Item 1. Financial Statements
Item 1. Financial Statements
ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of
April 2,
2023 December 31,
2022
(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 66,970 $ 84,024
Short-term investments 51,703 29,700
Accounts receivable, net 52,837 65,960
Inventories 39,922 46,554
Prepaid expenses and other current assets 7,415 6,544
Total current assets 218,847 232,782
Property and equipment, net 7,055 7,336
Operating lease right-of-use assets, net 11,985 12,809
Goodwill 11,038 11,038
Restricted cash 4,175 4,155
Other non-current assets 3,983 4,081
Total assets $ 257,083 $ 272,201
LIABILITIES AND STOCKHOLDERS ’ EQUITY
Current liabilities:
Accounts payable $ 46,031 $ 52,132
Deferred revenue 15,175 11,291
Accrued liabilities 88,216 98,855
Total current liabilities 149,422 162,278
Non-current operating lease liabilities 18,168 19,279
Other non-current liabilities 3,242 2,949
Total liabilities 170,832 184,506
Commitments and contingencies (Note 8)
Stockholders’ Equity:
Preferred stock: $ 0.001 par value; 50,000,000 shares authorized; none issued or outstanding
— —
Common stock: $ 0.001 par value; 500,000,000 shares authorized; shares issued and outstanding: 90,785,158 at April 2, 2023 and 88,887,139 at December 31, 2022
91 89
Additional paid-in capital 445,809 433,138
Accumulated other comprehensive income (loss) 21 ( 107 )
Accumulated deficit ( 359,670 ) ( 345,425 )
Total stockholders’ equity 86,251 87,695
Total liabilities and stockholders’ equity $ 257,083 $ 272,201
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Three Months Ended
April 2,
2023 April 3,
2022
(In thousands, except per share data)
Revenue:
Products $ 67,060 $ 94,825
Services 43,944 29,926
Total revenue 111,004 124,751
Cost of revenue:
Products 64,041 80,777
Services 11,746 10,399
Total cost of revenue 75,787 91,176
Gross profit 35,217 33,575
Operating expenses:
Research and development 17,750 16,379
Sales and marketing 15,353 13,168
General and administrative 15,622 12,621
Others 632 79
Total operating expenses 49,357 42,247
Loss from operations ( 14,140 ) ( 8,672 )
Interest income (expense), net 726 ( 5 )
Other income (expense), net ( 39 ) 411
Loss before income taxes ( 13,453 ) ( 8,266 )
Provision for income taxes 792 213
Net loss $ ( 14,245 ) $ ( 8,479 )
Net loss per share:
Basic $ ( 0.16 ) $ ( 0.10 )
Diluted $ ( 0.16 ) $ ( 0.10 )
Weighted average shares used to compute net loss per share:
Basic 89,653 85,222
Diluted 89,653 85,222
Comprehensive loss:
Net loss $ ( 14,245 ) $ ( 8,479 )
Other comprehensive income (loss), net of tax 128 ( 46 )
Total comprehensive loss $ ( 14,117 ) $ ( 8,525 )
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended
April 2,
2023 April 3,
2022
(In thousands)
Total stockholders’ equity, beginning balances
$ 87,695 $ 112,652
Common stock:
Beginning balances $ 89 $ 84
Issuance of common stock under stock-based compensation plans 3 3
Restricted stock unit withholdings ( 1 ) ( 1 )
Ending balances $ 91 $ 86
Additional paid-in capital:
Beginning balances $ 433,138 $ 401,367
Stock-based compensation expense 10,270 8,183
Settlement of liability classified restricted stock units 6,739 4,966
Issuance of common stock under stock-based compensation plans 355 1,385
Restricted stock unit withholdings ( 4,693 ) ( 6,659 )
Ending balances $ 445,809 $ 409,242
Accumulated deficit:
Beginning balances $ ( 345,425 ) $ ( 288,799 )
Net loss ( 14,245 ) ( 8,479 )
Ending balances $ ( 359,670 ) $ ( 297,278 )
Accumulated other comprehensive income (loss):
Beginning balances $ ( 107 ) $ —
Other comprehensive income (loss), net of tax 128 ( 46 )
Ending balances $ 21 $ ( 46 )
Total stockholders’ equity, ending balances
$ 86,251 $ 112,004
Common stock shares:
Beginning balances 88,887 84,453
Issuance of common stock under stock-based compensation plans 3,165 2,127
Restricted stock unit withholdings ( 1,267 ) ( 745 )
Ending balances 90,785 85,835
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
April 2,
2023 April 3,
2022
(In thousands)
Cash flows from operating activities:
Net loss $ ( 14,245 ) $ ( 8,479 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation expense 14,591 9,589
Depreciation and amortization 1,149 1,302
Allowance for credit losses and inventory reserves 198 ( 135 )
Deferred income taxes 127 ( 9 )
Others ( 124 ) 28
Changes in assets and liabilities:
Accounts receivable, net 13,216 1,508
Inventories 6,341 1,490
Prepaid expenses and other assets ( 900 ) 556
Accounts payable ( 6,093 ) ( 15,676 )
Deferred revenue 3,785 ( 13,411 )
Accrued and other liabilities ( 7,716 ) ( 1,320 )
Net cash provided by (used in) operating activities 10,329 ( 24,557 )
Cash flows from investing activities:
Purchases of property and equipment ( 923 ) ( 298 )
Purchases of short-term investments ( 36,755 ) ( 44,640 )
Proceeds from maturities of short-term investments 15,006 —
Net cash used in investing activities ( 22,672 ) ( 44,938 )
Cash flows from financing activities:
Proceeds related to employee benefit plans 3 1,388
Restricted stock unit withholdings ( 4,694 ) ( 6,660 )
Net cash used in financing activities ( 4,691 ) ( 5,272 )
Net decrease in cash, cash equivalents, and restricted cash
( 17,034 ) ( 74,767 )
Cash, cash equivalents, and restricted cash , at beginning of period
88,179 179,856
Cash, cash equivalents, and restricted cash , at end of period
$ 71,145 $ 105,089
Reconciliation of cash, cash equivalents, and restricted cash to Unaudited Condensed Consolidated Balance Sheets
Cash and cash equivalents $ 66,970 $ 100,975
Restricted cash 4,175 4,114
Total cash, cash equivalents, and restricted cash $ 71,145 $ 105,089
Supplemental cash flow information:
Non-cash investing activities:
Purchases of property and equipment included in accounts payable and accrued liabilities $ 894 $ 310
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Basis of Presentation
Description of Business
Arlo Technologies, Inc. (“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
We prepare our unaudited condensed consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated financial statements include the accounts of Arlo and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair statement of the unaudited condensed consolidated financial statements for interim periods.
Fiscal periods
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 unaudited condensed consolidated financial statements.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Use of estimates
The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Management bases its estimates on various assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates and operating results for the three months ended April 2, 2023 and are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any future period.
Note 2. Significant Accounting Policies and Recent Accounting Pronouncements
Our significant accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes to such policies during the three months ended April 2, 2023.
Emerging Growth Company Status
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. We will no longer qualify as an EGC on December 31, 2023. Accordingly, our Annual Report on Form 10-K for the year ending December 31, 2023 will include an attestation report of our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.
Accounting Pronouncements Recently Adopted
There were no accounting pronouncements adopted during the three months ended April 2, 2023.
Accounting Pronouncements Not Yet Effective
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.
Note 3. Revenue
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 April 2, 2023:
1 year 2 years Greater than 2 years Total
(In thousands)
Performance obligations $ 18,764 $ 110 $ 5 $ 18,879
The performance obligation classified as greater than one year pertains to revenue deferral from prepaid services.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended April 2, 2023 and April 3, 2022, $ 41.2 million and $ 25.8 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $ 38.4 million and $ 27.5 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. Approximately $ 8.4 million and $ 9.0 million of this recognized revenue was included in the contract liability balance at the beginning of the periods. There were no significant changes in estimates during the period that would affect the contract balances.
During the five-year period that commenced on January 1, 2020, Verisure Sàrl (“Verisure”) has an aggregate purchase commitment of $ 500.0 million. As of April 2, 2023, $ 378.9 million of the purchase commitment has been fulfilled with a backlog of $ 25.9 million.
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.
