What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-03-07 · 71 added, 122 removed, 204 unchanged (49% of the section changed)

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Business and Executive Overview

Arlo combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that are transforming the way people experience the connected lifestyle.

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

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 27.5 million smart connected devices.

Arlo is transforming the ways in which people can protect everything that matters to them with advanced home, business, and personal security services that combine a globally scaled cloud platform, advanced monitoring and analytics capabilities, and award-winning app-controlled devices to create a personalized security ecosystem.

Arlo’s deep expertise in cloud services, cutting-edge AI and computer vision analytics, wireless connectivity and intuitive user experience design delivers seamless, smart home security for Arlo users that is easy to setup and engage with every day.

Our highly secure, 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 – all rooted in a commitment to safeguard privacy for our users and their personal data.

Since the launch of our first product in December 2014, we have shipped over 32.2 million smart security devices.

As of December 31, 2023, the Arlo platform had approximately 8.7 million cumulative registered accounts across more than 100 countries around the world coupled with 2.8 million cumulative paid subscribers and annual recurring revenue of $210.1 million.

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Loss from operations was $24.9 million and $56.9 million for the years ended December 31, 2023 and 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.

Our goal is to continue to develop innovative, world-class smart security 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 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 our sales and marketing expense to increase in the future as we invest in marketing to drive awareness of our brand and drive demand for our products and services..

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

Key Business Metrics

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Cumulative paid accounts (1)

2,813 51.1 % 1,862

Annual recurring revenue $ 210,078 52.5 % $ 137,764

_________________________

(1) The number of cumulative paid accounts as of December 31, 2023 included paid accounts managed by Verisure in our EMEA region which are now onboarded with us.

This does not have an impact to our financial statements and key business metrics other than our number of cumulative paid accounts.

Cumulative Registered Accounts .

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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”) .

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ARR represents the amount of paid service revenue that we expect to recur annually and is calculated by taking our recurring paid service revenue for the last calendar month in the fiscal quarter, multiplied by 12 months.

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.

Recurring paid service revenue represents the revenue we recognize from our paid accounts and excludes prepaid service revenue.

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 and Global Geopolitical, Economic and Business Conditions

During the year ended December 31, 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 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 COVID-19 pandemic, the ongoing conflict in Ukraine, supply chain disruptions, the inflationary macro environment, lower consumer confidence and rising interest rates.

Impact of Global Geopolitical, Economic and Business Conditions

During the year ended December 31, 2023, we remained focused on the ongoing conflict in Ukraine, hostilities in the Middle-East, supply chain disruptions, the inflationary macro environment, fluctuating 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, and subleasing or reducing excess office space.

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, hostilities in the Middle-East, supply chain disruptions, the inflationary macro environment, fluctuating consumer confidence and rising interest rates, current financial conditions within the banking industry, including the effects of recent failures of other financial institutions, and liquidity levels.

Components of Results of Operations

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

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

We generally recognize revenue from product sales at the time the product is shipped and transfer of control from us to the customer occurs.

Upon device shipment, we attribute a portion of the sales price as prepaid service, deferring this revenue at the outset and subsequently recognizing it ratably over the estimated useful economic life of the device or free trial period, as applicable.

Our paid subscription services relate to sales of subscription plans to our registered accounts.

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

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

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

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

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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.

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.

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.

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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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Sales and Marketing

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

technical support expense;

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 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 demand for our products and services.

General and Administrative

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We expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense.

Restructuring Charges

Restructuring charges consist primarily of severance costs, office exit expense, and other exit expense associated with the abandonment of certain lease contracts and cancellation of contractual services arrangements with certain suppliers.

Impairment Charges

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As a result, we recorded an impairment charge for the right-of-use asset and other lease-related assets included in the San Jose office asset group.

Others include separation expense and gain on sale of business.

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

Gain on sale of business represents the gain on the sale of our commercial operations in Europe.

