Arlo Technologies, Inc. 10-Q

Item 1. Financial Statements ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS As of October 1, 2023 December 31, 2022 (In thousands, except share and per share data) ASSETS Current assets: Cash and cash equivalents $ 51,133 $ 84,024 Short-term investments 74,916 29,700 Accounts receivable, net 70,313 65,960 Inventories 53,496 46,554 Prepaid expenses and other current assets 11,100 6,544 Total current assets 260,958 232,782 Property and equipment, net 5,752 7,336 Operating lease right-of-use assets, net 12,190 12,809 Goodwill 11,038 11,038 Restricted cash 4,079 4,155 Other non-current assets 3,620 4,081 Total assets $ 297,637 $ 272,201 LIABILITIES AND STOCKHOLDERS ’ EQUITY Current liabilities: Accounts payable $ 82,479 $ 52,132 Deferred revenue 17,678 11,291 Accrued liabilities 85,999 98,855 Total current liabilities 186,156 162,278 Non-current operating lease liabilities 17,970 19,279 Other non-current liabilities 3,318 2,949 Total liabilities 207,444 184,506 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: 94,581,808 at October 1, 2023 and 88,887,139 at December 31, 2022 94 89 Additional paid-in capital 458,015 433,138 Accumulated other comprehensive income (loss) 237 ( 107 ) Accumulated deficit ( 368,153 ) ( 345,425 ) Total stockholders’ equity 90,193 87,695 Total liabilities and stockholders’ equity $ 297,637 $ 272,201 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands, except per share data) Revenue: Products $ 78,961 $ 92,720 $ 210,770 $ 273,736 Services 51,042 35,437 145,313 98,151 Total revenue 130,003 128,157 356,083 371,887 Cost of revenue: Products 73,335 79,386 197,520 233,992 Services 13,529 12,021 38,349 33,830 Total cost of revenue 86,864 91,407 235,869 267,822 Gross profit 43,139 36,750 120,214 104,065 Operating expenses: Research and development 16,829 16,471 52,197 50,252 Sales and marketing 15,863 22,193 48,137 49,867 General and administrative 12,460 12,253 43,089 38,023 Others 263 273 1,236 377 Total operating expenses 45,415 51,190 144,659 138,519 Loss from operations ( 2,276 ) ( 14,440 ) ( 24,445 ) ( 34,454 ) Interest income, net 1,175 290 2,736 414 Other income, net 10 19 23 314 Loss before income taxes ( 1,091 ) ( 14,131 ) ( 21,686 ) ( 33,726 ) Provision for income taxes 29 304 1,042 745 Net loss $ ( 1,120 ) $ ( 14,435 ) $ ( 22,728 ) $ ( 34,471 ) Net loss per share: Basic and diluted $ ( 0.01 ) $ ( 0.16 ) $ ( 0.25 ) $ ( 0.40 ) Weighted average shares used to compute net loss per share: Basic and diluted 94,243 88,124 92,069 86,677 Comprehensive loss: Net loss $ ( 1,120 ) $ ( 14,435 ) $ ( 22,728 ) $ ( 34,471 ) Other comprehensive income (loss), net of tax 85 ( 56 ) 344 ( 224 ) Total comprehensive loss $ ( 1,035 ) $ ( 14,491 ) $ ( 22,384 ) $ ( 34,695 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands) Total stockholders’ equity, beginning balances $ 81,756 $ 102,401 $ 87,695 $ 112,652 Common stock: Beginning balances $ 94 $ 88 $ 89 $ 84 Issuance of common stock under stock-based compensation plans 1 1 8 6 Restricted stock unit withholdings ( 1 ) ( 1 ) ( 3 ) ( 2 ) Ending balances $ 94 $ 88 $ 94 $ 88 Additional paid-in capital: Beginning balances $ 448,543 $ 411,316 $ 433,138 $ 401,367 Stock-based compensation expense 8,021 9,953 28,643 25,228 Settlement of liability classified restricted stock units 6,741 3,669 13,480 8,731 Issuance of common stock under stock-based compensation plans 681 — 3,667 1,419 Issuance of common stock under Employee Stock Purchase Plan — — 1,617 1,746 Restricted stock unit withholdings ( 5,971 ) ( 4,211 ) ( 22,530 ) ( 17,764 ) Ending balances $ 458,015 $ 420,727 $ 458,015 $ 420,727 Accumulated deficit: Beginning balances $ ( 367,033 ) $ ( 308,835 ) $ ( 345,425 ) $ ( 288,799 ) Net loss ( 1,120 ) ( 14,435 ) ( 22,728 ) ( 34,471 ) Ending balances $ ( 368,153 ) $ ( 323,270 ) $ ( 368,153 ) $ ( 323,270 ) Accumulated other comprehensive income (loss): Beginning balances $ 152 $ ( 168 ) $ ( 107 ) $ — Other comprehensive income (loss), net of tax 85 ( 56 ) 344 ( 224 ) Ending balances $ 237 $ ( 224 ) $ 237 $ ( 224 ) Total stockholders’ equity, ending