What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-11 compared with 2022-11-09 · 87 added, 160 removed, 144 unchanged (63% of the section changed)

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Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements.

For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “could,” “may,” “will,” and similar expressions are intended to identify forward-looking statements, including statements concerning our business and the expected performance characteristics, specifications, reliability, market acceptance, market growth, specific uses, user feedback, market position of our products and technology and the potential adverse impact of the COVID-19 pandemic on our business and operations.

For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “could,” “may,” “will,” and similar expressions are intended to identify forward-looking statements, including statements concerning our business and the expected performance characteristics, specifications, reliability, market acceptance, market growth, specific uses, user feedback, and market position of our products and technology.

Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements.

Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Part II—Item 1A—Risk Factors” and “Liquidity and Capital Resources” below.

All forward-looking statements in this document are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this quarterly report.

All forward-looking statements in this document are based on information available to us as of the date hereof, such information may be limited or incomplete, and we assume no obligation to update any such forward-looking statements.

These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q (the “Quarterly Report”).

Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us,” the “Company,” and “Arlo” refer to Arlo Technologies, Inc.

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

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

Since the launch of our first product in December 2014, we have shipped over 28.4 million smart connected devices.

As of April 2, 2023, the Arlo platform had approximately 7.5 million cumulative registered accounts across more than 100 countries around the world coupled with 2.0 million cumulative paid subscribers and annual recurring revenue of $182.6 million.

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

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

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

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

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

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

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

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

(" Verisure").

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

For the three months ended April 2, 2023 and April 3, 2022, we generated total revenue of $111.0 million and $124.8 million, respectively.

Loss from operations was $14.1 million and $8.7 million for the three months ended April 2, 2023 and April 3, 2022, respectively.

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

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

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

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

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

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

Key Business Metrics

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

October 2, 2022 % Change October 3, 2021

As of and for the Three Months Ended

2023 % Change April 3,

(In thousands, except percentage data)

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Cumulative Paid Accounts .

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

Paid accounts are defined as any account worldwide where a subscription to a paid service is being collected (either by us or by our customers or channel partners, including Verisure).

Annual Recurring Revenue (“ARR”) .

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

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

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

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

ARR is a performance metric and should be viewed independently of revenue and deferred revenue, and is not intended to be a substitute for, or combined with, any of these items.

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

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

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

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

Impact of Global Geopolitical, Economic and Business Conditions

During the three months ended April 2, 2023, we remained focused on the ongoing conflict in Ukraine, supply chain disruptions, inflation, lower consumer confidence and rising interest rates by preserving our liquidity and managing our cash flow by taking preemptive action to enhance our ability to meet our short-term liquidity needs.

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

We continue to monitor the situation and may, as necessary, reduce expenditures further, borrow under our revolving credit facility, or pursue other sources of capital that may include other forms of external financing in order to maintain our cash position and preserve financial flexibility in response to the uncertainty in the United States and global markets resulting from the ongoing conflict in Ukraine, supply chain disruptions, the inflationary macro environment, lower consumer confidence and rising interest rates and current financial conditions within the banking industry, including the effects of recent failures of other financial institutions, and liquidity levels.

Results of Operations

We operate as one operating and reportable segment.

The following table sets forth, for the periods presented, the unaudited condensed consolidated statements of operations data, which we derived from the accompanying unaudited condensed consolidated financial statements:

Three Months Ended Nine Months Ended

2022 October 3,

2021 October 2,

2022 October 3,

The following table sets forth, for the periods presented, the unaudited condensed consolidated statements of comprehensive loss data, which we derived from the accompanying unaudited condensed consolidated financial statements:

Three Months Ended

2023 April 3,

(In thousands, except percentage data)

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General and administrative 15,622 14.1 % 12,621 10.1 %

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

Separation expense 273 0.2 % 683 0.6 % 377 0.1 % 1,342 0.5 %

Others 632 0.6 % 79 0.1 %

Total operating expenses 49,357 44.5 % 42,247 33.9 %

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

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

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

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

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

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

We conduct business across three geographic regions:

the Americas, EMEA, and APAC.