Others include separation expense, which consists primarily of costs of legal and professional services and restructuring charges, which consist of severance costs, office exit expense, and other exit expense associated with the abandonment of certain lease contracts and cancellation of contractual services arrangements with certain suppliers.

Results of Operations

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General and administrative 56,371 11.5 % 55,932 11.4 %

Restructuring charges 1,805 0.3 % — — %

Impairment charges — — % 9,116 2.1 %

Others 1,307 0.2 % 2,192 0.4 %

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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.

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

Year Ended December 31,

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Total revenue $ 491,176 0.2 % $ 490,414

Revenue increased for the year ended December 31, 2022 compared to the prior year, primarily due to higher service revenue across all geographic regions and product sales mainly an increase in shipment volume.

Product revenue increased by $22.3 million, or 6.7% for the year ended December 31, 2022 compared to the prior year, primarily driven by an increase in product shipments in EMEA due to stronger customer demand and the full year sale of cameras in the Verisure security channel, partially offset by decreases in product sales in APAC and the Americas and by higher provisions for sales incentives and returns in the Americas that are accounted for a contra revenue.

Service revenue increased by $33.0 million, or 31.8%, for the year ended December 31, 2022 compared to the prior year, primarily driven by a 74.5% increase in paid accounts, partially offset by a decrease in NRE revenue.

Revenue by classification is as follows:

Year Ended December 31,

2023 % Change 2022

(In thousands, except percentage data)

Product Revenue $ 289,938 (18.1) % $ 353,935

Service Revenue 201,238 47.4 % 136,479

Total revenue $ 491,176 0.2 % $ 490,414

Product revenue decreased by $64.0 million, or 18.1% for the year ended December 31, 2023 compared to the prior year.

The declines were experienced mainly in EMEA and the Americas and were primarily driven by 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 a shift in product mix, driven by the softening consumer demand as a result of current macro-economic factors and seasonality.

This decline in revenue was partially offset by the revenue generated from the Essential 2 camera portfolio which was launched in the third quarter of 2023.

Service revenue increased in all regions by $64.8 million, or 47.4%, for the year ended December 31, 2023 compared to the prior year, primarily due to a 51.1% increase in cumulative paid accounts and an approximated 30% increase in rates for our subscription plans.

Cost of Revenue

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Total cost of revenue $ 323,613 (8.7) % $ 354,379

Cost of product revenue increased for the year ended December 31, 2022 compared to the prior year, primarily due to increases in gross shipments, coupled with increases in costs of materials and components of our products, mainly as a result of inflation, offset by a decrease in freight-in costs due to normalization of the supply chain and utilization of ocean freight.

Cost of service revenue increased for the year ended December 31, 2022 compared to the prior year, primarily due to the service revenue growth driven by growth of paid subscriber base, offset by cost optimizations.

Cost of product revenue decreased for the year ended December 31, 2023 compared to the prior year, primarily due to decreases in product shipments coupled with decreases in freight-in costs due to normalization of the supply chain and utilization of ocean freight, partially offset by increases in inventory reserves.

Cost of service revenue increased for the year ended December 31, 2023 compared to the prior year, primarily due to service revenue growth as a result of increases in cumulative paid accounts and rates for our subscription plans, partially offset by cost optimizations.

Year Ended December 31,

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Total gross margin 34.1 % 27.7 %

Product gross profit decreased for the year ended December 31, 2022 compared to the prior year, primarily due to higher product costs and provisions of sales incentives and returns that are accounted for a contra revenue, partially offset by the increase in product shipments.

Service gross profit increased for the year ended December 31, 2022 compared to the prior year, primarily due to growth in paid service revenue as a result of the increase in paid accounts and cost optimizations.

Product gross profit decreased for the year ended December 31, 2023 compared to the prior year, primarily driven by a reduction in the ASPs of our products as we increased promotional activities to stimulate household acquisition and increased subscriber growth coupled with a shift in product mix driven by 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 year ended December 31, 2023 compared to the prior year, primarily due to service revenue growth in all regions as a result of increases in cumulative paid accounts and rates for our subscription plans, as well as cost optimizations.