balances $ 90,193 $ 97,321 $ 90,193 $ 97,321 Common stock shares: Beginning balances 93,654 87,530 88,887 84,453 Issuance of common stock under stock-based compensation plans 1,488 1,464 8,629 5,885 Issuance of common stock under Employee Stock Purchase Plan — — 460 304 Restricted stock unit withholdings ( 560 ) ( 584 ) ( 3,394 ) ( 2,232 ) Ending balances 94,582 88,410 94,582 88,410 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended October 1, 2023 October 2, 2022 (In thousands) Cash flows from operating activities: Net loss $ ( 22,728 ) $ ( 34,471 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Stock-based compensation expense 37,851 31,787 Depreciation and amortization 3,809 3,653 Allowance for credit losses and inventory reserves 1,218 ( 211 ) Deferred income taxes 257 259 Others ( 1,224 ) 39 Changes in assets and liabilities: Accounts receivable, net ( 4,262 ) ( 3,171 ) Inventories ( 8,250 ) ( 34,613 ) Prepaid expenses and other assets ( 4,353 ) ( 105 ) Accounts payable 31,049 23,229 Deferred revenue 6,202 ( 18,544 ) Accrued and other liabilities ( 9,202 ) ( 2,635 ) Net cash provided by (used in) operating activities 30,367 ( 34,783 ) Cash flows from investing activities: Purchases of property and equipment ( 2,448 ) ( 815 ) Purchases of short-term investments ( 110,905 ) ( 69,305 ) Proceeds from maturities of short-term investments 67,259 24,542 Net cash used in investing activities ( 46,094 ) ( 45,578 ) Cash flows from financing activities: Proceeds related to employee benefit plans 5,293 3,172 Restricted stock unit withholdings ( 22,533 ) ( 17,766 ) Net cash used in financing activities ( 17,240 ) ( 14,594 ) Net decrease in cash, cash equivalents, and restricted cash ( 32,967 ) ( 94,955 ) Cash, cash equivalents, and restricted cash , at beginning of period 88,179 179,856 Cash, cash equivalents, and restricted cash , at end of period $ 55,212 $ 84,901 Reconciliation of cash, cash equivalents, and restricted cash to Unaudited Condensed Consolidated Balance Sheets Cash and cash equivalents $ 51,133 $ 80,773 Restricted cash 4,079 4,128 Total cash, cash equivalents, and restricted cash $ 55,212 $ 84,901 Supplemental cash flow information: Non-cash investing activities: Purchases of property and equipment included in accounts payable and accrued liabilities $ 726 $ 209 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents 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. 7 Table of Contents 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 nine months ended October 1, 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 nine months ended October 1, 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 nine months ended October 1, 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 October 1, 2023: 1 year 2 years Greater than 2 years Total (In thousands) Performance obligations $ 18,920 $ 24 $ 4 $ 18,948 The performance obligation classified as greater than one year pertains to revenue deferral from prepaid services. 8 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the nine months ended October 1, 2023 and October 2, 2022, $ 131.8 million and $ 82.5 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $ 125.6 million and $ 101.2 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. Approximately $ 10.6 million and $ 13.6 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 October 1, 2023, $ 438.9 million of the purchase commitment has been fulfilled. Based on the Supply Agreement with Verisure, a purchase obligation is not deemed to exist until we receive and accept Verisure’s purchase order. As of October 1, 2023, we had a backlog of $ 25.9 million which represents performance obligations that will be recognized as revenue once fulfilled, which is expected to occur over the next three months . 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 disaggregated by geographic regions. Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands) Americas $ 79,948 $ 71,040 $ 214,716 $ 199,851 EMEA 42,887 52,542 122,317 157,000 APAC 7,168 4,575 19,050 15,036 Total $ 130,003 $ 128,157 $ 356,083 $ 371,887 Note 4. Balance Sheet Components Short-term investments As of October 1, 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 $ 74,679 $ 243 $ ( 6 ) $ 74,916 $ 29,849 $ — $ ( 149 ) $ 29,700 Accounts receivable, net As of October 1, 2023 December 31, 2022 (In thousands) Gross accounts receivable $ 70,645 $ 66,383 Allowance for credit losses ( 332 ) ( 423 ) Total $ 70,313 $ 65,960 9 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands) Balance at the beginning of the period $ 322 $ 405 $ 423 $ 337 Provision for (release of) expected credit losses 10 ( 41 ) ( 91 ) 27 Balance at the end of the period $ 332 $ 364 $ 332 $ 364 Property and equipment, net The components of property and equipment are as follows: As of October 1, 2023 December 31, 2022 (In thousands) Machinery and equipment $ 14,328 $ 12,696 Software 16,134 15,606 Computer equipment 3,766 3,992 Leasehold improvements 4,661 4,657 Furniture and fixtures 2,547 2,554 Total property and equipment, gross 41,436 39,505 Accumulated depreciation ( 35,684 ) ( 32,169 ) Total property and equipment, net (1) $ 5,752 $ 7,336 _________________________ (1) $ 1.2 million and $ 1.7 million property and equipment, net, was included in the sublease arrangement for the San Jose office building as of October 1, 2023 and December 31, 2022, respectively. Depreciation expense pertaining to property and equipment was $ 1.5 million and $ 3.8 million for the three and nine months ended October 1, 2023, and $ 1.1 million and $ 3.7 million for the three and nine months ended October 2, 2022. Goodwill We have determined that no event occurred or circumstances changed during the three and nine months ended October 1, 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 and nine months ended October 1, 2023. 10 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Other non-current assets As of October 1, 2023 December 31, 2022 (In thousands) Deferred income taxes $ 1,126 $ 1,384 Sublease initial direct cost and adjustments 864 777 Other 1,630 1,920 Total $ 3,620 $ 4,081 Accrued liabilities As of October 1, 2023 December 31, 2022 (In thousands) Sales incentives $ 27,526 $ 36,271 Sales returns 15,971 18,656 Compensation 12,509 15,556 Cloud and other costs 11,200 11,154 Operating lease liabilities 4,239 4,190 Professional services 2,827 3,703 Warranty obligations 1,114 1,174 Freight cost 1,406 1,050 Service cost 1,348 806 Restructuring charges 603 1,265 Other 7,256 5,030 Total $ 85,999 $ 98,855 Other non-current liabilities As of October 1, 2023 December 31, 2022 (In thousands) Non-current service cost $ 1,289 $ 1,259 Non-current compensation 1,119 616 Non-current deferred revenue 28 212 Non-current income taxes payable 77 77 Other 805 785 Total $ 3,318 $ 2,949 11 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5. Fair Value Measurements The following table summarizes assets measured at fair value on a recurring basis: As of October 1, 2023 December 31, 2022 (In thousands) Cash equivalents: money-market funds (<90 days) $ 9,927 $ 12,614 Cash equivalents: U.S. Treasuries (<90 days) 257 20,274 Available-for-sale securities: U.S. Treasuries (1) 74,916 29,700 Total $ 85,100 $ 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 October 1, 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. 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. As of October 1, 2023, we have substantially incurred all costs pertaining to restructuring activities, with related cash outflows extending until the fourth quarter of 2024. The restructuring liabilities are included in accrued liabilities in our unaudited condensed consolidated balance sheets. Restructuring activities for the nine months ended October 1, 2023 are as follows: Total Severance Expense Office Exit Expense Other Exit Expense (In thousands) Balance as of December 31, 2022 $ 1,265 $ 219 $ 991 $ 55 Restructuring charges 634 506 117 11 Cash payments ( 1,270 ) ( 596 ) ( 634 ) ( 40 ) Non-cash and other adjustments ( 26 ) — — ( 26 ) Balance as of October 1, 2023 $ 603 $ 129 $ 474 $ — Total costs incurred inception to date $ 2,688 $ 1,551 $ 1,073 $ 64 12 Table of Contents 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 October 1, 2023, we had unused borrowing capacity of $ 14.4 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 October 1, 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 October 1, 2023. 