Arlo Technologies, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Arlo Technologies, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Arlo Technologies, Inc. and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of comprehensive loss, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because a material weakness in internal control over financial reporting existed as of that date as a result of information technology general control (ITGC) deficiencies related to (i) user access and segregation of duty controls that restrict user and privileged access to appropriate personnel; (ii) program change management controls; and (iii) certain computer operations controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and 73 Table of Contents disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Accrued Sales Warranty Returns As described in Note 2 to the consolidated financial statements, the Company’s standard obligation to direct customers for product sales generally provides for a full refund in the event that such product is found to be damaged or defective. At the time revenue is recognized, management records an estimate of sales warranty returns to reduce revenue in the amount of the expected credit or refund to be provided to direct customers. 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 products. As of December 31, 2023, accrued sales warranty returns were $16.6 million. The principal considerations for our determination that performing procedures relating to accrued sales warranty returns is a critical audit matter are (i) the significant judgment by management in developing the estimate of accrued sales warranty returns and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s estimate of sales returns considering historical sales and returns data. As described in the “Opinions on the Financial Statements and Internal Control over Financial Reporting” section, a material weakness was identified related to the Company’s information technology general controls, which impacted this matter. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) testing management’s process for developing the estimate of accrued sales warranty returns, (ii) evaluating the appropriateness of 74 Table of Contents the analysis performed by management, (iii) testing the completeness, accuracy, and relevance of data used by management in the analysis, and (iv) evaluating the reasonableness of management’s estimate of sales returns. Evaluating management’s estimate of sales returns involved evaluating whether the estimate was reasonable considering the related historical sales and returns activity. /s/ PricewaterhouseCoopers LLP San Jose, California February 29, 2024 We have served as the Company’s auditor since 2018. 75 Table of Contents ARLO TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS As of December 31, 2023 2022 (In thousands, except share and per share data) ASSETS Current assets: Cash and cash equivalents $ 56,522 $ 84,024 Short-term investments 79,974 29,700 Accounts receivable, net 65,360 65,960 Inventories 38,408 46,554 Prepaid expenses and other current assets 10,271 6,544 Total current assets 250,535 232,782 Property and equipment, net 4,761 7,336 Operating lease right-of-use assets, net 11,450 12,809 Goodwill 11,038 11,038 Restricted cash 4,131 4,155 Other non-current assets 3,623 4,081 Total assets $ 285,538 $ 272,201 LIABILITIES AND STOCKHOLDERS ’ EQUITY Current liabilities: Accounts payable $ 55,201 $ 52,132 Deferred revenue 18,041 11,291 Accrued liabilities 88,209 98,855 Total current liabilities 161,451 162,278 Non-current operating lease liabilities 17,021 19,279 Other non-current liabilities 3,790 2,949 Total liabilities 182,262 184,506 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: 95,380,281 at December 31, 2023 and 88,887,139 at December 31, 2022 95 89 Additional paid-in capital 470,322 433,138 Accumulated other comprehensive income (loss) 320 ( 107 ) Accumulated deficit ( 367,461 ) ( 345,425 ) Total stockholders’ equity 103,276 87,695 Total liabilities and stockholders’ equity $ 285,538 $ 272,201 The accompanying notes are an integral part of these consolidated financial statements. 76 Table of Contents ARLO TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Year Ended December 31, 2023 2022 2021 (In thousands, except per share data) Revenue: Products $ 289,938 $ 353,935 $ 331,620 Services 201,238 136,479 103,517 Total revenue 491,176 490,414 435,137 Cost of revenue: Products 270,663 308,692 285,334 Services 52,950 45,687 41,768 Total cost of revenue 323,613 354,379 327,102 Gross profit 167,563 136,035 108,035 Operating expenses: Research and development 68,647 64,709 59,063 Sales and marketing 66,141 70,081 48,909 General and administrative 56,371 55,932 49,489 Impairment charges — — 9,116 Others 1,307 2,192 1,596 Total operating expenses 192,466 192,914 168,173 Loss from operations ( 24,903 ) ( 56,879 ) ( 60,138 ) Interest income 3,935 926 11 Other income, net 107 302 4,775 Loss before income taxes ( 20,861 ) ( 55,651 ) ( 55,352 ) Provision for income taxes 1,175 975 677 Net loss $ ( 22,036 ) $ ( 56,626 ) $ ( 56,029 ) Net loss per share: Basic and diluted $ ( 0.24 ) $ ( 0.65 ) $ ( 0.68 ) Weighted average shares used to compute net loss per share: Basic and diluted 92,754 87,173 82,688 Comprehensive loss: Net loss $ ( 22,036 ) $ ( 56,626 ) $ ( 56,029 ) Other comprehensive income (loss), net of tax 427 ( 107 ) ( 3 ) Total comprehensive loss $ ( 21,609 ) $ ( 56,733 ) $ ( 56,032 ) The accompanying notes are an integral part of these consolidated financial statements. 77 Table of Contents ARLO TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Year Ended December 31, 2023 2022 2021 (In thousands) Total stockholders' equity, beginning balances $ 87,695 $ 112,652 $ 133,767 Common stock: Beginning balances $ 89 $ 84 $ 79 Issuance of common stock under stock-based compensation plans 9 6 8 Issuance of common stock under employee stock purchase plan — 2 — Restricted stock unit withholdings ( 3 ) ( 3 ) ( 3 ) Ending balances $ 95 $ 89 $ 84 Additional paid-in capital: Beginning balances $ 433,138 $ 401,367 $ 366,455 Stock-based compensation expense 36,971 36,985 24,792 Settlement of liability classified restricted stock units 13,480 8,733 15,095 Issuance of common stock under stock-based compensation plans 7,554 1,419 5,261 Issuance of common stock under employee stock purchase plan 2,811 2,833 2,962 Restricted stock unit withholdings ( 23,632 ) ( 18,199 ) ( 13,198 ) Ending balances $ 470,322 $ 433,138 $ 401,367 Accumulated deficit: Beginning balances $ ( 345,425 ) $ ( 288,799 ) $ ( 232,770 ) Net loss ( 22,036 ) ( 56,626 ) ( 56,029 ) Ending balances $ ( 367,461 ) $ ( 345,425 ) $ ( 288,799 ) Accumulated other comprehensive income (loss): Beginning balances $ ( 107 ) $ — $ 3 Other comprehensive income (loss), net of tax 427 ( 107 ) ( 3 ) Ending balances $ 320 $ ( 107 ) $ — Total stockholders' equity, ending balances $ 103,276 $ 87,695 $ 112,652 Common stock shares: Beginning balances 88,887 84,453 79,336 Issuance of common stock under stock-based compensation plans 9,390 6,155 6,538 Issuance of common stock under employee stock purchase plan 621 609 602 Restricted stock unit withholdings ( 3,518 ) ( 2,330 ) ( 2,023 ) Ending balances 95,380 88,887 84,453 The accompanying notes are an integral part of these consolidated financial statements. 