Operating Expenses

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Research and development expense $ 68,647 6.1 % $ 64,709

Research and development expense increased $5.6 million for the year ended December 31, 2022 compared to the prior year, primarily due to increases of $3.6 million in personnel-related expenses mainly increases in headcount and stock-based compensation, and $2.4 million in outside professional services, partially offset by a decrease of $1.2 million in IT and facility overhead and other expenses.

Research and development expense increased $3.9 million for the year ended December 31, 2023 compared to the prior year, primarily due to increases of $3.0 million in personnel-related expenses mainly from compensation recorded as a result of an increase in headcount and $2.1 million in outside professional services, partially offset by a decrease of $0.6 million in corporate IT and facilities overhead.

Sales and Marketing

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Sales and marketing expense $ 66,141 (5.6) % $ 70,081

Sales and marketing expense increased $21.2 million for the year ended December 31, 2022 compared to the prior year, primarily due to increases of $17.5 million in marketing expenses, primarily for the production of creative content and media spend for our brand awareness advertising campaign, $1.6 million in personnel-related expenses mainly from the increase in stock-based compensation, and $1.6 million in credit card processing fees.

Sales and marketing expense decreased $3.9 million for the year ended December 31, 2023 compared to the prior year, primarily due to a decrease of $9.2 million in marketing expenditures as a result of the suspension of our brand

awareness advertising campaign, partially offset by increases of $2.1 million in credit card processing fees as a result of increases in Arlo.com store sales and paid subscriber accounts, $2.1 million in customer care services as we continue to invest in improving our customer experience, and $1.8 million in freight-out expenses due to increase in customer shipment volume in Arlo.com store.

General and Administrative

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General and administrative expense $ 56,371 0.8 % $ 55,932

General and administrative expense increased $6.4 million for the year ended December 31, 2022 compared to the prior year, primarily due to an increase of $9.7 million in personnel-related expenses mainly an increase in stock-based compensation, partially offset by decreases of $1.6 million in legal and professional services and $1.4 million in IT and facility overhead.

Restructuring Charges

Year Ended December 31,

2022 % Change 2021

(In thousands)

Restructuring charges $ 1,805 ** $ —

**Percentage change not meaningful.

During the fourth quarter of 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 included the reduction of headcount as well as abandonment of certain lease contracts and cancellation of contractual services arrangements with certain suppliers.

Refer to Note 6, Restructuring in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for further information about the restructuring.

Impairment Charges

Year Ended December 31,

2022 % Change 2021

(In thousands)

Impairment charges $ — ** $ 9,116

**Percentage change not meaningful.

During the second quarter of 2021, we reviewed certain operating lease 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 included $6.8 million associated with operating lease 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.

Interest and Other Income, Net

General and administrative expense increased $0.4 million for the year ended December 31, 2023 compared to the prior year, primarily due to an increase of $2.2 million in personnel-related expenses mainly from stock-based compensation and merit increases, partially offset by a decrease of $1.8 million in corporate IT and facilities overhead and professional consulting services.

Interest Income and Other Income, Net

Year Ended December 31,

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(In thousands, except percentage data)

Interest income $ 926 ** $ 11

Interest income, net $ 3,935 ** $ 926

Other income, net $ 107 ** $ 302

**Percentage change not meaningful.

Interest income increased for the year ended December 31, 2022, compared to the prior year, primarily due to the increase in our short-term investments as well as a result of higher interest rates.

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.

Other income, net decreased for the year ended December 31, 2022 compared to the prior year, primarily due to decreases of $2.1 million in ERC under the CARES Act and $2.5 million in Verisure TSA related income.

Interest income, net increased for the year ended December 31, 2023, compared to the prior year, primarily due to the increase in our short-term investments as well as a result of higher interest rates.