We generally base revenue by geography on the ship-to location of the customer for device sales and device location for service sales.

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

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

and (iii) APAC—and generally base revenue by geography on the ship-to location of the customer for device sales and device location for service sales.

Three Months Ended

2023 % Change April 3,

(In thousands, except percentage data)

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Total revenue $ 111,004 (11.0) % $ 124,751

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

Product revenue increased by $8.6 million, or 10.2% and $56.5 million, or 26.0% for the three and nine months ended October 2, 2022 compared to the prior year periods, respectively, primarily driven by an increase in product shipments in EMEA due to stronger customer demand and the launch of a customized camera in the Verisure Security channel, partially offset by a decrease in product sales in the Americas and APAC.

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

Service revenue increased by $8.4 million, or 31.3% and $23.1 million, or 30.8% for the three and nine months ended October 2, 2022 compared to the prior year periods, respectively, primarily due to an increase in paid accounts, partially offset by a decrease in Verisure NRE revenue recognition.

Product revenue decreased in all regions by $27.8 million, or 29.3% for the three months ended April 2, 2023 compared to the prior year period, primarily driven by the decrease in product shipments in all regions due to a reduction in the average selling prices (“ASPs”) of our products as we increased promotional activities to stimulate household acquisition and increased subscriber growth coupled with the softening consumer demand as a result of current macro-economic factors.

Service revenue increased in all regions by $14.0 million, or 46.8% for the three months ended April 2, 2023 compared to the prior year period, primarily due to increases in paid accounts and rates for our subscription plans.

Cost of Revenue

Cost of revenue consists of both product costs and costs of service.

Product costs primarily consist of:

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

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

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

Cost of revenue consists of both product costs and service costs.

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

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

Our cost of revenue as a percentage of revenue can vary based upon a number of factors, including those that may affect our revenue set forth above and factors that may affect our cost of revenue, including, without limitation product mix, sales channel mix, registered accounts’ acceptance of paid subscription service offerings, and changes in our cost of goods sold due to fluctuations in prices paid for components, net of vendor rebates, cloud platform costs, warranty and overhead costs, inbound freight and duty costs, and charges for excess or obsolete inventory.

We outsource our manufacturing, warehousing, and distribution logistics.

We also outsource certain components of the required infrastructure to support our cloud-based back-end IT infrastructure.

We believe this outsourcing strategy allows

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

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

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

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

Three Months Ended

2023 % Change April 3,

(In thousands, except percentage data)

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Total cost of revenue $ 75,787 (16.9) % $ 91,176

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

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

Cost of service revenue increased 8.1% and 8.8% for the three and nine months ended October 2, 2022 compared to the prior year periods, respectively, as a result of service revenue growth, offset by cost optimizations.

Product cost of revenue decreased 20.7% for the three months ended April 2, 2023 compared to the prior year period, primarily due to a decrease in product shipments coupled with a decrease in freight-in costs due to normalization of the supply chain and utilization of ocean freight.

Service cost of revenue increased 13.0% for the three months ended April 2, 2023 compared to the prior year period, as a result of service revenue growth, offset by cost optimizations.

The following table presents gross profit for the periods indicated:

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

Three Months Ended

2023 % Change April 3,

(In thousands, except percentage data)

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Total gross margin 31.7 % 26.9 %

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

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

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

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

Product gross profit decreased for the three months ended April 2, 2023 compared to the prior year period, primarily due to the decrease in product shipments in all regions due to a reduction in the ASPs of our products as we increased promotional activities to stimulate household acquisition and increased subscriber growth coupled with the softening consumer demand as a result of current macro-economic factors.

The product gross profit decrease was partially offset by the decrease in freight-in costs due to normalization of the supply chain and utilization of ocean freight.