78 Table of Contents ARLO TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2023 2022 2021 (In thousands) Cash flows from operating activities: Net loss $ ( 22,036 ) $ ( 56,626 ) $ ( 56,029 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Stock-based compensation expense 47,948 48,476 38,030 Impairment charges — — 9,116 Depreciation and amortization 4,661 4,768 5,975 Provision for (release of) expected credit losses and inventory reserves 279 ( 190 ) ( 3,125 ) Deferred income taxes 112 181 ( 296 ) Discount accretion on investments and other ( 2,005 ) 24 ( 3 ) Changes in assets and liabilities: Accounts receivable, net 690 13,517 ( 1,739 ) Inventories 7,777 ( 7,887 ) 29,258 Prepaid expenses and other assets ( 1,498 ) 3,427 ( 3,463 ) Accounts payable 3,723 ( 32,520 ) 22,156 Deferred revenue 6,610 ( 19,281 ) ( 38,919 ) Accrued and other liabilities ( 7,959 ) 149 ( 24,158 ) Net cash provided by (used in) operating activities 38,302 ( 45,962 ) ( 23,197 ) Cash flows from investing activities: Purchases of property and equipment ( 2,847 ) ( 2,010 ) ( 2,268 ) Purchases of short-term investments ( 149,870 ) ( 69,305 ) — Proceeds from maturities of short-term investments 102,031 39,542 20,000 Net cash provided by (used in) investing activities ( 50,686 ) ( 31,773 ) 17,732 Cash flows from financing activities: Proceeds related to employee benefit plans 8,493 4,260 8,231 Restricted stock unit withholdings ( 23,635 ) ( 18,202 ) ( 13,201 ) Net cash used in financing activities ( 15,142 ) ( 13,942 ) ( 4,970 ) Net decrease in cash, cash equivalents, and restricted cash ( 27,526 ) ( 91,677 ) ( 10,435 ) Cash, cash equivalents, and restricted cash, at beginning of period 88,179 179,856 190,291 Cash, cash equivalents, and restricted cash, at end of period $ 60,653 $ 88,179 $ 179,856 Reconciliation of cash, cash equivalents, and restricted cash to Consolidated Balance Sheets Cash and cash equivalents $ 56,522 $ 84,024 $ 175,749 Restricted cash 4,131 4,155 4,107 Total cash, cash equivalents, and restricted cash $ 60,653 $ 88,179 $ 179,856 Supplemental cash flow information: Cash paid for income taxes, net $ 1,196 $ 415 $ 964 Non-cash investing activities: Purchases of property and equipment included in accounts payable and accrued liabilities $ 189 $ 946 $ 379 The accompanying notes are an integral part of these consolidated financial statements. 79 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Description of Business and Basis of Presentation Description of Business Arlo Technologies, Inc. (“we” or “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. 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 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 consolidated financial statements include the accounts of Arlo and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. 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 consolidated financial statements. Use of Estimates The preparation of 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 year ended December 31, 2023 are not necessarily indicative of the results that may be expected for any future period. 80 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 2. Summary of Significant Accounting Policies Cash and Cash Equivalents We invest excess cash primarily in government securities and money market funds and consider all highly liquid investments with an original maturity or a remaining maturity at the time of purchase of three months or less to be cash equivalents. We deposit cash and cash equivalents with high credit quality financial institutions. Restricted Cash We maintain certain cash balances restricted as to withdrawal or use. Restricted cash is comprised primarily of cash used as a collateral for a letter of credit associated with our lease agreement for office space in San Jose, California. We deposit restricted cash with high credit quality financial institutions. Short-Term Investments Short-term investments are comprised of marketable securities that consist of government securities with an original maturity or a remaining maturity at the time of purchase of greater than three months and no more than 12 months. The marketable securities are held with a high quality financial institution, which acts as our custodian and investment manager. These marketable securities are classified as available-for-sale securities in accordance with the provisions of the authoritative guidance for investments and are carried at fair value with unrealized gains and losses are included in accumulated other comprehensive income (loss), net of tax, which is reported on consolidated statements of stockholders’ equity. Fair Value Measurements The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair values due to their short maturities. Short-term investments are recognized or disclosed at fair value in the financial statements on a recurring basis. The fair value of assets and liabilities is measured based on a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). 81 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Trade Accounts Receivable We are exposed to credit losses primarily through sales of products and services. Allowance for current estimated credit losses for trade accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers’ trade accounts receivables. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Monitoring activities include dispute resolution, payment confirmation, review of customers’ financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. Although we have historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade accounts receivable. Concentrations of Risk and Other Uncertainties Financial instruments that potentially subject us to a concentration of credit risk mainly consist of cash equivalents, short-term investments and accounts receivable. We believe that there is minimal credit risk associated with the investments of cash equivalents and short-term investments due to the restrictions placed on the type of investment that can be entered into under our investment policy. Our cash equivalents and short-term investments primarily consist of government securities and money market funds which are held and managed by high credit quality financial institutions. Our customers are primarily retailers, wholesale distributors and security solution providers who sell or distribute our products to a large group of end-users. We regularly perform credit evaluations of our customers’ financial condition and performance and consider factors such as historical experience, credit quality, age of the accounts receivable balances, geographic or country-specific risks and current economic conditions that may affect our customers’ ability to pay. We do not require collateral from our customers. Historically, a substantial portion of revenue has been derived from a limited number of retailers and wholesale distribution partners. As of December 31, 2023 and 2022, three customers accounted for 37.1 %, 15.2 %, and 10.2 %, and four customers accounted for 28.4 %, 26.8 %, 16.6 %, and 13.3 % of the total accounts receivable, net, respectively. No other customers accounted for 10% or greater of the total accounts receivable, net. During the year ended December 31, 2023, 2022 and 2021, one customer accounted for 33.5 %, one customer accounted for 40.1 %, and two customers accounted for 30.8 % and 13.0 % of the total revenue, respectively. Additionally, we receive certain of our components from a limited number of suppliers and rely on a limited number of third parties to manufacture all of our products. If any of the third-party manufacturers cannot or will not manufacture our products in required volumes, on a cost-effective basis, in a timely manner or at all, we will have to secure additional manufacturing capacity. Any interruption or delay in manufacturing could materially and adversely affect our business, results of operations and financial condition. At the date of issuance of our financial statements, we are not aware of any event which could cause the severe impact in a near term. Our products are concentrated in the smart security solution industries, which are characterized by rapid technological advances, changes in customer requirements and evolving regulatory requirements and industry standards. Our success depends on management’s ability to anticipate and/or to respond quickly and adequately to such changes. Any significant delays in the development or introduction of products and services could materially and adversely affect our business, results of operations and financial condition. 