Provision for Income Taxes

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Effective tax rate (5.6) % (1.8) %

Our effective tax rate for the year ended December 31, 2022 was lower than the U.S.

federal income tax rate due to a lower effective tax rate on foreign earnings and valuation allowance on our net U.S.

deferred tax assets and certain foreign tax attributes as it is more likely than not that some or all of our deferred tax assets will not be realized.

Our provision for income taxes was primarily attributable to income taxes on foreign earnings and to a lesser extent U.S.

Provision for income taxes was primarily attributable to income taxes on foreign earnings and to a lesser extent U.S.

taxable income.

The increase in provision for income taxes for the year ended December 31, 2022 compared to the prior year was impacted by the application of Section 174 of the U.S.

Tax Code requiring capitalization of research and experimental expenses.

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

The increase in provision for income taxes for the year ended December 31, 2023 compared to the prior year was primarily due to (i) the higher U.S.

earnings, and (ii) the application of Section 174 of the Internal Revenue Code requiring capitalization of research and experimental expenses.

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.

The effective tax rate for the year ended December 31, 2023 was lower than the U.S.

federal income tax rate due to a lower effective tax rate on foreign earnings and valuation allowance on our net U.S.

deferred tax assets and certain foreign tax attributes as it is more likely than not that some or all of our deferred tax assets will not be realized.

Liquidity and Capital Resources

As of December 31, 2022, our cash and cash equivalent and short-term investments totaled $113.7 million and unused borrowing capacity of $22.2 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 December 31, 2023, our cash and cash equivalents and short-term investments totaled $136.5 million, and we had unused borrowing capacity of $13.9 million based on the terms and conditions of our revolving credit facility.

We have a history of losses and may incur operating and net losses in the future.

As of December 31, 2023, our accumulated deficit was $367.5 million.

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Material Cash Requirements

We believe that our existing sources of liquidity will be sufficient to meet 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 and beyond.

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 revenue, there will be a need for additional working capital, hence, we have increased our subscription rates effective February 3, 2023.

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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Commitments and Contingencies in the Notes to Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for further information about our operating leases, purchase obligations, and legal contingencies.

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

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(In thousands)

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

Net cash provided by (used in) operating activities $ 38,302 $ (45,962)

Net cash used in investing activities (50,686) (31,773)

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Operating activities

Net cash used in operating activities increased by $22.8 million for the year ended December 31, 2022 compared to the prior year.

This increase is mostly due to an increase in working capital used in operations of $25.7 million.

The increase in working capital used in operations was driven by higher inventory purchases as a result of our internal objective to maintain more appropriate inventory levels to support consumer demand and higher payments to our suppliers and vendors.

Net cash provided by (used in) operating activities increased by $84.3 million for the year ended December 31, 2023 compared to the prior year period, primarily due to improved profitability driven by growth in paid accounts and increased subscription rates and changes in working capital as a result of lower inventory and trade payable balances and increase in deferred revenue.

Investing activities

Net cash used in investing activities increased by $49.5 million for the year ended December 31, 2022 compared to the prior year, primarily due to higher net purchases of short-term investments.

Net cash used in investing activities increased by $18.9 million for the year ended December 31, 2023 compared to the prior year period, primarily due to increases in net purchases, and maturities of short-term investments and in purchases of property and equipment.

Financing activities

Net cash used in financing activities increased by $9.0 million for the year ended December 31, 2022 compared to the prior year, primarily due to the increase in withholding tax from restricted stock unit releases and the decrease in proceeds from exercises of stock options.

Net cash used in financing activities slightly increased by $1.2 million for the year ended December 31, 2023 compared to the prior year period, primarily due to an increase in withholding tax from restricted stock unit releases, partially offset by higher proceeds related to employee benefit plans.

Critical Accounting Estimates

We prepare the consolidated financial statements in accordance with U.S.

generally accepted accounting principles (“U.S.

GAAP and pursuant to the regulations of the U.S.

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

Transaction price is calculated as selling price net of variable

consideration which may include estimates for sales returns, sales incentives, and price protection related to current period product revenue.