Service gross profit increased for the three months ended April 2, 2023 compared to the prior year period, primarily due to growth in paid service revenue in all regions as a result of increases in paid accounts and rates for our subscription plans as well as cost optimizations.

Operating Expenses

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

We recognize research and development expenses as they are incurred.

Generally, we recognize research and development expenses as they are incurred.

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

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

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We believe that innovation and technological leadership are critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies, products, and services, including our hardware devices, cloud-based software, AI-based algorithms, and machine learning capabilities.

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

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

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

Three Months Ended

2023 % Change April 3,

(In thousands, except percentage data)

Research and development expense $ 17,750 8.4 % $ 16,379

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

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

Research and development expense increased by $1.4 million for the three months ended April 2, 2023 compared to the prior year period, primarily due to an increase of $2.0 million in personnel-related expenses mainly from stock-based compensation and merit increase in base salary, partially offset by a decrease of $0.7 million in corporate IT and facilities overhead.

Sales and Marketing

Sales and marketing expense consists primarily of personnel expense for sales and marketing staff;

technical support expense;

corporate communications and other marketing expense;

product marketing expense;

IT and facilities overhead;

outbound freight costs;

and credit card processing fees.

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

Sales and marketing expense consists primarily of personnel expense for sales and marketing staff, technical support expense, advertising, trade shows, media and placement, corporate communications and other marketing expense, product marketing expense, IT and facilities overhead, outbound freight costs, and credit card processing fees.

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

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

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

Three Months Ended

2023 % Change April 3,

(In thousands, except percentage data)

Sales and marketing expense $ 15,353 16.6 % $ 13,168

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

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

expenses, and $1.1 million in credit card processing fees, partially offset by a decrease of $1.2 million in outside professional services.

Sales and marketing expense increased $2.2 million for the three months ended April 2, 2023 compared to the prior year period, primarily due to increases of $1.0 million in marketing expenditures, $0.6 million in credit card processing fees and $0.4 million freight-out expenses.

General and Administrative

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

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

Three Months Ended

2023 % Change April 3,

(In thousands, except percentage data)

General and administrative expense $ 15,622 23.8 % $ 12,621

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

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

Impairment Charges

The following table presents impairment charges for the periods indicated:

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

(In thousands, except percentage data)

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

**Percentage change not meaningful.

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

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

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

Separation Expense

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

The following table presents separation expense for the periods indicated:

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

(In thousands, except percentage data)

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

Interest Income (Expense) and Other Income, Net

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

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

Other income, net primarily represents miscellaneous income and expense, which includes reimbursements under the Verisure Transition Service Agreement ("Verisure TSA") and the Employee Retention Credit ("ERC") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") for qualified wages.

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

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

General and administrative expense increased $3.0 million for the three months ended April 2, 2023 compared to the prior year period, primarily due to an increase of $3.9 million in personnel-related expenses mainly from stock-based compensation and merit increase in base salary, partially offset by decreases of $0.8 million in corporate IT and facilities overhead and other.

Others include separation expense, which consists primarily of costs of legal and professional services for IPO-related litigation associated with our separation from NETGEAR, and restructuring charges, which consist of severance costs and office exit expense associated with the abandonment of certain lease contracts.

Interest Income (Expense) and Other Income (Expense), Net

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

Three Months Ended

2023 % Change April 3,

(In thousands, except percentage data)

Interest income (expense), net $ 726 ** $ (5)

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

Other income (expense), net $ (39) ** $ 411

**Percentage change not meaningful.

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

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

Interest income (expense), net increased for the three months ended April 2, 2023 compared to the prior year period, primarily due to the increase in our short-term investments as well as a result of higher interest rates.

Other income (expense), net decreased for the three months ended April 2, 2023 compared to the prior year period, primarily due to the foreign currency exchange losses for the three months ended April 2, 2023 compared to the foreign currency exchange gains in the prior year period.