82 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Inventories Inventories consist of finished goods which are valued at the lower of cost or net realizable value, with cost being determined using the first-in, first-out method. We write down inventories based on estimated excess and obsolete amounts, determined primarily based on demand forecasts, but take into account market conditions, product development plans, product life expectancy and other factors. At the point of loss recognition, a new lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase of the newly established cost basis. While management believes the estimates and assumptions underlying its current forecasts are reasonable, there is risk that additional charges may be necessary if current forecasts are greater than actual demand. Property and Equipment, Net Property and equipment are stated at historical cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Asset Category: Range of Useful Lives Computer equipment 2 years Furniture and fixtures 5 years Software 2 - 5 years Machinery and equipment 2 - 3 years Leasehold improvements Shorter of remaining lease term or 7 years Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The carrying value of the asset is reviewed on a regular basis for the existence of facts, both internal and external, that may suggest impairment. Operating Leases Our operating leases comprise of offices, data centers, and other equipment. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, net, accrued liabilities, and non-current operating lease liabilities on the consolidated balance sheets. Leases with an initial term of 12 months or less are expensed as incurred and recorded on the consolidated statements of comprehensive loss. The lease expense for fixed lease payments is recorded on the consolidated statements of comprehensive loss on a straight-line basis over the lease term and variable lease payments are included in the lease expense when the obligation for those payments is incurred. Operating lease assets represent our right to use an underlying asset over the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, the incremental borrowing rate based on the information available is used at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease asset also includes any lease payments made before the lease commencement date less any lease incentives received. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise the options. The lease agreements with lease and non-lease components are generally accounted as a single component. In addition, certain lease agreements contain tenant improvement allowances (“TIA”) from the landlords. We record lessee-owned improvements as leasehold improvements within property and equipment, net on our consolidated balance sheets and the TIA as a reduction to the lease asset with the impact of the decrease recognized prospectively over the 83 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) remaining lease term. We record lessor-owned improvements as prepaid rent within prepaid expenses and other current assets on our consolidated balance sheets and the TIA as a reduction to prepaid rent. Sublease income from our sublet office space in San Jose, California is recognized on a straight-line basis over the term of the sublease and is recorded as a reduction of lease expense. Goodwill We perform an annual impairment assessment of goodwill at the reporting unit level on the first day of the fourth fiscal quarter. We operate as one operating and reportable segment and identify that one reporting unit for the purpose of goodwill impairment testing, which is at the same level as our operating and reportable segment. The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment. Should certain events or indicators of impairment occur between annual impairment tests, we will perform the impairment test as those events or indicators occur. Examples of such events or circumstances include a significant decline in the expected future cash flows, a sustained, significant decline in our stock price and market capitalization, a significant adverse change in the business climate and slower growth rates. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of the reporting unit is less than its carrying amount. The qualitative assessment considers macroeconomic conditions, industry and market considerations, cost factors, overall company financial performance, and events affecting our stock price. If the reporting unit does not pass the qualitative assessment, we estimate the fair value using a discounted cash flow method and compare the fair value with the carrying amount of our reporting unit, including goodwill. If the fair value is greater than the carrying amount of our reporting unit, no impairment is recorded. If the fair value is less than the carrying amount, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to our reporting unit. The impairment charge, if any, would be recorded to earnings in the consolidated statements of comprehensive loss. Revenue Recognition Revenue from contracts with customers is recognized when control of the promised goods or services is transferred to the customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our product revenue is recognized at a point in time when control of the goods is transferred to the customer, generally occurring upon shipment or delivery, dependent upon the terms of the underlying contract. Our paid subscription services are billed in advance of the start of the monthly subscription and revenues are recognized ratably over subscription period, generally 30 days or 12 months in length. Revenue from all sales types is recognized at the transaction price, which is the amount we expect to be entitled to in exchange for transferring goods or providing services. Transaction price is calculated as selling price net of variable consideration which may include estimates for sales returns, sales incentives, and price protection related to current period product revenue. Our standard obligation to our direct customers generally provides for a full refund in the event that such product is found to be damaged or defective. At the time revenue is recognized, management records an estimate of sales warranty returns to reduce revenue in the amount of the expected credit or refund to be provided to direct customers as a contra 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. Typically, variable consideration does not need to be constrained as estimates are based on predictive historical data or future commitments that we plan and control. However, we continue to assess variable consideration estimates such that it is probable that a significant reversal of revenue will not occur. 84 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Contracts with Multiple Performance Obligations Some of our contracts with customers contain multiple promised goods or services. Such contracts include hardware products with bundled services, various subscription services, and support. For these contracts, we account for the promises separately as individual performance obligations if they are distinct. Performance obligations are determined to be distinct if they are both capable of being distinct or separately identifiable within the context of the contract. In determining whether performance obligations meet the criteria for being distinct, we consider a number of factors, such as the degree of interrelation and interdependence between obligations, and whether or not the good or service significantly modifies or transforms another good or service in the contract. The embedded software in most of the hardware products is not considered distinct and therefore the combined hardware and incidental software are treated as one performance obligation and recognized at the point in time when control of product transfers to the customer. Services that are included with certain hardware products are considered distinct and therefore the hardware and service are treated as separate performance obligations. After identifying the separate performance obligations, the transaction price is allocated to the separate performance obligations on a relative stand-alone selling price basis. Stand-alone selling prices are generally determined based on the prices charged to customers or using an adjusted market assessment. Stand-alone selling price of the hardware is directly observable from add-on camera and base station sales. Stand-alone selling price of the premium services are directly observable from direct sales to end users while the service is estimated using an adjusted market approach. Revenue is then recognized for each distinct performance obligation as control is transferred to the customer. Revenue attributable to hardware is recognized at the time control of the product transfers to the customer. The transaction price allocated to the service is recognized over the specified service period or over the estimated useful life of the hardware, beginning when the customer is expected to activate their account. Useful life of the hardware is determined by industry norms, technical and financial relevance, frequency of new model releases, and user history. Long-Term Supply Arrangement - Verisure We have entered into a Supply Agreement which includes product purchases, paid subscription services, and an option for Verisure S.à.r.l. (“Verisure”) to acquire development services by submitting a statement of work (“SOW”). Products sold come with a standard twelve months warranty. Verisure assumes responsibilities for all warranty claims, returns of products and certain technical support provided to the end users. We provide technical support for paid subscription services where Verisure cannot resolve the issue. Verisure is responsible for any marketing and promotion of our products and services sold in Europe. We concluded that we are acting as the principal in the Supply Agreement and determined that revenue should be presented gross. Products are priced at a cost plus markup as specified in the Supply Agreement. The paid subscription services are billed based on the number of active cameras monthly and are priced at a cost plus markup specified in the Supply Agreement. The transaction price for products and paid subscription services is entirely variable because the consideration is dependent on the actual costs. For products, since quantity and product types are not specified in the agreement, contracts are not deemed to exist until we receive and accept the customer purchase order (“PO”). Each product with a valid PO is considered a single performance obligation. Non-Recurring Engineering (“NRE”) Arrangement - Verisure The Supply Agreement also provides for certain development services under an SOW to Verisure, which Verisure pays non-refundable installments upon the commencement of agreed-upon milestones. There is a single performance obligation as the distinct goods and services promised under the SOW are highly interdependent or interrelated inputs that produce a single combined output given the nature of such arrangements. We determined that the most appropriate measure of progress for revenue recognition is the input method based on cost because we can reasonably estimate the total costs for the NRE, and the costs incurred reasonably reflect our efforts to satisfy the performance obligation. The NRE costs include 85 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) labor, material, overhead as well as the use of outside services. Any losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. Warranties Sales of hardware products regularly include warranties to end customers that cover bug fixes, minor updates such that the product continues to function according to published specifications in a dynamic environment, and phone support. These standard warranties are assurance type warranties and do not offer any services in addition to the assurance that the product will continue working as specified for one or more years. Therefore, warranties are not considered separate performance obligations in the arrangement. Instead, the expected cost of warranties is accrued as an expense in accordance with authoritative guidance. Sales Incentives We recognize sales incentives offered to our customers as a marketing expense if we receive an identifiable benefit in exchange and can reasonably estimate the fair value of the identifiable benefit received; otherwise, it is 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. Shipping and Handling Costs We include shipping and handling fees billed to customers in Revenue. Shipping and handling costs associated with inbound freight are included in Cost of revenue. In cases where we give a freight allowance to the customer for their own inbound freight costs, such costs are appropriately recorded as a reduction in Revenue. Shipping and handling costs associated with outbound freight are included in sales and marketing expenses. We have elected to account for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. Shipping and handling costs associated with outbound freight totaled $ 5.2 million, $ 3.4 million and $ 2.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. Contract Costs We recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that otherwise would have been recognized is one year or less. These costs are included in operating expenses of sales and marketing and general and administrative on the consolidated statements of comprehensive loss. If the incremental costs of obtaining a contract, which consist of sales commissions, relate to a service recognized over a period longer than one year, costs are deferred and amortized in line with the related services over the period of benefit. Deferred commissions are classified as non-current based on the original amortization period of over one year. There were no deferred commissions as of December 31, 2023 and 2022. 86 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Contract Balances Contract assets are recorded as accounts receivable, net on the consolidated balance sheets when we have an unconditional right to consideration. Contract liabilities are recorded as deferred revenue on the consolidated balance sheets when cash payments are received or due in advance of performance. Contract liabilities consist of advance payments and customer billings in advance of revenue recognition from subscription contracts where we have unsatisfied performance obligations. Advance payments include prepayments for NRE services under the Supply Agreement with Verisure. Payment terms vary by customer. The time between invoicing and when payment is due is not significant. For certain products or services and customer types, payment is required before the products or services are delivered to the customer. Performance obligations represent the transaction price allocated that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities. Research and Development Costs incurred in the research and development of new products are expensed as incurred. Software Development Costs We expense software development costs, including costs to develop software products or the software component of products to be sold, leased, or marketed to external users, before technological feasibility is reached. Technological feasibility is typically reached shortly before the release of such products. As a result, development costs that meet the criteria for capitalization were $ 0.6 million and $ 1.8 million for the years ended December 31, 2023 and 2022, respectively. There were no capitalized development costs for the year ended 2021. We capitalize software development costs related to those software applications to be used solely to meet internal needs during the application development stage. Capitalized software development costs are amortized using the straight-line amortization method over the estimated useful life of the applicable software. Costs capitalized for developing such software applications were not material as of December 31, 2023 and 2022. Advertising Costs Advertising costs are expensed when incurred and included in sales and marketing in the consolidated statements of comprehensive loss. Total advertising costs were $ 17.9 million, $ 27.1 million and $ 9.6 million for the years ended December 31, 2023, 2022 and 2021, respectively. Stock-Based Compensation We measure stock-based compensation at the grant date based on the fair value of the award. The fair value of stock options is estimated on the grant date using the Black-Scholes option pricing model. The fair value of restricted stock units (“RSUs”) and performance-based restricted stock units is measured on the grant date based on the closing fair market value of our common stock. We utilize a Monte Carlo pricing model customized to the specific provisions to value the market-based restricted stock units on the grant date. The fair value determined using the Monte Carlo simulation model varies based on the assumptions used for the expected stock price volatility, the correlation coefficient between Arlo and Russell 2000 Index, risk-free interest rates, and dividend yield. Forfeitures are accounted for as they occur. Our Employee Stock Purchase Plan (“ESPP”) is intended to provide employees with the opportunity to purchase our common stock through accumulated payroll deductions at the end of specified purchase period. Eligible employees may contribute up to 15 % of compensation, subject to certain income limits, to purchase our common stock. The terms of the plan include a look-back feature that enables employees to purchase stock semi-annually at a price equal to 85 % of the lesser of the fair market value at the beginning of the offering period or the purchase date. The duration of each purchasing period is 87 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) generally six months . We determine the fair value using the Black-Scholes Model using various inputs, including its estimate of expected volatility, term, dividend yield and risk-free interest rate. The risk-free interest rate of the purchase rights granted under the ESPP is based on the implied yield currently available on U.S. Treasury securities, with a remaining term commensurate with the estimated expected term. Expected volatility of the purchase rights granted under the ESPP is based on historical volatility over the most recent period commensurate with the estimated expected term. We recognize compensation costs for RSUs, stock options, and ESPP on a straight-line basis over the requisite service period of the award, usually the vesting period, which is generally four years for stock options and three to five years for RSUs. For performance-based RSUs, compensation costs associated with individual performance milestones is recognized over the period when the performance conditions achievement become probable. In addition, we evaluate the probability of achieving the performance conditions at the end of each reporting period and record the related stock-based compensation expense based on performance to date over the service period. For market-based RSUs, stock-based compensation expense is recognized ratably over the performance period subject to achievement of market conditions. Foreign Currency Our functional currency is the U.S. dollar. Foreign currency transactions of international subsidiaries are re-measured into U.S. dollars at the end-of-period exchange rates for monetary assets and liabilities, and at historical exchange rates for non-monetary assets and liabilities. Revenue is re-measured at average exchange rates in effect during each period. Expenses are re-measured at average exchange rates in effect during each period, except for expenses related to non-monetary assets and liabilities, which are re-measured at historical exchange rates. Gains and losses arising from foreign currency transactions are included in other income, net on the consolidated statements comprehensive loss. Net Loss Per Share Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. Potentially dilutive common shares include common shares issuable upon exercise of stock options, vesting of restricted stock awards and performance shares, and issuances of shares under the ESPP, which are reflected in diluted net loss per share by application of the treasury stock method. Potentially dilutive common shares are excluded from the computation of diluted net loss per share when their effect is anti-dilutive. 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. Income Taxes We record the provision for income taxes in the consolidated financial statements using the asset and liability method. Under this method, we recognize income tax liabilities or receivables for the current year. We also recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce deferred tax assets to the net amount that we believe is more likely than not to be realized. Our assessment considers the recognition of deferred tax assets on a jurisdictional basis. Accordingly, in assessing the future taxable income on a jurisdictional basis, we consider the effect of the transfer pricing policies on that income. We have recorded a valuation allowance against U.S. federal and state 88 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) deferred tax assets and certain foreign tax attribute carryforwards since we do not anticipate realizing the benefits of these deferred tax assets. We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. As we expand internationally, we will face increased complexity in determining the appropriate tax jurisdictions for revenue and expense items. Our policy is to adjust these unrecognized tax benefits in the period when facts and circumstances change, such as the closing of a tax audit, the expiration of statute of limitation for a relevant taxing authority to examine a tax position, or when additional information becomes available. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on the financial condition and operating results. The provision for income taxes includes the effects of any accruals that we believe are appropriate, as well as the related interest and penalties. Legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act introduced the global intangible low-taxed income (“GILTI”) provisions effective in 2018, which generally impose a tax on the net income earned by foreign subsidiaries of a U.S company in excess of a deemed return on their tangible assets. We recognize the tax on GILTI as a period cost when the tax is incurred. Recent Accounting Pronouncements Accounting Pronouncements Recently Adopted There were no accounting pronouncements adopted during the year ended December 31, 2023. Accounting Pronouncements Not Yet Effective In October 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative , which modifies the disclosure or presentation requirements of a variety of Topics in the Codification. Among the various codification amendments, Topic 470 Debt is applicable to Arlo which requires the disclosure of amounts, terms and weighted-average interest rates of unused lines of credit. The effective date is either the date on which the SEC’s removal of the related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, or on June 30, 2027, if the SEC has not removed the requirement by that date, with early adoption prohibited. The adoption of this new standard will not have a material impact on our consolidated financial statements. In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting: Improvements to Reportable Segment Disclosures , which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. This guidance is effective for annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the impact of this guidance may have on our financial statements and related disclosures. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes: Improvements to Income Tax Disclosures , which requires on an annual basis to (1) disclose specific categories in the rate reconciliation, (2) provide additional information for reconciling items that meet a quantitative threshold, and (3) income taxes paid disaggregated by jurisdiction. This guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact of this guidance may have on our financial statements and related disclosures. 89 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 3. Revenue Contract Balances The following table reflects the changes in contract balances for the years ended December 31, 2023 and 2022: Contract Balances Balance Sheet Location December 31, 2023 December 31, 2022 $ change % change (In thousands) Accounts receivable, net Accounts receivable, net $ 65,360 $ 65,960 $ ( 600 ) ( 0.9 ) % Contract liabilities current Deferred revenue $ 18,041 $ 11,291 $ 6,750 59.8 % Contract liabilities non-current Other non-current liabilities $ 73 $ 212 $ ( 139 ) ( 65.6 ) % For the year ended December 31, 2023, compared to the previous year, deferred revenue increased, primarily due to deferred service revenue increase, driven by the increases in cumulative paid accounts and rates of subscriptions. For the years ended December 31, 2023 and 2022, $ 11.3 million and $ 29.4 million, respectively, of the recognized revenue was included in the contract liability balance at the beginning of the periods. There were no significant changes in estimates during the periods that would affect the contract balances. Refer to Note 4, Balance Sheet Components for further details of accounts receivable, net. Performance Obligations The total estimated service revenue expected to be recognized in the future related to performance obligations that are unsatisfied and partially unsatisfied as of December 31, 2023 was $ 18.8 million, with $ 18.7 million related to a performance obligation classified as less than one year. The performance obligation classified as greater than one year pertains to revenue deferral from prepaid services. During the five-year period that commenced on January 1, 2020, Verisure Sàrl (“Verisure”) has an aggregate purchase commitment of $ 500.0 million. 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 December 31, 2023, $ 469.8 million of the purchase commitment has been fulfilled. As of December 31, 2023, we had a backlog of $ 52.3 million which represents performance obligations that will be recognized as revenue once fulfilled, which is expected to occur over the next twelve 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 region. Year Ended December 31, 2023 2022 2021 (In thousands) Americas $ 301,418 $ 273,981 $ 271,182 EMEA 164,750 196,465 134,232 APAC 25,008 19,968 29,723 Total $ 491,176 $ 490,414 $ 435,137 90 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 4. Balance Sheet Components Short-Term Investments As of December 31, 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 $ 79,654 $ 320 $ — $ 79,974 $ 29,849 $ — $ ( 149 ) $ 29,700 Accounts Receivable, Net As of December 31, 2023 2022 (In thousands) Gross accounts receivable $ 65,693 $ 66,383 Allowance for credit losses ( 333 ) ( 423 ) Total $ 65,360 $ 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. Years Ended December 31, 2023 2022 2021 (In thousands) Balance at the beginning of the period $ 423 $ 337 $ 519 Provision for (release of) expected credit losses ( 90 ) 86 ( 182 ) Balance at the end of the period $ 333 $ 423 $ 337 91 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Property and Equipment, Net The components of property and equipment are as follows: As of December 31, 2023 2022 (In thousands) Machinery and equipment $ 14,148 $ 12,696 Software 15,639 15,606 Computer equipment 1,438 3,992 Leasehold improvements 4,661 4,657 Furniture and fixtures 2,544 2,554 Total property and equipment, gross 38,430 39,505 Accumulated depreciation ( 33,669 ) ( 32,169 ) Total property and equipment, net (1) $ 4,761 $ 7,336 _________________________ (1) $ 1.0 million and $ 1.7 million property and equipment, net was included in the sublease arrangement for the San Jose office building as of December 31, 2023 and 2022, respectively. Depreciation expense pertaining to property and equipment was $ 4.7 million, $ 4.8 million and $ 5.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. Goodwill We have determined that no event occurred or circumstances changed during the year ended December 31, 2023 that would more likely than not reduce the fair value of goodwill below the carrying amount. No goodwill impairment was recognized in the years ended December 31, 2023, 2022 and 2021. Accrued Liabilities As of December 31, 2023 2022 (In thousands) Sales incentives $ 28,187 $ 36,271 Sales returns 17,058 18,656 Compensation 13,278 15,556 Cloud and other costs 10,985 11,154 Other 18,701 17,218 Total $ 88,209 $ 98,855 92 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5. Fair Value Measurements The following table summarizes assets measured at fair value on a recurring basis: As of December 31 2023 2022 (In thousands) Cash equivalents: money-market funds (<90 days) $ 5,782 $ 12,614 Cash equivalents: U.S. Treasuries (<90 days) 520 20,274 Available-for-sale securities: U.S. Treasuries (1) 79,974 29,700 Total $ 86,276 $ 62,588 _________________________ (1) Included in short-term investments on the consolidated balance sheets. Our investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. As of December 31, 2023 and 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 December 31, 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 the consolidated balance sheets. The restructuring charges are included in others in the consolidated statements of comprehensive loss. Restructuring activities for the year ended December 31, 2023 are as follows: Total Severance Expense Office Exit Expense Other Exit Expense (In thousands) Balance as of December 31, 2021 $ — $ — $ — $ — Restructuring charges 1,805 798 928 79 Cash payments ( 588 ) ( 579 ) — ( 9 ) Non-cash and other adjustments 48 — 63 ( 15 ) Balance as of December 31, 2022 $ 1,265 $ 219 $ 991 $ 55 Restructuring charges 692 564 117 11 Cash payments ( 1,479 ) ( 694 ) ( 745 ) ( 40 ) Non-cash and other adjustments ( 26 ) — — ( 26 ) Balance as of December 31, 2023 $ 452 $ 89 $ 363 $ — Total costs incurred inception to date $ 2,746 $ 1,609 $ 1,073 $ 64 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”). 93 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 December 31, 2023, we had unused borrowing capacity of $ 13.9 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 December 31, 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 December 31, 2023. 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 $ 5.9 million, $ 7.1 million, and $ 7.0 million for the years ended December 31, 2023, 2022 and 2021, respectively. On June 29, 2021, we entered into a sublease agreement with Vocera Communications, Inc. for approximately 78,000 rentable square feet of office space located at 3030 Orchard Parkway in San Jose, California. The initial term of the 94 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) sublease commenced on February 1, 2022, and will expire on June 30, 2029, unless earlier terminated in accordance with the sublease. The sublease income was $ 2.0 million, $ 2.0 million, and $ 0.5 million which is recorded as a reduction of lease expense for the years ended December 31, 2023, 2022, and 2021, respectively. Supplemental cash flow information related to operating leases is as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 6,756 $ 6,375 $ 6,497 Right-of-use assets obtained in exchange for lease liabilities Operating leases $ 1,873 $ 3,470 $ 1,646 Weighted average remaining lease term and weighted average discount rate related to operating leases were as follows: As of December 31, 2023 2022 Weighted average remaining lease term 5.0 years 5.1 years Weighted average discount rate 5.74 % 5.69 % The future minimum undiscounted lease payments under operating leases and future non-cancelable rent payments from our subtenants for each of the next five years and thereafter as of December 31, 2023 were as follows: Operating Lease Payments Sublease Payments Net (In thousands) 2024 $ 5,301 $ ( 1,947 ) $ 3,354 2025 4,492 ( 2,006 ) 2,486 2026 4,637 ( 2,066 ) 2,571 2027 4,598 ( 2,322 ) 2,276 2028 3,663 ( 2,392 ) 1,271 Thereafter 1,751 ( 1,228 ) 523 Total future lease payments $ 24,442 $ ( 11,961 ) $ 12,481 Less: interest ( 3,210 ) Present value of future minimum lease payments $ 21,232 Accrued liabilities $ 4,211 Non-current operating lease liabilities 17,021 Total lease liabilities $ 21,232 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 December 31, 2023, we had $ 3.6 million of unused letters of credit outstanding, of which $ 3.1 million pertains to the lease arrangement in San Jose, California. 95 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 December 31, 2023, we had $ 40.2 million in non-cancelable purchase commitments with suppliers. As of December 31, 2023, an additional $ 31.4 million of purchase orders beyond contractual termination periods have been issued to supply chain partners in anticipation of demand requirements. Consequently, we may incur expenses for the materials and components, such as chipsets already purchased by the supplier to fulfill our orders if the purchase order is cancelled. Expenses incurred have historically not been significant relative to the original order value. As of December 31, 2023, the loss liability from committed purchases was not material. Warranty Obligations Changes in warranty obligations, which are included in accrued liabilities in the consolidated balance sheets, were as follows: Year Ended December 31, 2023 2022 2021 (In thousands) Balance at the beginning of the period $ 1,174 $ 1,330 $ 2,451 Provision for (release of) warranty obligations 286 145 ( 655 ) Settlements ( 267 ) ( 301 ) ( 466 ) Balance at the end of the period $ 1,193 $ 1,174 $ 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. 96 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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”), against us and certain of our executives and directors. The plaintiffs in the State Action alleged 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 sought unspecified monetary damages and other relief on behalf of investors who purchased Company common stock issued pursuant and/or traceable to the IPO. On May 5, 2021, the court instructed plaintiffs Perros, Patel, and Pham (“Plaintiffs”) 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. 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. 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. On May 5, 2023, the Court of Appeal affirmed the trial court’s dismissal of the State Action. On June 14, 2023, Plaintiffs filed a petition for review in the Supreme Court of California. 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 was filed, and the State Action has terminated. 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 December 31, 2023 and 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 December 31, 2023, 3.5 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 . During the year ended December 31, 2022, the Compensation and Human Capital Committee of the Board of Directors (the “Committee”) unanimously approved amendments to the 2018 Plan to, among other things, reserve an additional 3,000,000 shares of our common stock to be used exclusively for grants of awards to individuals who were not previously employees or non-employee directors (or following a bona fide period of non-employment), as an inducement material to the individual’s entry into employment with us within the meaning of Rule 303A.08 of the New York Stock Exchange (the “NYSE”) Listed Company Manual (“Rule 303A.08”). The 2018 Plan was amended by the Committee without stockholder approval pursuant to Rule 303A.08. 97 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On January 19, 2024, we registered an aggregate of up to 4,759,901 shares of common stock on a Registration Statement on Form S-8, including 3,807,921 shares issuable pursuant to the 2018 Plan that were automatically added to the shares authorized for issuance under the 2018 Plan and 951,980 shares issuable pursuant to the Employee Stock Purchase Plan (“ESPP”) that were automatically added to the shares authorized for issuance on January 1, 2024, both pursuant to an “evergreen” provision contained in the respective plans. The following table sets forth the available shares for grants as of December 31, 2023: Number of Shares (In thousands) Shares available for grants at the beginning of the period 4,213 Additional authorized shares 3,555 Granted ( 8,381 ) Forfeited / cancelled 611 Shares traded for taxes 3,518 Shares available for grants at the end of the period 3,516 Employee Stock Purchase Plan We sponsor the ESPP to eligible employees. As of December 31, 2023, 1.8 million shares were available for issuance under the ESPP. The following table sets forth the weighted average assumptions used to estimate the fair value of purchase rights granted under the ESPP. As of December 31, 2023 2022 2021 Expected life (in years) 0.5 0.5 0.5 Risk-free interest rate 4.97 % 3.29 % 0.07 % Expected volatility 64.0 % 69.2 % 63.8 % 98 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Option Activity We granted no options during the years ended December 31, 2023, 2022, and 2021. Stock option activity during the year ended of December 31, 2023 was as follows: Number of Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (In thousands) (In dollars) (In years) (In thousands) Outstanding as of December 31, 2022 2,082 $ 10.24 Granted — — Exercised ( 974 ) 7.76 Forfeited/ cancelled — — Expired ( 12 ) 7.55 Outstanding as of December 31, 2023 1,096 $ 12.48 3.48 $ 483 Vested and expected to vest as of December 31, 2023 1,096 $ 12.48 3.48 $ 483 Exercisable Options as of December 31, 2023 1,096 $ 12.48 3.48 $ 483 Year Ended December 31, 2023 2022 2021 (In millions) Total intrinsic value of options exercised $ 1.8 $ 0.9 $ 2.2 Total fair value of options vested $ — $ 2.3 $ 2.6 RSU Activity RSU activity, excluding PSU activity, during the year ended of December 31, 2023 was as follows: Number of Shares Weighted Average Grant Date Fair Value Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (In thousands) (In dollars) (In years) (In thousands) Outstanding as of December 31, 2022 9,487 $ 6.36 Granted 6,331 5.28 Vested ( 6,179 ) 5.58 Forfeited ( 596 ) 6.22 Outstanding as of December 31, 2023 9,043 $ 6.15 1.37 $ 86,085 Year Ended December 31, 2023 2022 2021 (In millions, except per share data) Total intrinsic value of RSUs vested (the release date fair value) $ 38.9 $ 41.4 $ 36.4 Total fair value of RSUs vested (the grant date fair value) $ 34.4 $ 34.0 $ 31.3 RSU granted weighted-average fair value per share $ 5.28 $ 7.23 $ 7.32 99 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 year ended of December 31, 2023 was as follows: Number of Shares Weighted Average Grant Date Fair Value Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (In thousands) (In dollars) (In years) (In thousands) Outstanding as of December 31, 2022 4,041 $ 6.22 Granted 2,050 4.56 Vested ( 2,237 ) 5.55 Forfeited ( 3 ) 8.28 Outstanding as of December 31, 2023 3,851 $ 5.72 1.00 $ 36,661 Year Ended December 31, 2023 2022 2021 (In millions, except per share data) Total intrinsic value of PSUs vested (the release date fair value) $ 17.7 $ 4.8 $ 1.4 Total fair value of PSUs vested (the grant date fair value) $ 12.4 $ 2.7 $ 0.6 PSU granted weighted-average fair value per share $ 4.56 $ 6.52 $ 6.74 Stock-Based Compensation Expense The following table sets forth the stock-based compensation expense included in our consolidated statements of comprehensive loss: Year Ended December 31, 2023 2022 2021 (In thousands) Cost of revenue $ 3,533 $ 4,841 $ 3,917 Research and development 12,700 12,317 10,865 Sales and marketing 5,899 6,290 5,392 General and administrative 25,816 25,028 17,856 Total $ 47,948 $ 48,476 $ 38,030 As of December 31, 2023, all outstanding options were fully vested, therefore, there was no unrecognized compensation cost related to stock options. Approximately $ 58.6 million of unrecognized compensation cost related to unvested RSUs and PSUs is expected to be recognized over a weighted-average period of 1.7 years as of December 31, 2023. 100 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the years ended December 31, 2023, 2022, and 2021, we settled executive and employee bonuses by granting and issuing restricted stock units (non-cash financing activities) that vested immediately amounting to $ 13.5 million, $ 8.7 million, and $ 15.1 million, respectively. 401(K) Plan We have a 401(K) Plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. We match 50 % of contributions for employees up to a maximum of $ 2,000 in employee contributions per fiscal year. During the years ended December 31, 2023, 2022 and 2021, we recognized expense of approximately $ 1.1 million, $ 1.1 million and $ 1.1 million, respectively. Note 10. Income Taxes Income (loss) before provision for income taxes consisted of the following: Year Ended December 31, 2023 2022 2021 (In thousands) United States $ ( 26,266 ) $ ( 60,374 ) $ ( 59,370 ) International 5,405 4,723 4,018 Total $ ( 20,861 ) $ ( 55,651 ) $ ( 55,352 ) Provision for income taxes consisted of the following: Year Ended December 31, 2023 2022 2021 (In thousands) Current: U.S. Federal $ 88 $ 166 $ — State 273 87 21 Foreign 697 601 989 1,058 854 1,010 Deferred: U.S. Federal — — — State — — — Foreign 117 121 ( 333 ) 117 121 ( 333 ) Total $ 1,175 $ 975 $ 677 101 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The effective tax rate differed from the U.S. federal income tax rate as follows: Year Ended December 31, 2023 2022 2021 Tax benefit at U.S. federal income tax rate 21.0 % 21.0 % 21.0 % State tax benefit, net of federal benefit ( 1.0 ) % 1.9 % 2.9 % Impact of international operations 3.1 % 1.3 % 1.3 % FDII deduction 1.8 % — % — % U.S. taxes on foreign entities — % — % ( 3.9 ) % Stock-based compensation ( 22.5 ) % ( 7.3 ) % ( 3.0 ) % U.S. federal tax credits 13.8 % 3.7 % 1.6 % Change in valuation allowance ( 21.7 ) % ( 21.8 ) % ( 20.3 ) % Non-deductible transaction costs ( 0.6 ) % ( 0.1 ) % ( 0.6 ) % Other 0.5 % ( 0.5 ) % ( 0.2 ) % Provision for income taxes ( 5.6 ) % ( 1.8 ) % ( 1.2 ) % The significant components of net deferred tax assets consisted of the following: As of December 31, 2023 2022 (In thousands) Deferred Tax Assets: Accruals and allowances $ 9,377 $ 11,330 Net operating loss carryforwards 18,940 22,622 Stock-based compensation 3,165 3,527 Lease liabilities 4,965 5,706 Deferred revenue 100 409 Tax credit carryforwards 15,775 11,510 Depreciation and amortization 3,231 3,307 Capitalized research and development expenses 50,519 40,016 Total deferred tax assets 106,072 98,427 Deferred Tax Liabilities: Operating lease right-of-use assets ( 2,823 ) ( 3,174 ) Total deferred tax liabilities ( 2,823 ) ( 3,174 ) Valuation Allowance ( 101,977 ) ( 93,869 ) Net deferred tax assets $ 1,272 $ 1,384 102 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Changes in valuation allowance for deferred tax assets were as follows: Year Ended December 31, 2023 2022 2021 (In thousands) Balance at the beginning of the period $ 93,869 $ 81,742 $ 70,496 Additions (1) 13,892 16,798 11,246 Deductions (2) ( 5,784 ) ( 4,671 ) — Balance at the end of the period $ 101,977 $ 93,869 $ 81,742 ________________________ (1) Additions are primarily increases in tax attribute carryforwards and capitalized expenditures for income tax purposes. (2) Deductions present the utilization of U.S. federal and state net operating losses and tax credit attributes. Realization of the deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. We do not anticipate to realize the net U.S. federal and state deferred tax assets and certain foreign tax attributes, which have been fully offset by a valuation allowance. As of December 31, 2023 and 2022, the valuation allowance was $ 102.0 million and $ 93.9 million, respectively. The utilization of net operating loss and credit carryforwards may be subject to annual limitation due to the ownership changes provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of portions of the net operating loss and tax credit carryforwards before utilization. As of December 31, 2023, net operating loss carryforwards consisted of the following: Amount Beginning Year of Expiration (in thousands) U.S. federal (1) $ 7,736 2031 U.S. federal (1)(2) 62,798 Indefinite California 36,888 2028 Other states 35,489 2024 _________________________ (1) All of the losses are subject to annual usage limitations under Internal Revenue Code Section 382. (2) All of the losses are subject to usage limitation of 80% of taxable income in a year when the losses will be utilized. As of December 31, 2023, tax credit carryforwards consisted of the following: Amount Beginning Year of Expiration (in thousands) U.S. federal $ 9,249 2039 California 8,662 Indefinite Foreign 2,766 2041 As of December 31, 2023, withholding taxes and state income taxes expected to be incurred on the foreign subsidiaries’ earnings that are not indefinitely reinvested are immaterial. 103 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A reconciliation of the beginning and ending amount of gross unrecognized tax benefits was as follows: Year Ended December 31, 2023 2022 2021 (In thousands) Balance at the beginning of the period $ 2,763 $ 1,736 $ 1,355 Additions for tax positions taken during the current year 679 765 444 Additions (reductions) for tax positions taken during a prior year 133 275 ( 58 ) Reductions as a result of a lapse of the applicable statute of limitations ( 21 ) ( 13 ) ( 5 ) Balance at the end of the period $ 3,554 $ 2,763 $ 1,736 The total amount of unrecognized tax benefits, including immaterial interest and penalties, was $ 3.6 million and $ 2.8 million as of December 31, 2023 and 2022, respectively. We recognize interest and penalties accrued related to unrecognized tax benefits as part of the provision for income taxes. We file income tax returns in the U.S. and numerous foreign jurisdictions. We are subject to income tax examinations by taxing authorities globally for years ending or after December 31, 2018. IRS audit of the consolidated returns of NETGEAR for which Arlo was a part of in 2018, had been closed with no findings, while the 2018 California Franchise Tax Board and 2016-2018 Texas Franchise tax audits are still in progress. Our estimate of the potential outcome of any uncertain tax positions is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. We believe that the estimate has adequately reflected these matters. However, the future results may include adjustments to estimates in the period the audits will be resolved, which may impact the effective tax rate. We don't expect a significant change in unrecognized tax benefits within the next twelve months. Note 11. Net Loss Per Share Year Ended December 31, 2023 2022 2021 (In thousands, except for per share data) Numerator: Net loss $ ( 22,036 ) $ ( 56,626 ) $ ( 56,029 ) Denominator: Weighted average common shares - basic and diluted 92,754 87,173 82,688 Basic and diluted net loss per share $ ( 0.24 ) $ ( 0.65 ) $ ( 0.68 ) Anti-dilutive employee stock-based awards, excluded 1,776 5,451 5,041 104 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO 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 geographic area is generally based upon the bill-to location of the customer. The following table presents revenue by geographic area. Year Ended December 31, 2023 2022 2021 (In thousands) United States $ 299,360 $ 268,435 $ 265,844 Spain 113,826 135,896 83,779 Ireland 20,148 44,287 40,877 Other countries 57,842 41,796 44,637 Total $ 491,176 $ 490,414 $ 435,137 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 December 31, 2023 2022 (In thousands) United States $ 13,372 $ 17,762 Other countries 2,839 2,383 Total $ 16,211 $ 20,145 105 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.