as stock-based compensation expense in the first fiscal quarter of 2020.

In the second fiscal quarter of 2020, $ 1.2 million of previously recognized compensation expense was reversed as a result of cancellation of unvested shares upon Ms.

Gorjanc's separation from the Company.

In addition, $ 0.4 million of compensation expense was recognized for Ms.

Gorjanc's accelerated vested shares upon her separation from the Company.

As of December 31, 2021, $ 0.3 million of unrecognized compensation cost related to Arlo’s stock options was expected to be recognized over a weighted-average period of 0.6 years.

$ 48.4 million of unrecognized compensation cost related to unvested Arlo’s RSUs, PSUs and MPSUs was expected to be recognized over a weighted-average period of 2.3 years.

As of December 31, 2021, there was no unrecognized compensation cost related to NETGEAR’s stock options for Arlo employees.

$ 0.4 million of unrecognized compensation cost related to unvested NETGEAR’s RSUs for Arlo employees was expected to be recognized over a weighted-average period of 0.2 years.

Balance at the end of the period $ 93,869 $ 81,742 $ 70,496

________________________

(1) Additions are primarily increases in tax attribute carryforwards and capitalized expenditures for income tax purposes.

(2) Deductions present the utilization of U.S.

federal and state net operating losses and tax credit attributes.

Realization of the deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.

We do not anticipate to realize the net U.S.

federal and state deferred tax assets and certain foreign tax attributes, which have been fully offset by a valuation allowance.

As of December 31, 2022 and 2021, the valuation allowance was $ 93.9 million and $ 81.7 million, respectively.

The utilization of net operating loss and credit carryforwards may be subject to annual limitation due to the ownership changes provided by the Internal Revenue Code and similar state provisions.

Such an annual limitation could result in the expiration of portions of the net operating loss and tax credit carryforwards before utilization.

As of December 31, 2022, net operating loss carryforwards consisted of the following:

Amount Beginning Year of Expiration

(in thousands)

federal (1)(2)

82,547 Indefinite

California 28,924 2028

Other states 32,366 2023

_________________________

(1) All of the losses are subject to annual usage limitations under Internal Revenue Code Section 382.

(2) All of the losses are subject to usage limitation of 80% of taxable income in a year when the losses will be utilized.

As of December 31, 2022, tax credit carryforwards consisted of the following:

Amount Beginning Year of Expiration

(in thousands)

federal $ 6,502 2039

California 6,396 Indefinite

Foreign 2,302 2041

As of December 31, 2022, withholding taxes and state income taxes expected to be incurred on the foreign subsidiaries’ earnings that are not indefinitely reinvested are immaterial.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In January 2019, the Company adopted the Arlo 401(k) Plan to which employees may contribute up to 100 % of salary subject to the legal maximum.

The Company matched 50 % of contributions for employees up to a maximum of $ 4,000 before fiscal 2020 and $ 2,000 starting fiscal 2020 in employee contributions per fiscal year.

During the years ended December 31, 2021, 2020 and 2019, the Company recognized $ 1.1 million, $ 0.9 million and $ 1.5 million in expenses for Arlo employees related to Arlo 401(k) Plan match, respectively.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits was as follows:

Year Ended December 31,

2022 2021 2020

(In thousands)

Balance at the beginning of the period $ 1,736 $ 1,355 $ 704

Additions for tax positions taken during the current year 765 444 503

Additions (reductions) for tax positions taken during a prior year 275 ( 58 ) 148

Reductions as a result of a lapse of the applicable statute of limitations ( 13 ) ( 5 ) —

Balance at the end of the period $ 2,763 $ 1,736 $ 1,355

The total amount of unrecognized tax benefits, including immaterial interest and penalties, was $ 2.8 million and $ 1.7 million as of December 31, 2022 and 2021, respectively.

We recognize interest and penalties accrued related to unrecognized tax benefits as part of the provision for income taxes.

We file income tax returns in the U.S.

and numerous foreign jurisdictions.

We are subject to income tax examinations by taxing authorities globally for years ending or after December 31, 2018.

As a result of the spin-off of Arlo from NETGEAR in 2018, Arlo filed the consolidated U.S.

federal and various combined state income tax returns with NETGEAR for the calendar year ended December 31, 2018.

The IRS has examined NETGEAR’s U.S.

federal income tax return for the calendar year of 2018 and such examination was closed in 2022 without any adjustments.

In addition, the California Franchise Tax Board began an examination of NETGEAR’s 2018 tax year.

Our estimate of the potential outcome of any uncertain tax positions is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time.

We believe that the estimate has adequately reflected these matters.

However, the future results may include adjustments to estimates in the period the audits will be resolved, which may impact the effective tax rate.

We don't expect a significant change in unrecognized tax benefits within the next twelve months.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period.

Potentially dilutive common shares, such as common shares issuable upon exercise of stock options, vesting of restricted stock awards and performance shares, and issuance of shares under the ESPP, are typically reflected in the computation of diluted net loss per share by application of the treasury stock method.

For certain periods presented, due to the net losses reported, these potentially dilutive securities were excluded from the computation of diluted net loss per share, since their effect would be anti-dilutive.

Net loss per share for the years ended December 31, 2021, 2020 and 2019 were as follows:

Year Ended December 31,

8 unchanged sentences

Anti-dilutive employee stock-based awards, excluded 5,451 5,041 5,623

Segment and Geographic Information

Segment Information

The Company operates as one operating and reportable segment.

The Company has identified its CEO as the CODM.

The CODM reviews financial information presented on a combined basis for purposes of allocating resources and evaluating financial performance.

Geographic Information

The Company conducts business across three geographic regions:

Americas, EMEA and APAC.

Revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, net changes in deferred revenue, and gains or losses from hedging.

For reporting purposes, revenue by geography is generally based upon the ship-to location of the customer for device sales and prepaid services, while based upon a paid account's location for paid service revenue.

ARLO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table shows revenue by geography for the periods indicated:

Segment and Geographic Information

Segment Information

We operate as one operating and reportable segment.

Geographic Information for Revenue

Revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates, net changes in deferred revenue, and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance.

Sales and usage-based taxes are excluded from revenue.

For reporting purposes, revenue by geography is generally based upon the ship-to location of the customer for device sales and device location for service sales.

The following table presents revenue by geography.

For comparative purposes, amounts in prior periods have been recast.

Year Ended December 31,

1 unchanged sentence

(In thousands)

United States (“U.S.”) $ 265,844 $ 259,023 $ 274,592

Americas (excluding U.S.) 5,338 10,372 14,568

EMEA 134,232 61,832 57,232

APAC 29,723 25,927 23,615

Total revenue $ 435,137 $ 357,154 $ 370,007

The fiscal 2020 and 2019 balances have been recast to conform with the fiscal 2021 classification of paid service revenue following the paid account's location.

Prior to the recast, the paid service revenue was allocated and was reported based the ship-to location of the customer for device sales and prepaid services.

The Company’s Property and equipment, net are located in the following geographic locations:

United States $ 268,435 $ 265,844 $ 259,023

Spain 135,896 83,779 5,385

Ireland 44,287 40,877 49,437

Other countries 41,796 44,637 43,309

Total $ 490,414 $ 435,137 $ 357,154

Geographic Information for Long-Lived Assets

Long-lived assets include property and equipment, net and operating lease right-of-use assets, net.

Our long-lived assets are based on the physical location of the assets.

The following table presents long-lived assets by geography.

For comparative purposes, amounts in prior periods have been recast.

As of December 31,

(In thousands)

United States (“U.S.”) $ 7,302 $ 12,644

Americas (excluding U.S.) 520 629

China 1,143 1,821

APAC (excluding China) 228 493

Total property and equipment, net $ 9,595 $ 15,821

Significant Customers

Two customers accounted for 30.8 %, and 13.0 % of revenue for the year ended December 31, 2021.

Four customers accounted for 20.6 %, 17.3 %, 14.6 % and 12.2 % of revenue for the year ended December 31, 2020.

Two customers accounted for 32.3 % and 10.1 % of revenue for the year ended December 31, 2019.

No other customers accounted for 10% or greater of the Company's revenue.

United States $ 17,762 $ 19,587

Other countries 2,383 4,822

Total $ 20,145 $ 24,409

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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-K

Item 8. Financial Statements and Supplementary Data