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

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

In determining estimates for sales returns, management analyzes certain factors, including historical sales

and returns data, channel inventory levels, current economic trends, and changes in customer demand for our products.

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

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

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

Our standard warranty obligation to our direct customers generally provides for a right of return of any product for a full refund in the event that such product is found to be damaged or defective.

At the time we recognize revenue, we record an estimate of sales warranty returns to reduce revenue in the amount of the expected credit or refund to be provided to our direct customers as a contra revenue, and we record a write-down to reduce the carrying value of such products to net realizable value as cost of revenue.

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As of December 31, 2023 and 2022, accrued sales warranty returns amounted to $16.6 million and $17.7 million, respectively.

Our standard warranty obligation to end-users provides for replacement of a defective product for one or more years.

Factors that affect the warranty obligation include product failure rates, material usage and service delivery costs incurred in correcting product failures.

We record the estimated cost associated with fulfilling the warranty obligation to end-users as cost of revenue.

As of December 31, 2022 and 2021, accrued warranty obligations were not material.

In addition to sales warranty returns, certain distributors and retailers generally have the right to return products for stock rotation purposes.

Upon shipment of the product, we record an estimate of potential stock rotation returns related to the current period product revenue as a contra revenue.

Our estimated allowances for returns due to stock rotation can vary from actual results, and we may have to record additional contra revenue, which could materially impact our financial position and results of operations.

As of December 31, 2022 and 2021, accrued stock rotation returns were not material.

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

otherwise, it is recorded as a contra revenue.

As a consequence, we record a substantial portion of our channel marketing costs as a contra revenue.

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

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

otherwise, it is recognized as a contra revenue.

Consequently, we recognize a substantial portion of sales incentives as channel marketing costs accounted as a contra revenue.

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

As of December 31, 2023 and 2022, accrued sales incentives amounted to $28.2 million and $36.3 million, respectively.

Valuation of Inventory

We value our inventory at the lower of cost or net realizable value, cost being determined using the first-in, first-out method.

We continually assess the value of our inventory and will periodically write down its value to account for estimated excess and obsolete inventory based upon assumptions about future demand and market conditions.

On a quarterly basis, we review inventory quantities on hand and on order under non-cancelable purchase commitments and compare those quantities to our estimated forecast of product demand for the next nine months to determine what inventory, if any, is not salable.

We base our analysis on the product demand forecast by taking into account market conditions, product development plans, product life expectancy and other factors.

Based on this analysis, we write down the carrying value of the affected inventory to account for estimated excess and obsolete amounts.

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

As demonstrated during prior years, demand for our products can fluctuate significantly.

If actual demand is lower than our forecasted demand and we fail to reduce our

manufacturing accordingly, we could be required to write down the value of additional inventory, which would have a negative effect on our gross profit.

As of December 31, 2022 and 2021, excess and obsolescence reserves were not material.

Valuation of Long-Lived Assets

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If such review indicates that the carrying amount of property and equipment and operating lease assets is not recoverable, the carrying amount of such assets is reduced to the fair value.

During the year ended December 31, 2022, no impairment of long-lived assets has been identified.

For the year ended December 31, 2021, we recorded an impairment charge of $9.1 million, which included $6.8 million associated with operating lease right-of-use assets and $2.3 million associated with lease related property and equipment.

During the year ended December 31, 2023 and 2022, no impairment of long-lived assets has been identified.

Valuation of Goodwill

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No goodwill impairment was recognized in the years ended December 31, 2023 and 2022.

Uncertain Tax Position

We are subject to income taxes in the U.S.

and numerous foreign jurisdictions.

We apply significant judgement in determining our uncertain tax positions.

Although we believe that our reserves of uncertain tax position are reasonably adequate, no assurance can be given that the final outcome of these matters will not be different from our reserves.

When facts and circumstances change, our reserves are adjusted, such as the closing of a tax audit, the expiration of statute of limitation for a relevant taxing authority to examine a tax position, or when additional information becomes available.

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

Recent Accounting Pronouncements

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis