Arlo Technologies, Inc. 10-Q

Item 1. Financial Statements ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS As of March 31, 2024 December 31, 2023 (In thousands, except share and per share data) ASSETS Current assets: Cash and cash equivalents $ 62,054 $ 56,522 Short-term investments 80,809 79,974 Accounts receivable, net 56,496 65,360 Inventories 44,676 38,408 Prepaid expenses and other current assets 11,896 10,271 Total current assets 255,931 250,535 Property and equipment, net 4,311 4,761 Operating lease right-of-use assets, net 10,697 11,450 Goodwill 11,038 11,038 Restricted cash 4,183 4,131 Other non-current assets 3,602 3,623 Total assets $ 289,762 $ 285,538 LIABILITIES AND STOCKHOLDERS ’ EQUITY Current liabilities: Accounts payable $ 69,878 $ 55,201 Deferred revenue 21,394 18,041 Accrued liabilities 79,100 88,209 Total current liabilities 170,372 161,451 Non-current operating lease liabilities 16,133 17,021 Other non-current liabilities 3,320 3,790 Total liabilities 189,825 182,262 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: 97,202,042 at March 31, 2024 and 95,380,281 at December 31, 2023 97 95 Additional paid-in capital 476,665 470,322 Accumulated other comprehensive income 280 320 Accumulated deficit ( 377,105 ) ( 367,461 ) Total stockholders’ equity 99,937 103,276 Total liabilities and stockholders’ equity $ 289,762 $ 285,538 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Three Months Ended March 31, 2024 April 2, 2023 (In thousands, except per share data) Revenue: Products $ 67,493 $ 67,060 Services 56,707 43,944 Total revenue 124,200 111,004 Cost of revenue: Products 63,224 64,041 Services 13,596 11,746 Total cost of revenue 76,820 75,787 Gross profit 47,380 35,217 Operating expenses: Research and development 20,793 17,750 Sales and marketing 17,370 15,353 General and administrative 19,348 15,622 Others 479 632 Total operating expenses 57,990 49,357 Loss from operations ( 10,610 ) ( 14,140 ) Interest income, net 1,386 726 Other loss, net ( 25 ) ( 39 ) Loss before income taxes ( 9,249 ) ( 13,453 ) Provision for income taxes 395 792 Net loss $ ( 9,644 ) $ ( 14,245 ) Net loss per share: Basic and diluted $ ( 0.10 ) $ ( 0.16 ) Weighted average shares used to compute net loss per share: Basic and diluted 96,264 89,653 Comprehensive loss: Net loss $ ( 9,644 ) $ ( 14,245 ) Other comprehensive income (loss), net of tax ( 40 ) 128 Total comprehensive loss $ ( 9,684 ) $ ( 14,117 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Three Months Ended March 31, 2024 April 2, 2023 (In thousands) Total stockholders’ equity, beginning balances $ 103,276 $ 87,695 Common stock: Beginning balances $ 95 $ 89 Issuance of common stock under stock-based compensation plans 3 3 Restricted stock unit withholdings ( 1 ) ( 1 ) Ending balances $ 97 $ 91 Additional paid-in capital: Beginning balances $ 470,322 $ 433,138 Stock-based compensation expense 13,224 10,270 Settlement of liability classified restricted stock units 6,903 6,739 Issuance of common stock under stock-based compensation plans 570 355 Restricted stock unit withholdings ( 14,354 ) ( 4,693 ) Ending balances $ 476,665 $ 445,809 Accumulated deficit: Beginning balances $ ( 367,461 ) $ ( 345,425 ) Net loss ( 9,644 ) ( 14,245 ) Ending balances $ ( 377,105 ) $ ( 359,670 ) Accumulated other comprehensive income: Beginning balances $ 320 $ ( 107 ) Other comprehensive income (loss), net of tax ( 40 ) 128 Ending balances $ 280 $ 21 Total stockholders’ equity, ending balances $ 99,937 $ 86,251 Common stock shares: Beginning balances 95,380 88,887 Issuance of common stock under stock-based compensation plans 3,221 3,165 Restricted stock unit withholdings ( 1,399 ) ( 1,267 ) Ending balances 97,202 90,785 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2024 April 2, 2023 (In thousands) Cash flows from operating activities: Net loss $ ( 9,644 ) $ ( 14,245 ) Adjustments to reconcile net loss to net cash provided by operating activities: Stock-based compensation expense 18,550 14,591 Depreciation and amortization 903 1,149 Allowance for credit losses and non-cash changes to reserves ( 107 ) 198 Deferred income taxes 68 127 Other ( 792 ) ( 124 ) Changes in assets and liabilities: Accounts receivable 8,978 13,216 Inventories ( 6,275 ) 6,341 Prepaid expenses and other assets ( 1,672 ) ( 900 ) Accounts payable 14,561 ( 6,093 ) Deferred revenue 3,427 3,785 Accrued and other liabilities ( 8,191 ) ( 7,716 ) Net cash provided by operating activities 19,806 10,329 Cash flows from investing activities: Purchases of property and equipment ( 356 ) ( 923 ) Purchases of short-term investments ( 40,802 ) ( 36,755 ) Proceeds from maturities of short-term investments 40,718 15,006 Net cash used in investing activities ( 440 ) ( 22,672 ) Cash flows from financing activities: Proceeds related to employee benefit plans 573 3 Restricted stock unit withholdings ( 14,355 ) ( 4,694 ) Net cash used in financing activities ( 13,782 ) ( 4,691 ) Net increase (decrease) in cash, cash equivalents, and restricted cash 5,584 ( 17,034 ) Cash, cash equivalents, and restricted cash , at beginning of period 60,653 88,179 Cash, cash equivalents, and restricted cash , at end of period $ 66,237 $ 71,145 Reconciliation of cash, cash equivalents, and restricted cash to Unaudited Condensed Consolidated Balance Sheets Cash and cash equivalents $ 62,054 $ 66,970 Restricted cash 4,183 4,175 Total cash, cash equivalents, and restricted cash $ 66,237 $ 71,145 Supplemental cash flow information: Non-cash investing activities: Purchases of property and equipment included in accounts payable and accrued liabilities $ 180 $ 894 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Description of Business and Basis of Presentation Description of Business Arlo Technologies, Inc. (“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 unaudited condensed consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated financial statements include the accounts of Arlo and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, which was filed with the SEC on February 29, 2024. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair statement of the unaudited condensed consolidated financial statements for interim periods. Fiscal Periods Our fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. We report the results on a fiscal quarter basis rather than on a calendar quarter basis. Under the fiscal quarter basis, each of the first three fiscal quarters ends on the Sunday closest to the calendar quarter end, with the fourth quarter ending on December 31. Reclassification Certain prior periods amounts have been reclassified to conform to the current period’s presentation. None of these reclassifications had a material impact to the unaudited condensed consolidated financial statements. 7 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Use of Estimates The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Management bases its estimates on various assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates and operating results for the three months ended March 31, 2024 and are not necessarily indicative of the results that may be expected for the year ending December 31, 2024 or any future period. Note 2. Significant Accounting Policies and Recent Accounting Pronouncements Our significant accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no significant changes to such policies during the three months ended March 31, 2024. Accounting Pronouncements Recently Adopted There were no accounting pronouncements adopted during the three months ended March 31, 2024. 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 financial statements and related disclosures. 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 that 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 that this guidance may have on our financial statements and related disclosures. 8 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 3. Revenue Performance Obligations The total estimated service revenue expected to be recognized in the future related to performance obligations that are unsatisfied and partially unsatisfied was $ 23.5 million as of March 31, 2024 and $ 18.8 million as of December 31, 2023, substantially related to a performance obligation classified as less than one year . For the three months ended March 31, 2024 and April 2, 2023, $ 52.7 million and $ 41.2 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $ 49.2 million and $ 38.4 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. Approximately $ 12.1 million and $ 8.4 million of this recognized revenue was included in the contract liability balance at the beginning of the periods. There were no significant changes in estimates during the period that would affect the contract balances. During the five-year period that commenced on January 1, 2020, Verisure Sàrl (“Verisure”) has an aggregate purchase commitment of $ 500.0 million. As of March 31, 2024, the entire purchase commitment has been fulfilled. Based on the Supply Agreement with Verisure, a purchase obligation is not deemed to exist until we receive and accept Verisure’s purchase order. As of March 31, 2024, we had a backlog of $ 44.5 million which represents performance obligations that will be recognized as revenue once fulfilled, which is expected to occur over the next six months . On April 25, 2024, Verisure notified us that it is exercising its right under the Supply Agreement to extend the term for another five years (through November 2029) under the same terms but without minimum purchase obligations. 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. Three Months Ended March 31, 2024 April 2, 2023 (In thousands) Americas $ 57,169 $ 56,632 EMEA 61,380 48,472 APAC 5,651 5,900 Total $ 124,200 $ 111,004 As of March 31, 2024 and December 31, 2023, one customer accounted for 69.9 %, and three customers accounted for 37.1 %, 15.2 %, and 10.2 % of the total accounts receivable, net, respectively. No other customers accounted for 10% or greater of the total accounts receivable, net. For the three months ended March 31, 2024 and April 2, 2023, one customer accounted for 49.4 % and 43.7 %, respectively. No other customers accounted for 10% or greater of the total revenue. 9 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 4. Balance Sheet Components Short-Term Investments As of March 31, 2024 As of December 31, 2023 Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value (In thousands) U.S. Treasuries $ 80,529 $ 280 $ — $ 80,809 $ 79,654 $ 320 $ — $ 79,974 Accounts Receivable, Net As of March 31, 2024 December 31, 2023 (In thousands) Gross accounts receivable $ 56,714 $ 65,693 Allowance for credit losses ( 218 ) ( 333 ) Total $ 56,496 $ 65,360 The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected. Three Months Ended March 31, 2024 April 2, 2023 (In thousands) Balance at the beginning of the period $ 333 $ 423 Provision for (release of) expected credit losses ( 115 ) ( 94 ) Balance at the end of the period $ 218 $ 329 10 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Property and Equipment, Net The components of property and equipment are as follows: As of March 31, 2024 December 31, 2023 (In thousands) Machinery and equipment $ 14,531 $ 14,148 Software 15,676 15,639 Computer equipment 855 1,438 Leasehold improvements 4,572 4,661 Furniture and fixtures 2,544 2,544 Total property and equipment, gross 38,178 38,430 Accumulated depreciation ( 33,867 ) ( 33,669 ) Total property and equipment, net (1) $ 4,311 $ 4,761 _________________________ (1) $ 0.8 million and $ 1.0 million property and equipment, net, was included in the sublease arrangement for the San Jose office building as of March 31, 2024 and December 31, 2023, respectively. Depreciation expense pertaining to property and equipment was $ 0.9 million and $ 1.1 million for the three months ended March 31, 2024 and April 2, 2023, respectively. Goodwill We have determined that no event occurred or circumstances changed during the three months ended March 31, 2024 that would more likely than not reduce the fair value of goodwill below the carrying amount. No goodwill impairment was recognized in the three months ended March 31, 2024 and April 2, 2023. Accrued Liabilities As of March 31, 2024 December 31, 2023 (In thousands) Sales incentives $ 22,941 $ 28,187 Sales returns 11,558 17,058 Compensation 15,240 13,278 Cloud and other costs 9,085 10,985 Other 20,276 18,701 Total $ 79,100 $ 88,209 11 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 5. Fair Value Measurements The following table summarizes assets measured at fair value on a recurring basis: As of March 31, 2024 December 31, 2023 (In thousands) Cash equivalents: money-market funds (<90 days) $ 6,314 $ 5,782 Cash equivalents: U.S. Treasuries (<90 days) 264 520 Available-for-sale securities: U.S. Treasuries (1) 80,809 79,974 Total $ 87,387 $ 86,276 _________________________ (1) Included in short-term investments on our unaudited condensed consolidated balance sheets. Our investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. As of March 31, 2024 and December 31, 2023, 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. 12 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 March 31, 2024, we have substantially incurred all costs pertaining to restructuring activities, with related cash outflows extending until the fourth quarter of 2024. The restructuring liabilities are included in accrued liabilities in our unaudited condensed consolidated balance sheets. The restructuring charges are included in “Others” in the unaudited condensed consolidated statements of comprehensive loss. Restructuring activity is 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 $ — Restructuring charges 484 484 — — Cash payments ( 640 ) ( 525 ) ( 115 ) — Non-cash and other adjustments — — — — Balance as of March 31, 2024 $ 296 $ 48 $ 248 $ — Total costs incurred inception to date $ 3,003 $ 1,846 $ 1,108 $ 49 13 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 7. Revolving Credit Facility On October 27, 2021, we entered into a Loan and Security Agreement (the “Credit Agreement”) with Bank of America, N.A., a national banking association, as lender (the “Lender”). The Credit Agreement provides for a three-year revolving credit facility (the “Credit Facility”) that matures on October 27, 2024. Borrowings under the Credit Facility are limited to the lesser of (x) $ 40.0 million, and (y) an amount equal to the borrowing base. The borrowing base will be the sum of (i) 90 % of investment grade eligible receivables and (ii) 85 % of non-investment grade eligible accounts, less applicable reserves established by the Lender. The Credit Agreement also includes a $ 5.0 million sublimit for the issuance by the Lender of letters of credit. In addition, the Credit Agreement includes an uncommitted accordion feature that allows us to request, from time to time, that the Lender increase the aggregate revolving loan commitments by up to an additional $ 25.0 million in the aggregate, subject to the satisfaction of certain conditions, including obtaining the Lender’s agreement to participate in each increase. The proceeds of the borrowings under the Credit Facility may be used for working capital and general corporate purposes. Based on certain terms and conditions including eligible accounts receivable as of March 31, 2024, we had unused borrowing capacity of $ 4.2 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, 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 March 31, 2024, 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 March 31, 2024. 14 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 8. Commitments and Contingencies Operating Leases Our operating lease obligations mostly include offices, equipment, and distribution centers, with various expiration dates through June 2029. Certain lease agreements include options to renew or terminate the lease, which are not reasonably certain to be exercised and therefore are not factored into our determination of lease payments. The terms of certain leases provide for rental payments on a graduated scale. Gross lease expense was $ 1.5 million for each of the three months ended March 31, 2024 and April 2, 2023. We recorded sublease income as reduction of lease expense, in the amount of $ 0.5 million for each of the three months ended March 31, 2024 and April 2, 2023. Supplemental cash flow information related to operating leases is as follows: Three Months Ended March 31, 2024 April 2, 2023 (In thousands) Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 1,516 $ 1,889 Weighted average remaining lease term and weighted average discount rate related to operating leases are as follows: As of March 31, 2024 December 31, 2023 Weighted average remaining lease term 4.8 years 5.0 years Weighted average discount rate 5.74 % 5.74 % 15 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The future minimum undiscounted lease payments under operating leases and future non-cancelable rent payments from our subtenants for each of the next five years and thereafter as of March 31, 2024 are as follows: Operating Lease Payments Sublease Payments Net (In thousands) 2024 (Remaining nine months) $ 3,923 $ ( 1,598 ) $ 2,325 2025 4,488 ( 2,006 ) 2,482 2026 4,631 ( 2,066 ) 2,565 2027 4,594 ( 2,322 ) 2,272 2028 3,659 ( 2,392 ) 1,267 Thereafter 1,750 ( 1,228 ) 522 Total future lease payments $ 23,045 $ ( 11,612 ) $ 11,433 Less: imputed interest ( 2,909 ) Present value of future minimum lease payments $ 20,136 Accrued liabilities $ 4,003 Non-current operating lease liabilities 16,133 Total lease liabilities $ 20,136 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 March 31, 2024, 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. 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 March 31, 2024, we had $ 40.0 million in non-cancelable purchase commitments with suppliers which is expected to be paid over the next twelve months . As of March 31, 2024, an additional $ 29.4 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 material relative to the original order value. 16 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Warranty Obligations Changes in warranty obligations, which are included in accrued liabilities in the unaudited condensed consolidated balance sheets, are as follows: Three Months Ended March 31, 2024 April 2, 2023 (In thousands) Balance at the beginning of the period $ 1,193 $ 1,174 Provision for warranty obligations 143 15 Settlements ( 71 ) ( 70 ) Balance at the end of the period $ 1,265 $ 1,119 Litigation and Other Legal Matters We are involved in disputes, litigation, and other legal actions. 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. 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 March 31, 2024 and December 31, 2023, we have not incurred any material costs as a result of such indemnifications and we are not currently aware of any indemnification claims. 17 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 9. Employee Benefit Plans We grant options and restricted stock units (“RSUs”) under the 2018 Equity Incentive Plan (the “2018 Plan”), under which awards may be granted to all employees. We also grant performance-based and market-based restricted stock units (“PSUs”) to our executive officers periodically. Award vesting periods for the 2018 Plan are generally three to four years . As of March 31, 2024, approximately 3.8 million shares were available for future grants. Options may be granted for periods of up to 10 years or such shorter term as may be provided in the agreement and at prices no less than 100 % of the fair market value of Arlo’s common stock on the date of grant. Options granted under the 2018 Plan generally vest over four years , the first tranche at the end of 12 months and the remaining shares underlying the option vesting monthly over the remaining three years . On January 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 March 31, 2024: Number of Shares (In thousands) Shares available for grants as of December 31, 2023 3,516 Additional authorized shares 3,808 Granted ( 5,257 ) Forfeited / cancelled 327 Shares traded for taxes 1,399 Shares available for grants as of March 31, 2024 3,793 Employee Stock Purchase Plan We sponsor the ESPP to eligible employees. As of March 31, 2024, 2.8 million shares were available for issuance under the ESPP. Option Activity We granted no options during the three months ended March 31, 2024. Stock option activity during the three months ended March 31, 2024 was as follows: Number of Shares Weighted Average Exercise Price Per Share (In thousands) (In dollars) Outstanding as of December 31, 2023 1,096 $ 12.48 Granted — $ — Exercised ( 68 ) $ 8.35 Forfeited / cancelled — $ — Expired — $ — Outstanding as of March 31, 2024 1,028 $ 12.76 Vested and exercisable as of March 31, 2024 1,028 $ 12.76 18 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) RSU Activity RSU activity, excluding PSU activity, during the three months ended March 31, 2024 was as follows: Number of Shares Weighted Average Grant Date Fair Value Per Share (In thousands) (In dollars) Outstanding as of December 31, 2023 9,043 $ 6.15 Granted 2,332 $ 9.79 Vested ( 2,411 ) $ 7.63 Forfeited ( 301 ) $ 6.49 Outstanding as of March 31, 2024 8,663 $ 6.71 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 three months ended March 31, 2024 was as follows: Number of Shares Weighted Average Grant Date Fair Value Per Share (In thousands) (In dollars) Outstanding as of December 31, 2023 3,851 $ 5.72 Granted 2,924 $ 9.12 Vested ( 742 ) $ 4.59 Forfeited ( 25 ) $ 4.33 Outstanding as of March 31, 2024 6,008 $ 7.52 Stock-Based Compensation Expense The following table sets forth the stock-based compensation expense included in our unaudited condensed consolidated statements of comprehensive loss: Three Months Ended March 31, 2024 April 2, 2023 (In thousands) Cost of revenue $ 1,371 $ 860 Research and development 4,904 3,911 Sales and marketing 2,240 1,722 General and administrative 10,035 8,098 Total $ 18,550 $ 14,591 19 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of March 31, 2024, all outstanding options were fully vested; therefore, there was no unrecognized compensation cost related to stock options. Approximately $ 83.3 million of unrecognized compensation cost related to unvested RSUs and PSUs is expected to be recognized over a weighted-average period of 1.5 years as of March 31, 2024. During the three months ended March 31, 2024 and April 2, 2023, we settled executive and employee bonuses by granting and issuing restricted stock units (non-cash financing activities) that vested immediately amounting to $ 6.9 million and $ 6.7 million, respectively. Note 10. Income Taxes The provision for income taxes for the three months ended March 31, 2024 was $ 0.4 million or an effective tax rate of ( 4.3 )%. The provision for income taxes for the three months ended April 2, 2023 was $ 0.8 million or an effective tax rate of ( 5.9 )%. During the three months ended March 31, 2024 and April 2, 2023, we sustained U.S. book losses. Consistent with the prior year periods, we maintained a valuation allowance against our U.S. federal and state deferred tax assets and did not record a tax benefit on these deferred tax assets since it is more likely than not that these deferred tax assets will not be realized. Provision for income taxes decreased for the three months ended March 31, 2024, compared to the prior year period, primarily due to (i) foreign-derived intangible income (“FDII”) and higher Section 174 amortization in the U.S. and (ii) the utilization of R&D credit in Ireland to partially offset its tax liability. Note 11. Net Loss Per Share Three Months Ended March 31, 2024 April 2, 2023 (In thousands, except per share data) Numerator: Net loss $ ( 9,644 ) $ ( 14,245 ) Denominator: Weighted average common shares - basic and diluted 96,264 89,653 Basic and diluted net loss per share $ ( 0.10 ) $ ( 0.16 ) Anti-dilutive employee stock-based awards, excluded 805 7,859 20 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Note 12. Segment and Geographic Information Segment Information We operate as one operating and reportable segment. Our Chief Executive Officer (“CEO”) is identified as the Chief Operating Decision Maker (“CODM”), who reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Geographic Information for Revenue Revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates, net changes in deferred revenue, and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance. Sales and usage-based taxes are excluded from revenue. For reporting purposes, revenue by geographic area is generally based upon the bill-to location of the customer. The following table presents revenue by geographic area. For comparative purposes, amounts in prior period have been recast. Three Months Ended March 31, 2024 April 2, 2023 (In thousands) United States $ 54,375 $ 55,843 Spain 40,406 38,571 Sweden 13,261 5,021 Other countries 16,158 11,569 Total $ 124,200 $ 111,004 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 March 31, 2024 December 31, 2023 (In thousands) United States $ 12,237 $ 13,372 Other countries 2,771 2,839 Total $ 15,008 $ 16,211 21 Table of Contents