Three Months Ended
April 2,
2023 April 3,
2022
(In thousands)
Americas $ 56,632 $ 68,466
EMEA 48,472 49,975
APAC 5,900 6,310
Total $ 111,004 $ 124,751
Note 4. Balance Sheet Components
Short-term investments
As of April 2, 2023 As of December 31, 2022
Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value
(In thousands)
U.S. Treasuries $ 51,730 $ — $ ( 27 ) $ 51,703 $ 29,849 $ — $ ( 149 ) $ 29,700
Accounts receivable, net
As of
April 2,
2023 December 31,
2022
(In thousands)
Gross accounts receivable $ 53,166 $ 66,383
Allowance for credit losses ( 329 ) ( 423 )
Total $ 52,837 $ 65,960
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.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three Months Ended
April 2,
2023 April 3,
2022
(In thousands)
Balance at the beginning of the period $ 423 $ 337
Provision for (release of) expected credit losses ( 94 ) 2
Balance at the end of the period $ 329 $ 339
Property and equipment, net
The components of property and equipment are as follows:
As of
April 2,
2023 December 31,
2022
(In thousands)
Machinery and equipment $ 13,526 $ 12,696
Software 15,635 15,606
Computer equipment 3,938 3,992
Leasehold improvements
4,661 4,657
Furniture and fixtures 2,553 2,554
Total property and equipment, gross 40,313 39,505
Accumulated depreciation ( 33,258 ) ( 32,169 )
Total property and equipment, net (1)
$ 7,055 $ 7,336
_________________________
(1) $ 1.5 million and $ 1.7 million property and equipment, net, was included in the sublease arrangement for the San Jose office building as of April 2, 2023 and December 31, 2022, respectively.
Depreciation expense pertaining to property and equipment was $ 1.1 million and $ 1.3 million for the three months ended April 2, 2023 and April 3, 2022, respectively.
Goodwill
We have determined that no event occurred or circumstances changed during the three months ended April 2, 2023 that would more likely than not reduce the fair value of goodwill below the carrying amount. No goodwill impairment was recognized in the three months ended April 2, 2023 and the goodwill balance was $ 11.0 million as of April 2, 2023 and December 31, 2022.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other non-current assets
As of
April 2,
2023 December 31,
2022
(In thousands)
Deferred income taxes $ 1,256 $ 1,384
Sublease initial direct cost and adjustments 928 777
Other 1,799 1,920
Total $ 3,983 $ 4,081
Accrued liabilities
As of
April 2,
2023 December 31,
2022
(In thousands)
Sales incentives $ 33,943 $ 36,271
Sales returns
15,000 18,656
Compensation 15,134 15,556
Cloud and other costs 7,196 11,154
Operating lease liabilities 3,880 4,190
Professional services 3,148 3,703
Income taxes payable 2,034 961
Warranty obligations 1,119 1,174
Freight cost 989 1,050
Service cost 907 806
Restructuring charges 749 1,265
Other 4,117 4,069
Total $ 88,216 $ 98,855
Other non-current liabilities
As of
April 2,
2023 December 31,
2022
(In thousands)
Non-current service cost $ 1,196 $ 1,259
Non-current compensation 994 616
Non-current deferred revenue 114 212
Non-current income taxes payable 77 77
Other 861 785
Total $ 3,242 $ 2,949
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5. Fair Value Measurements
Fair Value Measurements - Recurring Basis
The following table summarizes assets measured at fair value on a recurring basis:
As of
April 2,
2023 December 31,
2022
(In thousands)
Cash equivalents: money-market funds (<90 days)
$ 1,450 $ 12,614
Cash equivalents: U.S. Treasuries (<90 days)
10,174 20,274
Available-for-sale securities: U.S. Treasuries (1)
51,703 29,700
Total $ 63,327 $ 62,588
_________________________
(1) Included in short-term investments on our unaudited condensed 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 April 2, 2023 and December 31, 2022, 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 of the asset may not be recoverable. For the three months ended April 2, 2023 and April 3, 2022, we had no assets or liabilities measured on a nonrecurring basis.
Note 6. 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 $ 2.1 million.
The restructuring liabilities are included in accrued liabilities in our unaudited condensed consolidated balance sheets. Restructuring activities for the three months ended April 2, 2023 are as follows:
Total Severance Expense Office Exit Expense Other Exit Expense
(In thousands)
Balance at the beginning of the period $ 1,265 $ 219 $ 991 $ 55
Restructuring charges 276 248 28 —
Cash payments ( 792 ) ( 440 ) ( 333 ) ( 19 )
Non-cash and other adjustments — — — —
Balance at the end of the period $ 749 $ 27 $ 686 $ 36
Total costs incurred inception to date $ 2,081 $ 1,046 $ 956 $ 79
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 7. Revolving Credit Facility
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. Borrowings under the Credit Facility are limited to the lesser of (x) $ 40.0 million, and (y) an amount equal to the borrowing base. The borrowing base will be the sum of (i) 90 % of investment grade eligible receivables and (ii) 85 % of non-investment grade eligible accounts, less applicable reserves established by the Lender. 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 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. Based on certain terms and conditions including eligible accounts receivable as of April 2, 2023, we had unused borrowing capacity of $ 8.4 million.
Our 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 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 April 2, 2023, we were 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 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 April 2, 2023.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8. Commitments and Contingencies
Operating Leases
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 $ 1.5 million and $ 1.8 million for the three months ended April 2, 2023 and April 3, 2022, respectively. We recorded sublease income as reduction of lease expense, in the amount of $ 0.5 million for each of the three months ended April 2, 2023 and April 3, 2022.
Supplemental cash flow information related to operating leases was as follows:
Three Months Ended
April 2,
2023 April 3,
2022
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 1,889 $ 2,036
Right-of-use assets obtained in exchange for lease liabilities
Operating leases $ — $ 18
Weighted average remaining lease term and weighted average discount rate related to operating leases were as follows:
As of
April 2,
2023 December 31,
2022
Weighted average remaining lease term 4.9 years 5.1 years
Weighted average discount rate 5.78 % 5.69 %
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED 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 April 2, 2023 were as follows:
Operating Lease Payments Sublease Payments Net
(In thousands)
2023 (Remaining nine months) $ 3,657 $ ( 1,551 ) $ 2,106
2024 5,251 ( 1,947 ) 3,304
2025 3,897 ( 2,006 ) 1,891
2026 4,011 ( 2,066 ) 1,945
2027 3,986 ( 2,322 ) 1,664
Thereafter 5,130 ( 3,620 ) 1,510
Total future lease payments 25,932 $ ( 13,512 ) $ 12,420
Less: interest ( 3,884 )
Present value of future minimum lease payments $ 22,048
Accrued liabilities $ 3,880
Non-current operating lease liabilities 18,168
Total lease liabilities $ 22,048
Letters of Credit
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 April 2, 2023, we 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.
Purchase Obligations
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 April 2, 2023, we had approximately $ 36.6 million in non-cancelable purchase commitments with suppliers.
As of April 2, 2023, an additional $ 24.2 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 April 2, 2023, the loss liability from committed purchases was not material.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Warranty Obligations
Changes in warranty obligations, which are included in accrued liabilities in the unaudited condensed consolidated balance sheets, were as follows:
Three Months Ended
April 2,
2023 April 3,
2022
(In thousands)
Balance at the beginning of the period $ 1,174 $ 1,330
Provision for warranty obligations 15 79
Settlements ( 70 ) ( 79 )
Balance at the end of the period $ 1,119 $ 1,330
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
On December 11, 2018, purported stockholders of Arlo 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 our 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. In the Federal Action, the court appointed a shareholder named Matis Nayman as lead plaintiff. 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 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
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
plaintiff’s counsel (the “Settlement Fund”). 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, 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 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 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. On November 16, 2021, Plaintiffs filed a Notice of Appeal. The appeal occurred before the California Court of Appeal, Sixth Appellate District. 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. On April 13, 2023, the court heard oral argument on the appeal and the case was submitted. On May 5, 2023, the Court of Appeal affirmed by written order the trial court’s dismissal of the State Action based on the federal forum provision in Arlo’s certificate of incorporation and awarded costs to Arlo.
Leonard R. Pinto v. Arlo Technologies, Inc., et al.
In addition to the State Action and the Federal Action, a purported stockholder named Leonard Pinto filed a tagalong derivative action on June 13, 2019 in the U.S. District Court for the Northern District of California, captioned Pinto v. Arlo Technologies, Inc. et al. , No. 19-CV-03354 (the “Derivative Action”). The Derivative Action is brought on behalf of Arlo 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. On August 20, 2019, the court stayed the Derivative Action in deference to the Federal Action. On April 8, 2021, because it had granted final approval of the settlement in the Federal Action, the court lifted the stay in the Derivative Action and asked the parties to file a joint status report by April 22, 2021. In their status report, the parties stipulated to a schedule for plaintiff to file an amended complaint and for the parties to brief a motion to dismiss. Plaintiff filed his amended complaint on May 24, 2021. Defendants moved to dismiss the amended complaint on July 9, 2021. On August 23, 2021, plaintiff filed a second amended complaint. 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. The Derivative Action is now closed.
Indemnifications
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 our board of directors and certain of our executive officers that require us, among other things, to indemnify them against certain liabilities that may
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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 April 2, 2023 and December 31, 2022, we have not incurred any material costs as a result of such indemnifications and we are not currently aware of any indemnification claims.
Note 9. Employee Benefit Plans
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 April 2, 2023, approximately 3.7 million shares were 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 January 20, 2023, we registered an aggregate of up to 4,444,072 shares of common stock on a Registration Statement on Form S-8, including 3,555,258 shares issuable pursuant to the 2018 Plan that were automatically added to the shares authorized for issuance under the 2018 Plan and 888,814 shares issuable pursuant to the Employee Stock Purchase Plan (“ESPP”) that were automatically added to the shares authorized for issuance on January 1, 2023, both pursuant to an “evergreen” provision contained in the respective plans.
The following table sets forth the available shares for grants as of April 2, 2023:
Number of Shares
(In thousands)
Shares available for grants as of December 31, 2022
4,213
Additional authorized shares 3,555
Granted ( 5,701 )
Forfeited / cancelled 356
Shares traded for taxes 1,267
Shares available for grants as of April 2, 2023
3,690
Employee Stock Purchase Plan
We sponsor the ESPP to eligible employees. As of April 2, 2023, 2.4 million shares were available for issuance under the ESPP.
Option Activity
Stock option activity during the three months ended April 2, 2023 was as follows:
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Number of Shares Weighted Average Exercise Price Per Share
(In thousands) (In dollars)
Outstanding as of December 31, 2022
2,082 $ 10.24
Granted — $ —
Exercised — $ —
Forfeited / cancelled — $ —
Expired ( 12 ) $ 7.55
Outstanding as of April 2, 2023 2,070 $ 10.26
Vested and expected to vest as of April 2, 2023 2,070 $ 10.26
Exercisable Options as of April 2, 2023 2,070 $ 10.26
RSU Activity
RSU activity, excluding PSU activity, during the three months ended April 2, 2023 was as follows:
Number of Shares Weighted Average Grant Date Fair Value Per Share
(In thousands) (In dollars)
Outstanding as of December 31, 2022
9,487 $ 6.36
Granted 4,583 $ 3.66
Vested ( 3,072 ) $ 5.17
Forfeited ( 342 ) $ 6.43
Outstanding as of April 2, 2023 10,656 $ 5.54
PSU Activity
During the three months ended April 2, 2023 and April 3, 2022, our executive officers and other senior employees 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 three months ended April 2, 2023 was as follows:
Number of Shares Weighted Average Grant Date Fair Value Per Share
(In thousands) (In dollars)
Outstanding as of December 31, 2022
4,041 $ 6.22
Granted 1,120 $ 3.75
Vested ( 94 ) $ 7.71
Forfeited ( 3 ) $ 8.28
Outstanding as of April 2, 2023
5,064 $ 5.64
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Stock-Based Compensation Expense
The following table sets forth the stock-based compensation expense included in our unaudited condensed consolidated statements of comprehensive loss:
Three Months Ended
April 2,
2023 April 3,
2022
(In thousands)
Cost of revenue $ 860 $ 910
Research and development 3,911 2,302
Sales and marketing 1,722 1,380
General and administrative 8,098 4,997
Total $ 14,591 $ 9,589
As of April 2, 2023, there was no unrecognized compensation cost related to stock options. Approximately $ 75.5 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 April 2, 2023.
Note 10. Income Taxes
The provision for income taxes for the three months ended April 2, 2023 was $ 0.8 million, or an effective tax rate of ( 5.9 )%. The provision for income taxes for the three months ended April 3, 2022 was $ 0.2 million, or an effective tax rate of ( 2.6 )%. During the three months ended April 2, 2023 and April 3, 2022, we sustained U.S. book losses. Consistent with the prior year, we maintained a valuation allowance against our U.S. federal and state deferred tax assets and did not record a tax benefit on these deferred tax assets since it is more likely than not that these deferred tax assets will not be realized. 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.
Note 11. Net Loss Per Share
Three Months Ended
April 2,
2023 April 3,
2022
(In thousands, except per share data)
Numerator:
Net loss $ ( 14,245 ) $ ( 8,479 )
Denominator:
Weighted average common shares - basic 89,653 85,222
Potentially dilutive common shares — —
Weighted average common shares - dilutive 89,653 85,222
Basic net loss per share $ ( 0.16 ) $ ( 0.10 )
Diluted net loss per share $ ( 0.16 ) $ ( 0.10 )
Anti-dilutive employee stock-based awards, excluded 7,859 1,031
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Note 12. Segment and Geographic Information
Segment Information
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.
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.
Three Months Ended
April 2,
2023 April 3,
2022
(In thousands)
United States $ 55,843 $ 65,237
Spain 38,571 24,568
Ireland 4,879 22,087
Other countries 11,711 12,859
Total $ 111,004 $ 124,751
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.
As of
April 2,
2023 December 31,
2022
(In thousands)
United States $ 16,262 $ 17,762
Other countries 2,778 2,383
Total $ 19,040 $ 20,145
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.