13 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 8. Commitments and Contingencies Operating Leases Our operating lease obligations mostly include 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 $ 4.5 million for the three and nine months ended October 1, 2023, respectively, and $ 1.8 million and $ 5.4 million for the three and nine months ended October 2, 2022, respectively. We recorded sublease income as reduction of lease expense, in the amount of $ 0.5 million and $ 1.5 million for the three and nine months ended October 1, 2023 and October 2, 2022. Supplemental cash flow information related to operating leases was as follows: Nine Months Ended October 1, 2023 October 2, 2022 (In thousands) Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 5,274 $ 5,208 Right-of-use assets obtained in exchange for lease liabilities Operating leases $ 1,851 $ 2,670 Weighted average remaining lease term and weighted average discount rate related to operating leases were as follows: As of October 1, 2023 December 31, 2022 Weighted average remaining lease term 5.1 years 5.1 years Weighted average discount rate 5.74 % 5.69 % 14 Table of Contents 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 October 1, 2023 were as follows: Operating Lease Payments Sublease Payments Net (In thousands) 2023 (Remaining three months) $ 949 $ ( 517 ) $ 432 2024 5,673 ( 1,947 ) 3,726 2025 4,450 ( 2,006 ) 2,444 2026 4,602 ( 2,066 ) 2,536 2027 4,569 ( 2,322 ) 2,247 Thereafter 5,411 ( 3,620 ) 1,791 Total future lease payments 25,654 $ ( 12,478 ) $ 13,176 Less: interest ( 3,445 ) Present value of future minimum lease payments $ 22,209 Accrued liabilities $ 4,239 Non-current operating lease liabilities 17,970 Total lease liabilities $ 22,209 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 October 1, 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 October 1, 2023, we had approximately $ 32.9 million in non-cancelable purchase commitments with suppliers. As of October 1, 2023, an additional $ 14.3 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 October 1, 2023, the loss liability from committed purchases was not material. 15 Table of Contents 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 Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands) Balance at the beginning of the period $ 1,093 $ 1,285 $ 1,174 $ 1,330 Provision for warranty obligations 86 ( 88 ) 141 25 Settlements ( 65 ) ( 76 ) ( 201 ) ( 234 ) Balance at the end of the period $ 1,114 $ 1,121 $ 1,114 $ 1,121 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 16 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 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. On June 14, 2023, Plaintiffs filed a petition for review in the Supreme Court of California. Defendants-Respondents filed their answer to the petition for review on July 5, 2023, and Plaintiffs filed their reply in support of the petition for review on July 17, 2023. On July 19, 2023, the Supreme Court of California denied Plaintiffs’ petition for review and closed the case. The deadline for Plaintiffs to file a petition for writ of certiorari to the Supreme Court of the United States appealing the dismissal of the State Action was October 17, 2023. To our knowledge, no such petition has been filed. 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 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 October 1, 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. 17 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 October 1, 2023, approximately 3.6 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 October 1, 2023: Number of Shares (In thousands) Shares available for grants as of December 31, 2022 4,213 Additional authorized shares 3,555 Granted ( 8,062 ) Forfeited / cancelled 506 Shares traded for taxes 3,394 Shares available for grants as of October 1, 2023 3,606 Employee Stock Purchase Plan We sponsor the ESPP to eligible employees. As of October 1, 2023, 2.0 million shares were available for issuance under the ESPP. Option Activity Stock option activity during the nine months ended October 1, 2023 was as follows: 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 ( 513 ) $ 7.15 Forfeited / cancelled — $ — Expired ( 12 ) $ 7.55 Outstanding as of October 1, 2023 1,557 $ 11.28 Vested and expected to vest as of October 1, 2023 1,557 $ 11.28 Exercisable Options as of October 1, 2023 1,557 $ 11.28 18 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) RSU Activity RSU activity, excluding PSU activity, during the nine months ended October 1, 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 6,015 $ 5.10 Vested ( 5,914 ) $ 5.50 Forfeited ( 494 ) $ 6.27 Outstanding as of October 1, 2023 9,094 $ 6.09 PSU Activity Our executive officers and other senior employees have been 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 nine months ended October 1, 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 2,050 $ 4.56 Vested ( 2,202 ) $ 5.54 Forfeited ( 3 ) $ 8.28 Outstanding as of October 1, 2023 3,886 $ 5.73 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 Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands) Cost of revenue $ 868 $ 1,365 $ 2,696 $ 3,610 Research and development 2,847 2,679 10,069 8,602 Sales and marketing 1,224 1,389 4,616 4,559 General and administrative 5,348 4,520 20,470 15,016 Total $ 10,287 $ 9,953 $ 37,851 $ 31,787 19 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of October 1, 2023, there was no unrecognized compensation cost related to stock options. Approximately $ 65.7 million of unrecognized compensation cost related to unvested RSUs and PSUs is expected to be recognized over a weighted-average period of 2.0 years as of October 1, 2023. Note 10. Income Taxes The provision for income taxes for the three and nine months ended October 1, 2023 was $ 0.03 million and $ 1.04 million, or an effective tax rate of ( 2.7 )% and ( 4.8 )%. The provision for income taxes for the three and nine months ended October 2, 2022 was $ 0.3 million and $ 0.7 million, or an effective tax rate of ( 2.2 )% and ( 2.2 )%. During the three and nine months ended October 1, 2023 and October 2, 2022, we sustained U.S. book losses. Consistent with the prior year periods, 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 decreased for the three months ended October 1, 2023, compared to the prior year period and increased for the nine months ended October 1, 2023, compared to the prior year period, primarily due to (i) the higher U.S. earnings, (ii) the application of Section 174 of the Internal Revenue Code requiring capitalization of research and experimental expenses, which increase was recognized mostly in the first quarter of 2023, and (iii) the recognition of a tax benefit from return to provision adjustments in the third quarter of 2023. Note 11. Net Loss Per Share Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands, except per share data) Numerator: Net loss $ ( 1,120 ) $ ( 14,435 ) $ ( 22,728 ) $ ( 34,471 ) Denominator: Weighted average common shares - basic and dilutive 94,243 88,124 92,069 86,677 Basic and diluted net loss per share $ ( 0.01 ) $ ( 0.16 ) $ ( 0.25 ) $ ( 0.40 ) Anti-dilutive employee stock-based awards, excluded 989 8,400 2,137 2,610 20 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 geographic area. For comparative purposes, amounts in prior periods have been recast. Three Months Ended Nine Months Ended October 1, 2023 October 2, 2022 October 1, 2023 October 2, 2022 (In thousands) United States $ 79,775 $ 71,040 $ 213,804 $ 196,276 Spain 32,802 38,889 90,923 103,598 Ireland 3,535 8,616 12,521 41,368 Other countries 13,891 9,612 38,835 30,645 Total $ 130,003 $ 128,157 $ 356,083 $ 371,887 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 geographic area. As of October 1, 2023 December 31, 2022 (In thousands) United States $ 14,684 $ 17,762 Other countries 3,258 2,383 Total $ 17,942 $ 20,145 21 Table of Contents