Provision for Income Taxes

Three Months Ended Nine Months Ended

2022 % Change October 3,

2021 October 2,

2022 % Change October 3,

The following table presents provision for income taxes for the periods indicated:

Three Months Ended

2023 % Change April 3,

(In thousands, except percentage data)

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Effective tax rate (5.9) % (2.6) %

Our provision for income taxes was primarily attributable to income taxes on foreign earnings.

The increase in provision for income taxes for the three and nine months ended October 2, 2022, compared to the prior year periods, was primarily due to higher foreign earnings.

Provision for income taxes increased for the three months ended April 2, 2023, compared to the prior year period, primarily due to higher U.S.

earnings and also the application of Section 174 of the Internal Revenue Code requiring capitalization of research and experimental expenses.

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

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Liquidity and Capital Resources

As of April 2, 2023, our cash and cash equivalent and short-term investments totaled $118.7 million and we had unused borrowing capacity of $8.4 million based on the terms and conditions of our revolving credit facility.

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

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

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

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

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

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

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

Refer to Note 6.

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

As of April 2, 2023, our accumulated deficit was $359.7 million.

Historically, we have funded our principal business activities through cash flows generated from operations and available cash on hand.

Material Cash Requirements

Based on our current plans, the Loan and Security Agreement with Bank of America, N.A, and market conditions, we believe that such sources of liquidity will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months.

We believe that our existing sources of liquidity will be sufficient to meet our anticipated cash requirements for at least the next 12 months.

However, in the future we may require or desire additional funds to support our operating expenses and capital requirements.

To the extent that current and anticipated future sources of liquidity are insufficient, we may seek to raise additional funds through public or private equity.

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

Our future liquidity and cash requirements may vary from those currently planned and will depend on numerous factors, including the introduction of new products, the growth in our service revenue, the ability to increase our gross margin dollars, as well as cost optimization initiatives and controls over our operating expenditures.

As we grow our installed base and related cost structure, there will be a need for additional working capital, hence, we have increased our subscription rates effective February 3, 2023.

Leases and Contractual Commitments

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Refer to Note 8.

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

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

Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for further information about our operating leases, purchase obligations, and legal contingencies.

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

Nine Months Ended

2022 October 3,

Three Months Ended

2023 April 3,

(In thousands)

Net cash used in operating activities $ (34,783) $ (32,656)

Net cash provided by (used in) investing activities (45,578) 18,062

Net cash provided by (used in) operating activities $ 10,329 $ (24,557)

Net cash used in investing activities (22,672) (44,938)

Net cash used in financing activities (4,691) (5,272)

1 unchanged sentence

Operating activities

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

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

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

Net cash provided by operating activities increased by $34.9 million for the three months ended April 2, 2023 compared to the prior year period, primarily due to changes in working capital as a result of an increase in our service revenue driven by growth in paid accounts and increased subscription rates, higher collection from customers on products sales due to enhanced collection efforts, and lower payments to suppliers primarily as a result of lower inventory purchases.

Investing activities

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

Net cash used in investing activities decreased by $22.3 million for the three months ended April 2, 2023 compared to the prior year period, primarily due to lower net purchases of short-term investments.

Financing activities

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

Net cash used in financing activities decreased by $0.6 million for the three months ended April 2, 2023 compared to the prior year period, primarily due to the decrease in withholding tax from restricted stock unit releases, partially offset by lower proceeds related to employee benefit plans.

Critical Accounting Policies and Estimates

For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2022.

There have been no material changes to our critical accounting policies and estimates during the nine months ended October 2, 2022, other than as discussed in Note 2.

Significant Accounting Policies and Recent Accounting Pronouncements, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.

There have been no material changes to our critical accounting policies and estimates during the three months ended April 2, 2023, other than as discussed in Note 2.

Significant Accounting Policies and Recent Accounting Pronouncements, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report.

Quantitative and Qualitative Disclosures About Market Risk

During the nine months ended October 2, 2022, there were no material changes to our market risk disclosures as set forth in Part II Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2021.

During the three months ended April 2, 2023, there were no material changes to our market risk disclosures as set forth in Part II Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2022.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis