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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 (Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 2022
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    

Commission file number: 001-38618
ARLO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter) 
Delaware 38-4061754
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
2200 Faraday Ave.,  Suite #150
Carlsbad, California 92008
(Address of principal executive offices) (Zip Code)
(408) 890-3900
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class  Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 per share ARLO New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer
☐
 Accelerated filer ☒
Non-Accelerated filer
☐
 Smaller reporting company
☐
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐  No  x

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 86,861,053 as of May 6, 2022.

1
ARLO TECHNOLOGIES, INC.

TABLE OF CONTENTS
 
2
PART I: FINANCIAL INFORMATION

Item 1.Financial Statements

ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of
April 3,
2022		 December 31,
2021
(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents $ 100,975  $ 175,749 
Short-term investments (amortized cost of $44,612 and $—)
 44,566  — 
Accounts receivable (net of allowance for credit losses of $339 and $337)
 78,054  79,564 
Inventories 37,038  38,390 
Prepaid expenses and other current assets 9,015  9,919 
Total current assets 269,648  303,622 
Property and equipment, net 8,522  9,595 
Operating lease right-of-use assets, net 13,797  14,814 
Goodwill 11,038  11,038 
Restricted cash 4,114  4,107 
Other non-current assets 4,671  4,314 
Total assets $ 311,790  $ 347,490 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 68,266  $ 84,098 
Deferred revenue 16,460  29,442 
Accrued liabilities 91,732  97,377 
Income tax payable 45  12 
Total current liabilities 176,503  210,929 
Non-current deferred revenue 915  1,344 
Non-current operating lease liabilities 20,308  21,470 
Non-current income taxes payable 94  94 
Other non-current liabilities 1,966  1,001 
Total liabilities 199,786  234,838 
Commitments and contingencies (Note 9)
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: 85,834,841 at April 3, 2022 and 84,453,212 at December 31, 2021
 86  84 
Additional paid-in capital 409,242  401,367 
Accumulated other comprehensive income (46) — 
Accumulated deficit (297,278) (288,799)
Total stockholders’ equity 112,004  112,652 
Total liabilities and stockholders’ equity $ 311,790  $ 347,490 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended
April 3,
2022		 March 28,
2021
(In thousands, except per share data)
Revenue:
Products $ 94,825  $ 59,761 
Services 29,926  22,795 
Total revenue 124,751  82,556 
Cost of revenue:
Products 80,777  47,157 
Services 10,399  9,592 
Total cost of revenue 91,176  56,749 
Gross profit 33,575  25,807 
Operating expenses:
Research and development 16,379  14,791 
Sales and marketing 13,168  11,207 
General and administrative 12,621  11,227 
Separation expense 79  54 
Total operating expenses 42,247  37,279 
Loss from operations (8,672) (11,472)
Interest income (expense), net (5) 24 
Other income (expense), net 411  909 
Loss before income taxes (8,266) (10,539)
Provision for income taxes 213  180 
Net loss $ (8,479) $ (10,719)
Net loss per share:
Basic $ (0.10) $ (0.13)
Diluted $ (0.10) $ (0.13)
Weighted average shares used to compute net loss per share:
Basic 85,222  80,370 
Diluted 85,222  80,370 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4
ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
  Three Months Ended
April 3,
2022		 March 28,
2021
(In thousands)
Net loss $ (8,479) $ (10,719)
Other comprehensive income (loss), before tax:
Unrealized gain (loss) on derivative instruments —  (2)
Unrealized gain (loss) on available-for-sale securities (46) (1)
Total other comprehensive income (loss), before tax (46) (3)
Total other comprehensive income (loss), net of tax (46) (3)
Comprehensive loss $ (8,525) $ (10,722)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5
ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Common Stock

Shares Amount  Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total
(In thousands)
Balance as of December 31, 2021 84,453  $ 84  $ 401,367  $ —  $ (288,799) $ 112,652 
Net loss —  —  —  —  (8,479) (8,479)
Stock-based compensation expense —  —  8,183  —  —  8,183 
Settlement of liability classified RSUs —  —  4,966  —  —  4,966 
Issuance of common stock under stock-based compensation plans 2,127  3  1,385  —  —  1,388 
Restricted stock unit withholdings (745) (1) (6,659) —  —  (6,660)
Change in unrealized gains and losses on available-for-sale securities, net of tax —  —  —  (46) —  (46)
Balance as of April 3, 2022 85,835  $ 86  $ 409,242  $ (46) $ (297,278) $ 112,004 
Common Stock

Shares Amount  Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total
(In thousands)
Balance as of December 31, 2020 79,336  $ 79  $ 366,455  $ 3  $ (232,770) $ 133,767 
Net loss —  —  —  —  (10,719) (10,719)
Stock-based compensation expense —  —  4,871  —  —  4,871 
Settlement of liability classified RSUs —  —  6,458  —  —  6,458 
Issuance of common stock under stock-based compensation plans 2,133  3  4,433  —  —  4,436 
Issuance of common stock under Employee Stock Purchase Plan 353  —  1,697  1,697 
Restricted stock unit withholdings (572) (1) (4,176) —  —  (4,177)
Change in unrealized gains and losses on available-for-sale securities, net of tax —  —  —  (1) —  (1)
Change in unrealized gains and losses on derivatives, net of tax —  —  —  (2) —  (2)
Balance as of March 28, 2021 81,250  $ 81  $ 379,738  $ —  $ (243,489) $ 136,330 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6
ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three Months Ended
April 3,
2022		 March 28,
2021
(In thousands)
Cash flows from operating activities:
Net loss $ (8,479) $ (10,719)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense 9,589  8,340 
Depreciation and amortization 1,302  1,547 
Allowance for credit losses and inventory reserves (135) (562)
Deferred income taxes (9) (130)
Premium amortization (discount accretion) on investments, net 28  (3)
Changes in assets and liabilities:
Accounts receivable, net 1,508  26,522 
Inventories 1,490  9,296 
Prepaid expenses and other assets 556  361 
Accounts payable (15,676) (34,647)
Deferred revenue (13,411) (8,101)
Accrued and other liabilities (1,320) (22,072)
Net cash used in operating activities (24,557) (30,168)
Cash flows from investing activities:
Purchases of property and equipment (298) (803)
Purchases of short-term investments (44,640) — 
Proceeds from maturities of short-term investments —  15,000 
Net cash provided by (used in) investing activities (44,938) 14,197 
Cash flows from financing activities:
Proceeds related to employee benefit plans 1,388  6,133 
Restricted stock unit withholdings (6,660) (4,177)
Net cash provided by (used in) financing activities (5,272) 1,956 
Net decrease in cash and cash equivalents and restricted cash
 (74,767) (14,015)
Cash and cash equivalents and restricted cash, at beginning of period
 179,856  190,291 
Cash and cash equivalents and restricted cash, at end of period
 $ 105,089  $ 176,276 
Non-cash investing and financing activities:
Purchases of property and equipment included in accounts payable and accrued liabilities $ 310  $ 82 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7

ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Note 1.    The Company and Basis of Presentation

The Company

Arlo Technologies, Inc. ("Arlo" or the "Company") combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle. The Company's deep expertise in product design, wireless connectivity, cloud infrastructure and cutting-edge AI capabilities focuses on delivering a seamless, smart home experience for Arlo users that is easy to setup and interact with every day. The Company's 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. The Company conducts business across three geographic regions - Americas; Europe, Middle-East and Africa (“EMEA”); and Asia Pacific (“APAC”), and primarily generates 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.

The Company's corporate headquarters is located in Carlsbad, California with other satellite offices across North America and various other global locations.

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All periods presented have been accounted for 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”).

These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 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

The Company’s fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. The Company reports its 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.

Use of estimates

The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Management bases its estimates on various assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates and operating results for the three months ended April 3, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or any future period.

8


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 2.    Significant Accounting Policies and Recent Accounting Pronouncements

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes during the three months ended April 3, 2022.

Recent accounting pronouncements

Emerging Growth Company Status

As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless the Company otherwise irrevocably elects not to avail itself of this exemption. The Company did not make such an irrevocable election and has not delayed the adoption of any applicable accounting standards.

Accounting Pronouncements Recently Adopted

There were no accounting pronouncements adopted during the three months ended April 3, 2022.

Accounting Pronouncements Not Yet Effective

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its financial statements and related disclosures.

With the exception of the new standard discussed above, there have been no other new accounting pronouncements that have significance, or potential significance, to the Company’s financial position, results of operations, or cash flows.

Note 3.    Deferred Revenue

Deferred Revenue

Deferred revenue consists of advance payments and deferred revenue, where the Company has unsatisfied performance obligations. Deferred revenue consists of prepaid services and customer billings in advance of revenues being recognized from the Company's subscription contracts. Advance payments include prepayments for products and Non-Recurring Engineering ("NRE") services under the Supply Agreement with Verisure S.à.r.l. (“Verisure”).

Transaction Price Allocated to the Remaining Performance Obligations

Remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities, in-transit orders with destination terms, and non-cancellable backlog. Non-cancellable backlog includes goods and services for which customer purchase orders have been accepted and that are scheduled or in the process of being scheduled for shipment.
9


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of April 3, 2022:
1 year 2 years Greater than 2 years Total
(In thousands)
Performance obligations $ 21,122  $ 809  $ 107  $ 22,038 

The performance obligation classified as greater than one year pertains to revenue deferral from prepaid services.

For the three months ended April 3, 2022 and March 28, 2021, $25.8 million and $17.7 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $27.5 million and $21.9 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. $9.0 million and $10.5 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.

Disaggregation of Revenue

The Company conducts business across three geographic regions: Americas, EMEA, and APAC. Sales and usage-based taxes are excluded from revenue. Refer to Note 13, Segment and Geographic Information, for revenue by geography.

Note 4.    Balance Sheet Components

Cash and Cash Equivalents and Restricted cash

The Company maintains certain cash balances restricted as to withdrawal or use. The restricted cash is comprised primarily of cash used as collateral for a letter of credit associated with the Company’s lease agreement in San Jose, California. The Company deposits restricted cash with high credit quality financial institutions. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same amounts shown on the statements of cash flows:
As of
April 3,
2022		 December 31,
2021
(In thousands)
Cash and cash equivalents $ 100,975  $ 175,749 
Restricted cash 4,114  4,107 
Total as presented on the unaudited condensed consolidated statements of cash flows $ 105,089  $ 179,856 
As of
March 28,
2021		 December 31,
2020
(In thousands)
Cash and cash equivalents $ 172,113  $ 186,127 
Restricted cash 4,163  4,164 
Total as presented on the unaudited condensed consolidated statements of cash flows $ 176,276  $ 190,291 
10


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Available-for-sale short-term investments

As of April 3, 2022 As of December 31, 2021
  Cost Unrealized Gains Unrealized Losses Estimated Fair Value Cost Unrealized Gains Unrealized Losses Estimated Fair Value
(In thousands)
U.S. treasuries $ 44,612  $ —  $ (46) $ 44,566  $ —  $ —  $ —  $ — 

The Company’s short-term investments are classified as available-for-sale and consist of government securities with an original maturity or remaining maturity at the time of purchase of greater than three months and no more than twelve months. Accordingly, none of the available-for-sale securities have unrealized losses greater than twelve months. The Company did not recognize any allowance for credit losses related to available for sale short-term investments for the three months ended April 3, 2022.

Accounts receivable, net
As of
April 3,
2022		 December 31,
2021
(In thousands)
Gross accounts receivable $ 78,393  $ 79,901 
Allowance for credit losses (339) (337)
Total accounts receivable, net $ 78,054  $ 79,564 

    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
April 3,
2022		 March 28,
2021
(In thousands)
Balance at the beginning of the period $ 337  $ 519 
Provision for expected credit losses 2  — 
Amounts recovered due to collection —  — 
Balance at the end of the period $ 339  $ 519 

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 as of April 3, 2022.

11


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
April 3,
2022		 December 31,
2021
(In thousands)
Machinery and equipment $ 13,531  $ 13,302 
Software 13,670  13,928 
Computer equipment 4,074  4,062 
Furniture and fixtures 2,534  2,404 
Leasehold improvements
 4,935  4,922 
Total property and equipment, gross 38,744  38,618 
Accumulated depreciation and amortization (30,222) (29,023)
Total property and equipment, net (1)
 $ 8,522  $ 9,595 
_________________________
(1)    $2.2 million and $2.4 million property and equipment, net, respectively, was included in the sublease arrangement for the San Jose office building as of April 3, 2022 and December 31, 2021.

Depreciation and amortization expense pertaining to property and equipment was $1.3 million and $1.5 million for the three months ended April 3, 2022 and March 28, 2021, respectively.

Goodwill

There was no change in the carrying amount of goodwill during the three months ended April 3, 2022. The goodwill as of December 31, 2021 and April 3, 2022 was $11.0 million.

Goodwill Impairment

The Company performs an annual assessment of goodwill at the reporting unit level on the first day of the fourth fiscal quarter and during interim periods if there are triggering events to reassess goodwill. The Company operates as one operating and reportable segment.

The Company determined that no events occurred or circumstances changed during the three months ended April 3, 2022 that would more likely than not reduce the fair value of the Company below its carrying amount. If there is a significant decline in the Company’s stock price based on market conditions and deterioration of the Company’s business, the Company may have to record a charge to its earnings for the goodwill impairment of up to $11.0 million.

12


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other non-current assets

As of
April 3,
2022		 December 31,
2021
(In thousands)
Net deferred tax assets $ 1,574  $ 1,565 
Sublease 1,762  1,471 
Deposits 122  122 
Other 1,213  1,156 
Total other non-current assets $ 4,671  $ 4,314 

Accrued liabilities

As of
April 3,
2022		 December 31,
2021
(In thousands)
Sales and marketing $ 31,252  $ 31,417 
Sales returns
 17,924  19,960 
Accrued employee compensation 11,753  12,367 
Current operating lease liabilities 4,529  4,609 
Freight 5,551  8,086 
Warranty obligation 1,330  1,330 
Other 19,393  19,608 
Total accrued liabilities $ 91,732  $ 97,377 

13


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5.    Fair Value Measurements

Fair Value Measurements - Recurring Basis

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of April 3, 2022 and December 31, 2021:

As of April 3, 2022 As of December 31, 2021
Total Quoted market
prices in active
markets
(Level 1)		 Significant
other
observable
inputs
(Level 2)		 Total Quoted market
prices in active
markets
(Level 1)		 Significant
other
observable
inputs
(Level 2)
(In thousands)
Assets:
Cash equivalents: money-market funds (<90 days)
 $ 7,179  $ 7,179  $ —  $ 21,935  $ 21,935  $ — 
Available-for-sale securities: U.S. treasuries (1)
 44,566  44,566  —  —  —  — 
Foreign currency forward contracts (2)
 —  —  —  65  —  65 
Total assets measured at fair value $ 51,745  $ 51,745  $ —  $ 22,000  $ 21,935  $ 65 
Liabilities:
Foreign currency forward contracts (3)
 $ 37  $ —  $ 37  $ 47  $ —  $ 47 
Total liabilities measured at fair value $ 37  $ —  $ 37  $ 47  $ —  $ 47 
_________________________
(1)Included in Short-term investments on the Company’s unaudited condensed consolidated balance sheets.
(2)Included in Prepaid expenses and other current assets on the Company’s unaudited condensed consolidated balance sheets.
(3)Included in Accrued liabilities on the Company’s unaudited condensed consolidated balance sheets.

The Company’s 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. The Company enters into foreign currency forward contracts with only those counterparties that have long-term credit ratings of A-/A3 or higher. The Company’s foreign currency forward contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that take into account the contract terms as well as currency rates and counterparty credit rates. The Company verifies the reasonableness of these pricing models using observable market data for related inputs into such models. Additionally, the Company includes an adjustment for non-performance risk in the recognized measure of fair value of derivative instruments. As of April 3, 2022 and December 31, 2021, the adjustment for non-performance risk did not have a material impact on the fair value of the Company’s foreign currency forward contracts. The carrying value of non-financial assets and liabilities measured at fair value in the financial statements on a recurring basis, including accounts receivable and accounts payable, approximate fair value due to their short maturities. As of April 3, 2022 and December 31, 2021, the Company had no Level 3 fair value assets or liabilities measured on a recurring basis.

Fair Value Measurements - Nonrecurring Basis

The Company measures the fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying amount the asset may not be recoverable. For the three months ended April 3, 2022 and March 28, 2021, respectively, the Company had no assets or liabilities measured on a nonrecurring basis.

14


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6.    Derivative Financial Instruments

The Company’s subsidiaries have had, and will continue to have material future cash flows, including revenue and expenses, which are denominated in currencies other than the Company’s functional currency. The Company and all its subsidiaries designate the U.S. dollar as the functional currency. Changes in exchange rates between the Company’s functional currency and other currencies in which the Company transacts business will cause fluctuations in cash flow expectations and cash flow realized or settled. Accordingly, the Company uses derivatives to mitigate its business exposure to foreign exchange risk. The Company enters into foreign currency forward contracts in Australian dollars and Canadian dollars to manage its exposure to foreign exchange risk related to expected future cash flows on certain forecasted revenue, costs of revenue, operating expenses and existing assets and liabilities.

The Company’s foreign currency forward contracts do not contain any credit risk-related contingent features. The Company is exposed to credit losses in the event of nonperformance by the counter-parties of its forward contracts. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any one counter-party. In addition, the derivative contracts typically mature in less than six months and the Company continuously evaluates the credit standing of its counter-party financial institutions. The counter-parties to these arrangements are large highly rated financial institutions and the Company does not consider non-performance a material risk.

The Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, materiality, accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign exchange rates. The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with the authoritative guidance for derivatives and hedging. The Company records all derivatives on the balance sheets at fair value. Cash flow hedge gains and losses are recorded in other comprehensive income (“OCI”) until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in Other income (expense), net in the unaudited condensed consolidated statements of operations.

Fair value of derivative instruments

The fair values of the Company’s derivative instruments and the line items on the unaudited condensed consolidated balance sheets to which they were recorded as of April 3, 2022 and December 31, 2021 are summarized as follows:
Derivative Assets Balance Sheet
Location		 April 3, 2022 December 31, 2021 Balance Sheet
Location		 April 3, 2022 December 31, 2021
(In thousands) (In thousands)
Derivative assets not designated as hedging instruments Prepaid expenses and other current assets $ —  $ 65  Accrued liabilities $ 37  $ 47 

Refer to Note 5, Fair Value Measurements, for detailed disclosures regarding fair value measurements in accordance with the authoritative guidance for fair value measurements and disclosures.

Gross amounts offsetting of derivative instruments

The Company has entered into master netting arrangements which allow net settlements under certain conditions. Although netting is permitted, it is currently the Company’s policy and practice to record all derivative assets and liabilities on a gross basis in the unaudited condensed consolidated balance sheets.

15


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There were no derivative assets recorded as of April 3, 2022. The following table sets forth the offsetting of derivative assets as of December 31, 2021:
December 31, 2021 Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
Gross Amounts of Recognized Assets Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets Net Amounts Of Assets Presented in the Unaudited Condensed Consolidated Balance Sheets Financial Instruments Cash Collateral Pledged Net Amount
(In thousands)
Wells Fargo Bank $ 65  $ —  $ 65  $ (47) $ —  $ 18 


The following tables set forth the offsetting of derivative liabilities as of April 3, 2022 and December 31, 2021:
As of April 3, 2022 Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets Net Amounts Of Liabilities Presented in the Unaudited Condensed Consolidated Balance Sheets Financial Instruments Cash Collateral Pledged Net Amount
(In thousands)
Wells Fargo Bank $ 37  $ —  $ 37  $ —  $ —  $ 37 
December 31, 2021 Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets Net Amounts Of Liabilities Presented in the Unaudited Condensed Consolidated Balance Sheets Financial Instruments Cash Collateral Pledged Net Amount
(In thousands)
Wells Fargo Bank $ 47  $ —  $ 47  $ (47) $ —  $ — 

Cash flow hedges

The Company typically hedges portions of its anticipated foreign currency exposure which generally are less than six months. The Company did not enter into any forward contracts related to its cash flow hedging program for the three months ended April 3, 2022. There were no cash flow hedge effects on the unaudited condensed consolidated statements of operations for the three months ended April 3, 2022.

16


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of the Company’s cash flow hedges on the unaudited condensed consolidated statements of operations for the three months ended March 28, 2021 are summarized as follows:

Three Months Ended March 28, 2021
Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges
Revenue Cost of revenue Research and development Sales and marketing General and administrative
(In thousands)
Statements of operations $ 82,556  $ 56,749  $ 14,791  $ 11,207  $ 11,227 
Gains (losses) on cash flow hedge —  —  —  2  — 

The Company expects to reclassify to earnings all of the amounts recorded in AOCI (as defined below) associated with its cash flow hedges over the next twelve months. For information on the unrealized gains or losses on derivatives reclassified out of AOCI into the unaudited condensed consolidated statements of operations, refer to Note 7, Accumulated Other Comprehensive Income (Loss).

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur within the designated hedge period or if not recognized within 60 days following the end of the hedge period. The Company did not recognize any material net gains or losses related to the loss of hedge designation as there were no discontinued cash flow hedges during the three months ended April 3, 2022 and March 28, 2021.

Non-designated hedges

The Company adjusts its non-designated hedges monthly and enters into about six non-designated derivatives per quarter with an average size of $2.3 million. The hedges range typically from one to three months in duration. The effects of the Company’s non-designated hedges, which are included in Other income (expense), net in the unaudited condensed consolidated statements of operations for the three months ended April 3, 2022 and March 28, 2021, were as follows:
Derivatives Not Designated as Hedging Instruments Location of Gains (Losses)
Recognized in Income on Derivative		 Three Months Ended
April 3, 2022 March 28, 2021
(In thousands)
Foreign currency forward contracts Other income (expense), net $ 128  $ (5)

17


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 7.    Accumulated Other Comprehensive Income (Loss)

The following table sets forth the changes in accumulated other comprehensive income (loss) (“AOCI”) by component for the three months ended April 3, 2022 and March 28, 2021.
Unrealized gains (losses) on available-for-sale securities Unrealized gains (losses) on derivatives Estimated tax benefit (provision) Total
(In thousands)
Balance as of December 31, 2021 $ —  $ —  $ —  $ — 
Other comprehensive income (loss) before reclassifications (46) —  —  (46)
Less: Amount reclassified from accumulated other comprehensive income (loss) —  —  —  — 
Net current period other comprehensive income (loss) (46) —  —  (46)
Balance as of April 3, 2022 $ (46) $ —  $ —  $ (46)

Unrealized gains (losses) on available-for-sale securities Unrealized gains (losses) on derivatives Estimated tax benefit (provision) Total
(In thousands)
Balance as of December 31, 2020 $ 1  $ 2  $ —  $ 3 
Other comprehensive income (loss) before reclassifications (1) —  —  (1)
Less: Amount reclassified from accumulated other comprehensive income (loss) —  2  —  2 
Net current period other comprehensive income (loss) (1) (2) —  (3)
Balance as of March 28, 2021 $ —  $ —  $ —  $ — 

The following tables provide details about significant amounts reclassified out of each component of AOCI for the three months ended April 3, 2022 and March 28, 2021:
Three Months Ended
April 3, 2022 March 28, 2021
Gains (Losses) Recognized in OCI - Effective Portion Gains (Losses) Reclassified from OCI to Income - Effective Portion Gains (Losses) Recognized in OCI - Effective Portion Gains (Losses) Reclassified from OCI to Income - Effective Portion Affected Line Item in the Statements of Operations
(In thousands)
Gains (losses) on cash flow hedge:
Foreign currency contracts $ —  $ —  $ —  $ —  Revenue
Foreign currency contracts —  —  —  —  Cost of revenue
Foreign currency contracts —  —  —  —  Research and development
Foreign currency contracts —  —  —  2  Sales and marketing
Foreign currency contracts —  —  —  —  General and administrative
$ —  $ —  $ —  $ 2  Total *
_________________________
* Tax impact to hedging gains and losses from derivative contracts was immaterial. 

Note 8.    Debt

Revolving Credit Facility

18


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On October 27, 2021, the Company 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 the Company 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.

The obligations of the Company under the Credit Agreement are secured by substantially all of the Company’s domestic working capital assets, including accounts receivable, cash and cash equivalents, inventory, and other assets of the Company to the extent related to such working capital assets.

At the Company’s 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 the Company’s 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 the Company’s average daily availability for the prior fiscal quarter. Among other fees, the Company is 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 the Company to (a) until the Company achieves 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, 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 a Financial Covenant Trigger Period (as defined in the Credit Agreement) is in effect. As of April 3, 2022, the Company is 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 the Company files a bankruptcy petition, a bankruptcy petition is filed against the Company and is not dismissed or stayed within thirty days, or the Company makes a general assignment for the benefit of creditors, then any outstanding obligations under the Credit Agreement will automatically and without notice or demand become immediately due and payable.

No amounts had been drawn under the Credit Facility as of April 3, 2022.

Note 9.     Commitments and Contingencies

Operating Leases

The Company primarily leases office space, with various expiration dates through June 2029. Some of the leases include options to extend such leases for up to five years, and some include options to terminate such leases within one year. The terms of certain of the Company's leases provide for rental payments on a graduated scale. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, accrued liabilities, and non-current operating lease liabilities in the unaudited condensed consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for
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fixed lease payments are recognized in the unaudited condensed consolidated statements of operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. Gross lease expense was $1.8 million and $1.6 million for the three months ended April 3, 2022 and March 28, 2021, respectively. The lease expense was recorded within Cost of revenue, Research and development, Sales and marketing, and General and administrative expense in the Company's unaudited condensed consolidated statements of operations. Short-term leases and variable lease costs were included in the lease expense and they were immaterial. The Company recorded sublease income as reduction of lease expense, in the amount of $0.5 million for the three months ended April 3, 2022.

Supplemental cash flow information related to operating leases for the three months ended April 3, 2022 and March 28, 2021 was as follows:
April 3, 2022 March 28, 2021
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
    Operating cash flows from operating leases $ 2,036  $ 1,534 
Right-of-use assets obtained in exchange for lease liabilities
    Operating leases $ 18  $ — 

Weighted average remaining lease term and weighted average discount rate related to operating leases were as follows:
As of
April 3, 2022 December 31, 2021
Weighted average remaining lease term 5.9 years 6.1 years
Weighted average discount rate 5.76  % 5.77  %

The Company's future minimum undiscounted lease payments under operating leases and future non-cancelable rent payments from its subtenants for each of the next five years and thereafter as of April 3, 2022 were as follows:
Operating Lease Payments Sublease Payments Net
(In thousands)
2022 (Remaining nine months) $ 4,362  $ (1,506) $ 2,856 
2023 5,563  (1,891) 3,672 
2024 4,885  (1,947) 2,938 
2025 3,174  (2,006) 1,168 
2026 3,267  (2,066) 1,201 
Thereafter 8,217  (5,942) 2,275 
Total future lease payments 29,468  $ (15,358) $ 14,110 
Less: interest (1)
 (4,631)
Present value of future minimum lease payments $ 24,837 
Accrued liabilities $ 4,529 
Non-current operating lease liabilities 20,308 
Total lease liabilities $ 24,837 
________________________
(1) Leases that commenced before November 5, 2019 were calculated using the Company’s incremental borrowing rate on a collateralized basis plus LIBOR rate that closely matches contractual term of most leases. Leases that commenced between November 5, 2019 and October 27, 2021 were calculated using the Company's borrowing rate defined in the credit agreement with Western Alliance Bank. Leases that commenced after October 27, 2021 were calculated using the Company's borrowing rate defined in the Credit Agreement with Bank of America, N.A.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Letters of Credit

In connection with the lease agreement for the office space located in San Jose, California, the Company executed a letter of credit with the landlord as the beneficiary. As of April 3, 2022, the Company had approximately $3.6 million of unused letters of credit outstanding, of which $3.1 million pertains to the lease arrangement in San Jose, California.

Purchase Obligations

The Company has entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. Orders are non-cancelable within 30 days prior to the expected shipment date. As of April 3, 2022, the Company had approximately $34.7 million in non-cancelable purchase commitments with suppliers. As a result of the COVID-19 pandemic, the Company has experienced an elongation of the time from order placement to production primarily due to component shortages and supply chain disruptions. In order to reduce manufacturing lead-times and to ensure an adequate supply of inventories, the Company has worked with its suppliers to place longer lead-time purchase orders to ensure availability of components and materials from its supply chain. Under this circumstance, the Company may be obligated to purchase long lead-time component inventory procured in accordance with its forecasts. The Company may become liable for non-cancellable material components, such as chipsets purchased by the supplier to meet its purchase order, even if it is subsequently cancelled. The Company establishes a loss liability for all products it does not expect to sell for which it has committed purchases from suppliers. As of April 3, 2022, the loss liability from committed purchases was $0.3 million. From time to time the Company’s suppliers procure unique complex components on the Company’s behalf. If these components do not meet specified technical criteria or are defective, the Company should not be obligated to purchase the materials.

Warranty Obligations

Changes in the Company’s warranty liability, which is included in Accrued liabilities in the unaudited condensed consolidated balance sheets, were as follows:
  Three Months Ended
  April 3,
2022		 March 28,
2021
(In thousands)
Balance at the beginning of the period $ 1,330  $ 2,451 
Provision for (release of) warranty obligation made during the period 79  (369)
Settlements made during the period (79) (145)
Balance at the end of the period $ 1,330  $ 1,937 

Litigation and Other Legal Matters

Securities Class Action Lawsuits and Derivative Suit

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below. In all cases, at each reporting period, the Company evaluates 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, the Company accrues for the amount or, if a range, the Company accrues 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 litigation reserves, net. The Company monitors developments in these legal matters that could affect the estimate the Company had previously accrued. In relation to such matters, the Company currently believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its 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 the Company may cause the Company to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any intellectual property litigation may require the Company to make royalty payments, which could have an adverse effect in future periods. If any of those events were to occur, the Company's 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 the Company's estimates, which could result in the need to adjust the liability and record additional expenses.

Beginning on December 11, 2018, purported stockholders of Arlo Technologies, Inc. filed six putative securities class action complaints in the Superior Court of California, County of Santa Clara, and one complaint in the U.S. District Court for the Northern District of California against the Company and certain of its executives and directors. Some of these actions also name as defendants the underwriters in the Company’s initial public offering ("IPO") and NETGEAR, Inc. ("NETGEAR"). The actions pending in state court are Aversa v. Arlo Technologies, Inc., et al., No. 18CV339231, filed Dec. 11, 2018; Pham v. Arlo Technologies, Inc. et al., No. 19CV340741, filed January 9, 2019; Patel v. Arlo Technologies, Inc., No. 19CV340758, filed January 10, 2019; Perros v. NetGear, Inc., No. 19CV342071, filed February 1, 2019; Vardanian v. Arlo Technologies, Inc., No. 19CV342318, filed February 8, 2019; and Hill v. Arlo Technologies, Inc. et al., No. 19CV343033, filed February 22, 2019. On April 26, 2019, the state court consolidated these actions as In re Arlo Technologies, Inc. Shareholder Litigation, No. 18CV339231 (the “State Action"). The action in federal court is Wong v. Arlo Technologies, Inc. et al., No. 19-CV-00372 (the “Federal Action”).
    
The plaintiffs in the State Action filed a consolidated complaint on May 1, 2019. The plaintiffs allege that the Company failed to adequately disclose quality control problems and adverse sales trends ahead of its IPO, violating the Securities Act of 1933, as amended (the "Securities Act"). The complaint seeks unspecified monetary damages and other relief on behalf of investors who purchased Company common stock issued pursuant and/or traceable to the IPO. On June 21, 2019, the court stayed the State Action pending resolution of the Federal Action, given the substantial overlap between the claims.

In the Federal Action, the court appointed a shareholder named Matis Nayman as lead plaintiff. On June 7, 2019, plaintiff filed an amended complaint. Lead Plaintiff alleges violations of the Securities Act and the Securities Exchange Act of 1934, as amended, based on alleged materially false and misleading statements about the Company’s sales trends and products. In the amended complaint, lead plaintiff sought to represent a class of persons who purchased or otherwise acquired the Company’s common stock (i) during the period between August 3, 2018 through December 3, 2018 and/or (ii) pursuant to or traceable to the IPO. Lead plaintiff seeks class certification, an award of unspecified damages, an award of costs and expenses, including attorneys’ fees, and other further relief as the court may deem just and proper.

On August 6, 2019, defendants filed a motion to dismiss. The federal court granted that motion, and lead plaintiff filed a second amended complaint. On June 12, 2020, lead plaintiff filed an unopposed motion for preliminary approval of a class action settlement for $1.25 million, which was also the amount that the Company had accrued for loss contingency. On September 24, 2020, the federal court entered an order preliminarily approving the settlement. On February 5, 2021, lead plaintiff filed a motion for final approval of the settlement. In October 2020, the Company made a $1.25 million payment an escrow account administered by the court and plaintiff’s counsel (the “Settlement Fund”). The
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Settlement Fund shall be deemed to be in the custody of the court and shall remain subject to the jurisdiction of the court until such time as the Settlement Fund is distributed pursuant to the settlement agreement and/or further order of the court.

On February 5, 2021, lead plaintiff filed a motion for final approval of the settlement. In advance of the final approval hearing, three of the named plaintiffs in the State Action requested exclusion from the settlement. The court held a final approval hearing on March 11, 2021, and, on March 25, 2021, entered an order and final judgment approving the settlement and, among other things, dismissing with prejudice all claims of lead plaintiff and the Settlement Class (as defined in the settlement agreement). On April 19, 2021, the Court issued an amended order and corrected judgment to include defendant NETGEAR, who had been inadvertently omitted from the prior order and final judgment. The Federal Action is now closed.

In the State Action, on May 5, 2021, the court held a status conference. At that conference, the state court instructed plaintiffs Perros, Patel, and Pham (“Plaintiffs”), who were the only Arlo stockholders to opt out of the federal settlement, to file an amended complaint by June 4, 2021. Plaintiffs filed their second amended complaint on June 4, 2021, asserting their individual Securities Act claims, but also purporting to represent a new class of Arlo stockholders who purchased Arlo shares between December 3, 2018 and February 22, 2019 and fell outside the Settlement Class (as defined in the federal settlement). On June 21, 2021, the Arlo defendants filed a motion to dismiss the State Action (for forum non conveniens) based on the federal forum provision in Arlo’s certificate of incorporation. Plaintiffs opposed on July 28, 2021, and the Arlo defendants replied on August 13, 2021. On July 6, 2021, defendants filed multiple demurrers to the second amended complaint. Plaintiffs filed their oppositions on August 12, 2021, and defendants filed their replies on August 27, 2021. On September 9, 2021, the court issued an order granting the Arlo defendants’ forum non conveniens motion, and on September 17, 2021, the court issued a final judgment dismissing the State Action in its entirety. On November 16, 2021, Plaintiffs filed a Notice of Appeal. The appeal is pending before the California Court of Appeal, Sixth Appellate District. The court has not yet set a date for oral argument.

Leonard R. Pinto v. Arlo Technologies, Inc., et al.

In addition to the State Action and the Federal Action, a purported stockholder named Leonard Pinto filed a tagalong derivative action on June 13, 2019 in the U.S. District Court for the Northern District of California, captioned Pinto v. Arlo Technologies, Inc. et al., No. 19-CV-03354 (the “Derivative Action”). The Derivative Action is brought on behalf of the Company against the majority of the Company’s current directors. The complaint is based on the same alleged misconduct as the securities class actions but asserts claims for breach of fiduciary duty, waste of corporate assets, and violation of the Securities Exchange Act of 1934, as amended. On August 20, 2019, the court stayed the Derivative Action in deference to the Federal Action. On April 8, 2021, because it had granted final approval of the settlement in the Federal Action, the court lifted the stay in the Derivative Action and asked the parties to file a joint status report by April 22, 2021. In their status report, the parties stipulated to a schedule for plaintiff to file an amended complaint and for the parties to brief a motion to dismiss. Plaintiff filed his amended complaint on May 24, 2021. Defendants moved to dismiss the amended complaint on July 9, 2021. On August 23, 2021, plaintiff filed a second amended complaint. Defendants moved to dismiss the second amended complaint on December 17, 2021. Plaintiff filed his opposition on January 31, 2022, and defendants filed their reply on March 2, 2022. The hearing on defendants' motion to dismiss is currently scheduled for July 28, 2022.

Skybell Technologies, Inc. v. Arlo Technologies, Inc.

On December 18, 2020, Skybell Technologies, Inc., SB IP Holdings, LLC, and Eyetalk365, LLC (collectively, “Complainants” or “Skybell”) filed a Section 337 complaint against the Company, Vivint Smart Home, Inc. (“Vivint”), and SimpliSafe, Inc. (“SimpliSafe”) (collectively “Respondents”) at the U.S. International Trade Commission (“ITC”). The action alleges that the Company’s cameras and video doorbell cameras infringe seven patents: 10,097,796 (“the ’796 patent”), 10,200,660 (“the ’660 patent”), 10,523,906 (“the ’906 patent”), 10,097,797 (“the ’797 patent”), 9,485,478 (“the ’478 patent”), 10,674,120 (“the ’120 patent”), and 9,432,638 (“the ’638 patent”) (collectively, “the Asserted Patents”) in violation of Section 337 of the Tariff Act of 1930. The Asserted Patents are all from the same family and generally
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
directed to detecting a person at a camera and communicating video and audio from the camera to a cell phone along with various other features. The case was instituted on January 25, 2021 as Investigation No. 337-TA-1242.

On September 15, 2021, the Administrative Law Judge (“ALJ”) hearing the case at the ITC issued an Initial Determination (“ID”) ruling that all the Asserted Patents are invalid. The ALJ agreed with Respondents’ contention that there was an impermissible break in priority chains of the applications of the Asserted Patents during their prosecution – meaning that certain of Skybell’s prior issued patents fully anticipated or invalidated all the Asserted Patents. Therefore, the ALJ ruled that there can be no patent infringement or violation of Section 337 of the Tariff Act of 1930 by the Respondents.

Skybell appealed the ID by submitting its Petition for Review to the ITC on September 27, 2021, and the Respondents submitted their Response to the Petition to Review on October 4, 2021. On November 10, 2021, The ITC affirmed the ALJ’s ruling and did not grant any review of the ID, meaning that there is no trial on the ITC docket since there are no valid patents remaining, and the case is concluded at the ITC level. On January 9, 2022, Skybell filed its Notice of Appeal to the Federal Circuit to appeal the ITC’s rulings invalidating the Asserted Patents.

As of April 3, 2022, the Company is unable to predict the outcome of this matter, and, at this time, cannot reasonably estimate the possible loss or range of loss with respect to the legal proceeding discussed herein.

Indemnification of Directors and Officers

The Company, as permitted under Delaware law and in accordance with its bylaws, has agreed to indemnify its officers and directors for certain events or occurrences, subject to certain conditions, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that will enable it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the fair value of each indemnification agreement will be minimal. The Company had no liabilities recorded for these agreements as of April 3, 2022 and December 31, 2021.

Indemnifications

Prior to the completion of the IPO, the Company historically participated in NETGEAR’s sales agreements. In its sales agreements, NETGEAR typically agrees to indemnify its direct customers, distributors and resellers (the “Indemnified Parties”) for any expenses or liability resulting from claimed infringements by NETGEAR’s products of patents, trademarks or copyrights of third parties that are asserted against the Indemnified Parties, subject to customary carve-outs. The terms of these indemnification agreements are generally perpetual after execution of the agreement. The maximum amount of potential future indemnification is generally unlimited. From time to time, the Company receives requests for indemnity and may choose to assume the defense of such litigation asserted against the Indemnified Parties. The Company had no liabilities recorded for these agreements as of April 3, 2022 and December 31, 2021. In connection with the separation of Arlo from NETGEAR (the "Separation"), and after July 1, 2018, certain sales agreements were transferred to the Company, and the Company has replaced certain shared contracts, which include similar indemnification terms.

In addition, pursuant to the master separation agreement and certain other agreements entered into with NETGEAR in connection with the Separation and the IPO, NETGEAR has agreed to indemnify the Company for certain liabilities. The master separation agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of its business with the Company and financial responsibility for the obligations and liabilities of NETGEAR’s business with NETGEAR. Under the intellectual property rights cross-license agreement entered into between the Company and NETGEAR, each party, in its capacity as a licensee, indemnifies the other party, in its capacity as a licensor, and its directors, officers, agents, successors and subsidiaries against any losses suffered by such indemnified party as a result of the indemnifying party’s practice of the intellectual property licensed to
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
such indemnifying party under the intellectual property rights cross-license agreement. Also, under the tax matters agreement entered into between the Company and NETGEAR, each party is liable for, and indemnifies the other party and its subsidiaries from and against any liability for, taxes that are allocated to the indemnifying party under the tax matters agreement. In addition, the Company has agreed in the tax matters agreement that each party will generally be responsible for any taxes and related amounts imposed on it or NETGEAR as a result of the failure of the special stock dividend (the “Distribution”) by NETGEAR to NETGEAR stockholders of the 62,500,000 shares of Arlo common stock owned by NETGEAR that was made on December 31, 2018, together with certain related transactions, to qualify as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) and certain other relevant provisions of the Internal Revenue Code (the "Code"), to the extent that the failure to so qualify is attributable to actions, events or transactions relating to such party’s respective stock, assets or business, or a breach of the relevant representations or covenants made by that party in the tax matters agreement. The transition services agreement generally provides that the applicable service recipient indemnifies the applicable service provider for liabilities that such service provider incurs arising from the provision of services other than liabilities arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement, and that the applicable service provider indemnifies the applicable service recipient for liabilities that such service recipient incurs arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement. Pursuant to the registration rights agreement, the Company has agreed to indemnify NETGEAR and its subsidiaries that hold registrable securities (and their directors, officers, agents and, if applicable, each other person who controls such holder under Section 15 of the Securities Act) registering shares pursuant to the registration rights agreement against certain losses, expenses and liabilities under the Securities Act, common law or otherwise. NETGEAR and its subsidiaries that hold registrable securities similarly indemnify the Company but such indemnification will be limited to an amount equal to the net proceeds received by such holder under the sale of registrable securities giving rise to the indemnification obligation.

Change in Control and Severance Agreements

The Company has entered into change in control and severance agreements with certain of its executive officers (the “Severance Agreements”). Pursuant to the Severance Agreements, upon a termination without cause or resignation with good reason, the individual would be entitled to (1) cash severance equal to (a) the individual’s annual base salary and an additional amount equal to his or her target annual bonus (for the Chief Executive Officer) or (b) the individual’s annual base salary (for other executive officers), (2) 12 months of health benefits continuation, and (3) accelerated vesting of any unvested time-based equity awards that would have vested during the 12 months following the termination date. Upon a termination without cause or resignation with good reason that occurs during the one month prior to or 12 months following a change in control, the individual would be entitled to (1) cash severance equal to a multiple (2 times for the Chief Executive Officer and 1 times for other executive officers) of the sum of the individual’s annual base salary and target annual bonus, (2) a number of months of health benefits continuation (24 months for the Chief Executive Officer and 12 months for other executive officers) and (3) vesting of all outstanding, unvested equity awards (for the Chief Executive Officer) and the vesting of all outstanding, unvested time-based equity awards (for other executive officers). Severance will be conditioned upon the execution and non-revocation of a release of claims. The Company had no liabilities recorded for these agreements as of April 3, 2022.

Environmental Regulation

The Company is required to comply and is currently in compliance with the European Union (“EU”) and other Directives on the Restrictions of the use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”), Waste Electrical and Electronic Equipment (“WEEE”) requirements, Energy Using Product (“EuP”) requirements, the REACH Regulation, Packaging Directive and the Battery Directive.

The Company is subject to various federal, state, local, and foreign environmental laws and regulations, including those governing the use, discharge, and disposal of hazardous substances in the ordinary course of its manufacturing process. The Company believes that its current manufacturing and other operations comply in all material
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respects with applicable environmental laws and regulations; however, it is possible that future environmental legislation may be enacted or current environmental legislation may be interpreted to create an environmental liability with respect to its facilities, operations, or products.

Note 10.     Employee Benefit Plans

2018 Equity Incentive Plan

The Company grants options and restricted stock units ("RSUs") under the 2018 Equity Incentive Plan (the “2018 Plan”), under which awards may be granted to all employees. Award vesting periods for this plan are generally three to four years. Options may be granted for periods of up to 10 years or such shorter term as may be provided in the applicable option agreement and at prices no less than 100% of the fair market value of the Company’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 July 28, 2021, the Compensation Committee of the Board of Directors (the “Committee”) of the unanimously approved an amendment to the 2018 Plan to, among other things, reserve an additional 1,500,000 shares of the Company’s common stock to be used exclusively for grants of awards to individuals who were not previously employees or non-employee directors of the Company (or following a bona fide period of non-employment with the Company), as an inducement material to the individual’s entry into employment with the Company 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.

On January 21, 2022, the Company registered an aggregate of up to 4,222,270 shares of the Company’s common stock on Registration Statement on Form S-8, including 3,377,816 shares issuable pursuant to the Company's 2018 Plan that were automatically added to the shares authorized for issuance under the 2018 Plan on January 1, 2022 pursuant to an “evergreen” provision contained in the 2018 Plan and 844,454 shares issuable pursuant to the ESPP that were automatically added to the shares authorized for issuance under the ESPP on January 1, 2022 pursuant to an “evergreen” provision contained in the ESPP.

The Company’s employees have historically participated in NETGEAR’s various stock-based plans, which are described below and represent the portion of NETGEAR’s stock-based plans in which Arlo employees participated as of April 3, 2022. The Company’s unaudited condensed consolidated statements of operations reflect compensation expense for these stock-based plans associated with the portion of NETGEAR’s plans in which Arlo employees participated.

The following table sets forth the available shares for grant under the 2018 Plan as of April 3, 2022:
  Number of Shares
(In thousands)
Shares available for grant as of December 31, 2021
 2,509 
Additional authorized shares 3,378 
Granted (4,141)
Forfeited / cancelled 472 
Shares traded for taxes 745 
Shares available for grant as of April 3, 2022
 2,963 

Employee Stock Purchase Plan

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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company sponsors an Employee Stock Purchase Plan (“ESPP”), pursuant to which eligible employees may contribute up to 15% of compensation, subject to certain income limits, to purchase shares of the Company’s 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 offering period is generally six months. As of April 3, 2022, 2,159,534 shares were available for issuance under the ESPP.

Option Activity

Arlo’s stock option activity during the three months ended April 3, 2022 was as follows:
  Number of shares Weighted Average Exercise Price Per Share
(In thousands) (In dollars)
Outstanding as of December 31, 2021
 2,574  $ 10.55 
Granted —  $ — 
Exercised (204) $ 6.80 
Expired (173) $ 15.99 
Outstanding as of April 3, 2022 2,197  $ 10.47 
Vested and expected to vest as of April 3, 2022 2,197  $ 10.47 
Exercisable Options as of April 3, 2022 2,167  $ 10.42 

NETGEAR’s stock option activity for Arlo employees during the three months ended April 3, 2022 was as follows:
  Number of shares Weighted Average Exercise Price Per Share
(In thousands) (In dollars)
Outstanding as of December 31, 2021 11  $ 20.11 
Exercised (3) $ 19.34 
Forfeited / cancelled —  $ — 
Expired —  $ — 
Outstanding as of April 3, 2022 8  $ 20.42 
Vested and expected to vest as of April 3, 2022 8  $ 20.42 
Exercisable Options as of April 3, 2022 8  $ 20.42 

RSU Activity

Arlo’s RSU activity, excluding PSU activity and MPSU activity, during the three months ended April 3, 2022 was as follows:
  Number of shares Weighted Average Grant Date Fair Value Per Share
(In thousands) (In dollars)
Outstanding as of December 31, 2021
 10,080  $ 5.73 
Granted (1)
 3,221  $ 7.99 
Vested (1,844) $ 8.75 
Forfeited (299) $ 5.15 
Outstanding as of April 3, 2022 11,158  $ 5.90 
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

PSU Activity

The Company grants restricted stock units to its NEOs periodically that vested based on the Company's attainment of cash balance goals as of December 31, 2020, 2021 and 2022 and the NEO's continued employment through the vesting dates ("PSUs"). The vesting periods for the PSUs are three or four years. The maximum number of shares that NEOs can earn is 120% of the target number of the PSUs. The minimum number of shares that NEOs can earn is 75% of the target number of the PSUs. The Company determined the fair value of the PSUs using the closing price of the Company's common stock as of the grant date. For PSUs, stock-based compensation expense of performance milestone is recognized over the expected performance achievement period when the achievement becomes probable.

The Company's PSU activity during the year ended of April 3, 2022 was as follows:


 Number of Shares Weighted Average Grant Date Fair Value Per Share
(In thousands) (In dollars)
Outstanding as of December 31, 2021
 527  $ 4.80 
Granted 199  $ 8.28 
Vested (59) $ 8.22 
Forfeited —  $ — 
Outstanding as of April 3, 2022 (1)
 667  $ 5.53 
_________________________
(1)    Includes 329,178 shares of PSUs for the 2020 performance period, achieved at 120% of target, or 395,014 shares and vest over three years, and 148,368 shares of PSUs for the 2021 performance period, achieved at 120% of target, or 178,042 shares and vest over four years.

MPSU Activity

The Company grants restricted stock units to its NEOs that vest based on the Company's stock price performance relative to a broad-market index over a performance period of three to four years and the NEO's continued employment through the vesting date ("TSR MPSUs"). The TSR MPSUs will vest at the end of the three to four-year periods that begin on the TSR MPSUs' grant date based on performance of the Company's common stock relative to the Benchmark during the three to four-year periods from the grant dates. A positive 3.3x or negative 2.5x multiplier will be applied to the total shareholder returns (“TSR”), such that the number of shares vested will increase by 3.3% or decrease by 2.5% of the target numbers, for each 1% of positive or negative TSR relative to the Benchmark. In the event the Company's common stock performance is below negative 30% relative to the Benchmark, no shares will be vested. In no event will the number of shares vested exceed 200% of the target for that tranche.

28


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's TSR MPSU activity during the year ended of April 3, 2022 was as follows:

 Number of Shares Weighted Average Grant Date Fair Value Per Share
(In thousands) (In dollars)
Outstanding as of December 31, 2021
 841  $ 5.92 
Granted 189  $ 12.25 
Vested —  $ — 
Forfeited —  $ — 
Outstanding as of April 3, 2022
 1,030  $ 7.08 

The Company also grants restricted stock units to its CEO that vest based on the Company's achievement of its stock price performance targets and the CEO's continued employment through the vesting dates ("CEO MPSUs"). The CEO MPSUs will vest over four years in substantially equal quarterly installments that begin on the CEO MPSUs' grant date in five equal tranches based on the Company's achievement of certain average daily closing prices per share of the Company's common stock, as reported on the NYSE, for any 30 consecutive trading days on or prior to performance period end date. To the extent that the stock price of the tranche does not achieve its corresponding price target prior to the performance period end date, the CEO MPSUs expire or cancel.

The Company's CEO MPSU activity during the year ended of April 3, 2022 was as follows:

 Number of Shares Weighted Average Grant Date Fair Value Per Share
(In thousands) (In dollars)
Outstanding as of December 31, 2021
 739  $ 5.20 
Granted 531  $ 7.18 
Vested (19) $ 5.64 
Forfeited —  $ — 
Outstanding as of April 3, 2022
 1,251  $ 6.03 

The Company determined the fair value of the shares offered under the ESPP using the Black-Scholes option pricing model as of the grant date. The following table sets forth the weighted average assumptions used to estimate the fair value of purchase rights granted under Arlo’s ESPP for the three months ended April 3, 2022 and March 28, 2021.
  Three Months Ended
  April 3,
2022		 March 28,
2021
Expected life (in years) NA 0.5
Risk-free interest rate NA 0.06  %
Expected volatility NA 87.0  %
Dividend yield NA — 

The Company determined the fair value of the RSUs and PSUs using the closing price of the Company's common stock as of the grant date. For PSUs, stock-based compensation expense of performance milestone is recognized over the expected performance achievement period when the achievement becomes probable.
29


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company utilized a Monte Carlo pricing model customized to the specific provisions of the 2018 Plan to value the MPSUs awards on the grant date. The weighted average assumptions used in this model to estimate fair value at the grant date are as follows:
TSR MPSU CEO MPSU
Three Months Ended Three Months Ended
April 3,
2022		 March 28,
2021		 April 3,
2022		 March 28,
2021
Expected life 4.0 4.0 4.0 NA
Risk-free interest rate 1.49  % 0.33  % 1.54  % NA
Expected volatility 76.4  % 69.9  % 76.3  % NA
Dividend yield —  —  —  NA
Stock Beta 0.42  0.45  NA NA

NETGEAR’s RSU activity for Arlo employees during the three months ended April 3, 2022 was as follows:
  Number of shares Weighted Average Grant Date Fair Value Per Share
(In thousands) (In dollars)
Outstanding as of December 31, 2021
 47  $ 39.67 
Vested (31) $ 40.38 
Forfeited —  $ — 
Outstanding as of April 3, 2022
 16  $ 38.30 

Stock-Based Compensation Expense

The Company's employees have historically participated in NETGEAR's various stock-based plans, which are described below and represent the portion of NETGEAR's stock-based plans in which Company employees participated. The Company's unaudited condensed consolidated statements of operations reflect compensation expense for these stock-based plans associated with the portion of NETGEAR's plans in which Company employees participated. The stock-based compensation expense for Company employees consist of Company RSUs, PSUs, MPSUs and stock options and NETGEAR RSUs and stock options granted to Company employees, employees' annual bonus in RSU form and the purchase rights under Company ESPP. The following table sets forth the stock-based compensation expense included in the Company’s unaudited condensed consolidated statements of operations during the periods indicated:
  Three Months Ended
April 3, 2022 March 28, 2021
(In thousands)
Cost of revenue $ 910  $ 874 
Research and development 2,302  2,556 
Sales and marketing 1,380  1,190 
General and administrative 4,997  3,720 
Total stock-based compensation $ 9,589  $ 8,340 

The Company recognizes this compensation expense generally on a straight-line basis over the requisite service period of the award.

As of April 3, 2022, $0.2 million of unrecognized compensation cost related to Arlo’s stock options was expected to be recognized over a weighted-average period of 0.3 years. $67.8 million of unrecognized compensation cost
30


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
related to unvested Arlo’s RSUs, PSUs and MPSUs was expected to be recognized over a weighted-average period of 2.4 years.

As of April 3, 2022, there was no unrecognized compensation cost related to NETGEAR’s stock options for Arlo employees. $87 thousand of unrecognized compensation cost related to unvested NETGEAR RSUs for Arlo employees was expected to be recognized over a weighted-average period of 0.1 years.

Note 11.     Income Taxes

The provision for income taxes for the three months ended April 3, 2022 was $0.2 million, or an effective tax rate of (2.6)%. The provision for income taxes for the three months ended March 28, 2021 was $0.2 million, or an effective tax rate of (1.7)%. During the three months ended April 3, 2022, the Company sustained lower U.S. book losses than the same period in the prior year. Consistent with the prior year, the Company maintained a valuation allowance against its U.S. federal and state deferred tax assets and did not record a tax benefit on these deferred tax assets since it is more likely than not that these deferred tax assets will not be realized. The Company's provision for income taxes was primarily attributable to income taxes on foreign earnings. The increase in provision for income taxes for the three months ended April 3, 2022, compared to the prior year period, was primarily due to higher foreign earnings in fiscal 2022.

Note 12.     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. Potentially dilutive common shares, such as common shares issuable upon exercise of stock options and vesting of restricted stock awards are typically reflected in the computation of diluted net loss per share by application of the treasury stock method. For certain periods presented, due to the net losses reported, these potentially dilutive securities were excluded from the computation of diluted net loss per share, since their effect would be anti-dilutive.

Net loss per share for the three months ended April 3, 2022 and March 28, 2021 were as follows:

Three Months Ended
April 3, 2022 March 28, 2021
(In thousands, except per share data)
Numerator:
Net loss $ (8,479) $ (10,719)
Denominator:
Weighted average common shares - basic 85,222  80,370 
Potentially dilutive common share equivalent —  — 
Weighted average common shares - dilutive 85,222  80,370 
Basic net loss per share $ (0.10) $ (0.13)
Diluted net loss per share $ (0.10) $ (0.13)
Anti-dilutive employee stock-based awards, excluded 1,031  3,974 

31


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 13.     Segment and Geographic Information

Segment Information

The Company operates as one operating and reportable segment. The Company has identified its Chief Executive Officer ("CEO") as the Chief Operating Decision Maker (“CODM”). The CODM reviews financial information presented on a combined basis for purposes of allocating resources and evaluating financial performance.

Geographic Information

The Company conducts business across three geographic regions: Americas, EMEA and APAC. Revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, net changes in deferred revenue, and gains or losses from hedging. For reporting purposes, revenue by geography is generally based upon the ship-to location of the customer for device sales and device location for service sales.

The following table shows revenue by geography for the periods indicated:
  Three Months Ended
  April 3,
2022		 March 28,
2021
(In thousands)
United States (“U.S.”) $ 65,237  $ 49,541 
Americas (excluding U.S.) 3,229  95 
EMEA 49,975  24,591 
APAC 6,310  8,329 
Total revenue $ 124,751  $ 82,556 

The Company’s Property and equipment, net is located in the following geographic locations:
As of
April 3,
2022		 December 31,
2021
(In thousands)
Americas
United States (“U.S.”) $ 6,352  $ 7,302 
Americas (excluding U.S.) 510  520 
EMEA 369  402 
APAC
China 1,104  1,143 
APAC (excluding China) 187  228 
Total property and equipment, net $ 8,522  $ 9,595 

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “could,” “may,” “will,” and similar expressions are intended to identify forward-looking statements, including statements concerning our business and the expected performance characteristics, specifications, reliability, market acceptance, market growth, specific uses, user feedback, market position of our products and technology and the potential adverse impact of the COVID-19 pandemic on our business and operations. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Part II—Item 1A—Risk Factors” and “Liquidity and Capital Resources” below. All forward-looking statements in this document are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this quarterly report. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us,” the "Company,” and “Arlo” refer to Arlo Technologies, Inc. and our subsidiaries.

Business and Executive Overview

Arlo combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that are transforming the way people experience the connected lifestyle. Arlo’s deep expertise in product design, wireless connectivity, cloud infrastructure and cutting-edge AI capabilities focuses on delivering a seamless, smart home experience for Arlo users that is easy to setup and interact with every day. Our cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection. Since the launch of our first product in December 2014, we have shipped over 23.9 million smart connected devices, and as of April 3, 2022, Arlo platform had approximately 6.4 million cumulative registered accounts across more than 100 countries around the world.

We conduct business across three geographic regions—(i) the Americas; (ii) Europe, Middle-East and Africa (“EMEA”); and (iii) Asia Pacific (“APAC”) and we primarily generate revenue by selling devices through retail, wholesale distribution, wireless carrier channels, security solution providers, Arlo’s direct to consumer store and paid subscription services. International revenue was 47.7% and 40.0% of our revenue for the three months ended April 3, 2022 and March 28, 2021, respectively.

For the three months ended April 3, 2022 and March 28, 2021, we generated revenue of $124.8 million and $82.6 million, respectively, representing a year-over-year increase of 51.1%. Loss from operations were $8.7 million and $11.5 million for the three months ended April 3, 2022 and March 28, 2021, respectively.

Our goal is to continue to develop innovative, world-class connected lifestyle solutions to expand and further monetize our current and future user and paid account bases. We believe that the growth of our business is dependent on many factors, including our ability to innovate and launch successful new products on a timely basis and grow our installed base, to increase subscription-based recurring revenue, to invest in brand awareness and channel partnerships and to continue our global expansion. We expect to increase our investment in research and development going forward as we continue to introduce new and innovative products and services to enhance the Arlo platform and compete for engineering talent. We also expect to significantly increase our Sales and Marketing expense as we invest in new campaigns to increase awareness of and preference for the Arlo brand.
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Key Business Metrics

In addition to the measures presented in our unaudited condensed consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions. We believe these key business metrics provide useful information by offering the ability to make more meaningful period-to-period comparisons of our on-going operating results and a better understanding of how management plans and measures our underlying business. Our key business metrics may be calculated in a manner different from the same key business metrics used by other companies. We regularly review our processes for calculating these metrics, and from time to time we may discover inaccuracies in our metrics or make adjustments to better reflect our business or to improve their accuracy, including adjustments that may result in the recalculation of our historical metrics. We believe that any such inaccuracies or adjustments are immaterial unless otherwise stated.
As of
April 3, 2022 % Change March 28, 2021
(In thousands, except percentage data)
Cumulative registered accounts 6,389  21.1  % 5,275 
Cumulative paid accounts 1,272  131.7  % 549 
Annual recurring revenue $ 101,341  74.0  % $ 58,238 

Cumulative Registered Accounts. We believe that our ability to increase our user base is an indicator of our market penetration and growth of our business as we continue to expand and innovate our Arlo platform. We define our registered accounts at the end of a particular period as the number of unique registered accounts on the Arlo platform as of the end of such particular period. The number of registered accounts does not necessarily reflect the number of end-users on the Arlo platform, as one registered account may be used by multiple people. We changed our definition from registered users to registered accounts starting in the fourth quarter of 2019 due to the Verisure transaction. Verisure will own the registered accounts but we will continue to provide services to these European customers under the Verisure Agreements.

Cumulative Paid Accounts. Paid accounts worldwide measured as any account where a subscription to a paid service is being collected (either by the Company or by the Company’s customers or channel partners), plus paid service plans of a duration of more than 3 months bundled with products (such bundles being counted as a paid account after 90 days have elapsed from the date of registration). In the fourth quarter of 2019, we redefined paid subscribers as paid accounts to include customers that were transferred to Verisure as part of the disposal of our commercial operations in Europe because we will continue to provide services to these European customers and receive payments associated with them, under the Verisure Agreements.

Annual Recurring Revenue ("ARR"). Effective as of the quarter ended October 3, 2021, we have adopted ARR as one of the key indicators of our business performance. We believe ARR enables measurement of our business initiatives, and serves as an indicator of our future growth. ARR represents the amount of paid service revenue that we expect to recur annually and is calculated by taking our recurring paid service revenue for the last calendar month in the fiscal quarter, multiplied by 12 months. Recurring paid service revenue represents the revenue we recognize from our paid accounts and excludes prepaid service revenue and Non-Recurring Engineering ("NRE") service revenue from strategic partners. The ARR for the comparative period presented was derived following the same methodology. ARR is a performance metric and should be viewed independently of revenue and deferred revenue, and is not intended to be a substitute for, or combined with, any of these items.

COVID-19 Update

We continue to closely monitor developments and are taking steps to mitigate the potential risks related to the COVID-19 pandemic to us, our employees and our customers. The extent of the impact of the COVID-19 pandemic on our business operations will depend on future developments, including the duration of the pandemic, the broader implications of the macro-economic recovery and the impact on overall customer demand, all of which are uncertain and cannot be predicted. Our priorities and actions during the COVID-19 pandemic continue to be focused on protecting the health and
34

safety of all those we serve, our employees, our customers, our suppliers and our communities, including implementing continuous updates to our health and safety policies and processes and progress made through vaccinations. We continue to instruct all but a limited number of our global workforce to work remotely as a precautionary measure intended to minimize the risk of the virus to them and the communities in which we operate, while we continue to focus on providing our team with the resources that they need to meet the needs of our customers and deliver new innovations to the markets we serve, despite challenges presented by the COVID-19 pandemic. We also continue to work with our suppliers to address any supply chain disruptions, which might include larger component backlogs, component cost increases, travel restrictions and logistics changes that can impact our operations. For example, increased demand for electronics as a result of the COVID-19 pandemic increased demand for chips in the automotive industry and certain other factors have led to a global shortage of semiconductors. As a result, we have experienced component shortages, including longer lead times for components and supply constraints that have affected both our ability to meet scheduled product deliveries and worldwide demand for our products. Also, as a result of the COVID-19 pandemic, our supply chain partners are limited by production capacity, constrained by material availability, labor shortages, factory uptime and freight capacity, each of which constrains our ability to capitalize fully on end-market demand. As of April 3, 2022, international freight capacity has dropped, causing air and ocean freight rates to materially increase compared to pre-pandemic levels. Furthermore, transit times have also increased, causing us to rely more on air freight in order to meet our customers' demands. For the three months ended April 3, 2022, we saw a 606% increase in freight-in expense compared to the prior year period as a result of the higher sea and air freight rates and component shortages which necessitated use of air freight to meet customer requested delivery dates. We expect supply chain constraints to persist through 2022. While we believe we have been broadly successful in navigating COVID-19 related challenges to date, any further disruptions brought about by the COVID-19 pandemic to our supply chain and operations could have a significant negative impact on our net revenue, gross and operating margin performance. In addition, as a result of the COVID-19 pandemic, we could experience material charges from potential adjustments of the carrying value of our inventories and trade receivables, impairment charges on our long-lived assets, intangible assets and goodwill, and changes in the effectiveness of our hedging instruments, among others.

During the first quarter of 2022, we remained focused on navigating these on-going challenges presented by the COVID-19 pandemic through preserving our liquidity and managing our cash flow through taking preemptive action to enhance our ability to meet our short-term liquidity needs. These actions include, but are not limited to, proactively managing working capital by closely monitoring customers' credit and collections, renegotiating payment terms with third-party manufacturers and key suppliers, closely monitoring inventory levels and purchases against forecasted demand, reducing or eliminating non-essential spending, subleasing excess office space, and deferment of hiring. We continue to monitor this rapidly developing situation and may, as necessary, reduce expenditures further, borrow under our revolving credit facility, or pursue other sources of capital that may include other forms of external financing in order to maintain our cash position and preserve financial flexibility in response to the uncertainty in the United States and global markets resulting from the COVID-19 pandemic.

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Results of Operations

We operate as one operating and reportable segment. The following table sets forth, for the periods presented, the unaudited condensed consolidated statements of operations data, which we derived from the accompanying unaudited condensed consolidated financial statements:
  Three Months Ended
  April 3,
2022		 March 28,
2021
  (In thousands, except percentage data)
Revenue:
Products $ 94,825  76.0  % $ 59,761  72.4  %
Services 29,926  24.0  % 22,795  27.6  %
Total revenue 124,751  100.0  % 82,556  100.0  %
Cost of revenue:
Products 80,777  64.8  % 47,157  57.1  %
Services 10,399  8.3  % 9,592  11.6  %
Total cost of revenue 91,176  73.1  % 56,749  68.7  %
Gross profit 33,575  26.9  % 25,807  31.3  %
Operating expenses:
Research and development 16,379  13.1  % 14,791  17.9  %
Sales and marketing 13,168  10.6  % 11,207  13.6  %
General and administrative 12,621  10.1  % 11,227  13.6  %
Separation expense 79  0.1  % 54  0.1  %
Total operating expenses 42,247  33.9  % 37,279  45.2  %
Loss from operations (8,672) (7.0) % (11,472) (13.9) %
Interest income (expense), net (5) —  % 24  —  %
Other income (expense), net 411  0.3  % 909  1.1  %
Loss before income taxes (8,266) (6.7) % (10,539) (12.8) %
Provision for income taxes 213  0.2  % 180  0.2  %
Net loss $ (8,479) (6.9) % $ (10,719) (13.0) %

Revenue

Our gross revenue consists primarily of sales of devices, prepaid and paid subscription service revenue and NRE service revenue from Verisure. We generally recognize revenue from product sales at the time the product is shipped and transfer of control from us to the customer occurs. Our first generation camera products come with a prepaid service that provides users with rolling seven-day cloud video storage, the ability to connect up to five cameras and 90 days of customer support. Our second generation camera, doorbell and floodlight products under our new business model come with a prepaid service that includes a one-year free trial period of Arlo Secure bundled with our Arlo Ultra products launched in early 2019, and a three-month free trial period of Arlo Secure bundled with our products launched after September 2019. Upon device shipment, we attribute a portion of the sales price to the prepaid service, deferring this revenue at the outset and subsequently recognizing it ratably over the estimated useful life of the device or free trial period, as applicable. Our paid subscription services relate to sales of subscription plans to our registered accounts. Our services also include certain development services provided to Verisure and other customers under NRE arrangements. In the third quarter of 2021, we introduced Arlo Secure, our new service plan with coverage for unlimited cameras and an enhanced Emergency Response solution. Arlo Secure replaced Arlo Smart, our previous service plan. Existing Arlo Smart customers are entitled to either retain their existing plans or upgrade to the new Arlo Secure plan of their choosing.

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Our revenue consists of gross revenue, less end-user customer rebates and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, allowances for estimated sales returns, price protection, and net changes in deferred revenue. A significant portion of our marketing expenditure is with customers and is deemed to be a reduction of revenue under authoritative guidance for revenue recognition.

Under the Supply Agreement that we entered into with Verisure in 2019 (the "Supply Agreement"), Verisure became the exclusive distributor of our products in Europe for all channels, and will non-exclusively distribute our products through its direct channels globally for an initial term of five years. During the five-year period commencing January 1, 2020, Verisure has an aggregate product purchase commitment of $500.0 million. As of April 3, 2022, $205.5 million of the purchase commitment has been fulfilled. The Supply Agreement also provides for certain NRE services to Verisure, including developing certain custom products specified by Verisure in exchange for an aggregate of $13.5 million, payable in installments upon meeting certain development milestones. As of April 3, 2022, Verisure has paid the full cash consideration of $13.5 million for these NRE services. For the three months ended April 3, 2022 and March 28, 2021, the Company recognized service revenue of $0.1 million and $1.5 million, respectively, for these NRE services.

We conduct business across three geographic regions: Americas, EMEA, and APAC. We generally base revenue by geography on the ship-to location of the customer for device sales and device location for service sales.
  Three Months Ended
  April 3,
2022		 % Change March 28,
2021
  (In thousands, except percentage data)
Americas $ 68,466  37.9  % $ 49,636 
Percentage of revenue 54.9  % 60.1  %
EMEA 49,975  103.2  % 24,591 
Percentage of revenue 40.1  % 29.8  %
APAC 6,310  (24.2) % 8,329 
Percentage of revenue 5.0  % 10.1  %
Total revenue $ 124,751  51.1  % $ 82,556 

Revenue for the three months ended April 3, 2022 increased 51.1%, compared to the prior year period, primarily due to higher product sales and service revenue. Product revenue increased by $35.1 million, or 58.7% for the three months ended April 3, 2022 compared to the prior year period, primarily driven by an increase in product shipments in Americas and EMEA due to stronger customer demand, partially offset by higher provisions for sales returns and marketing expenditures that are deemed to be a reduction of revenue. Service revenue increased by $7.1 million, or 31.3% for the three months ended April 3, 2022 compared to the prior year period, primarily due to an increase in paid accounts, partially offset by a decrease in Verisure NRE revenue recognition.

Cost of Revenue

Cost of revenue consists of both product costs and costs of service. Product costs primarily consist of: the cost of finished products from our third-party manufacturers; overhead costs, including personnel expense for operation staff, purchasing, product planning, inventory control, warehousing and distribution logistics, third-party software licensing fees, inbound freight, IT and facilities overhead, warranty costs associated with returned goods, write-downs for excess and obsolete inventory, royalties to third parties; and amortization expense of certain acquired intangibles. Cost of service consists of costs attributable to the provision and maintenance of our cloud-based platform, including personnel, storage, security and computing, as well as NRE service costs incurred under the Verisure and other NRE arrangements.

Our cost of revenue as a percentage of revenue can vary based upon a number of factors, including those that may affect our revenue set forth above and factors that may affect our cost of revenue, including, without limitation: product mix, sales channel mix, registered accounts' acceptance of paid subscription service offerings, fluctuation in foreign exchange rates and changes in our cost of goods sold due to fluctuations in prices paid for components, net of
37

vendor rebates, cloud platform costs, warranty and overhead costs, inbound freight and duty product conversion costs, charges for excess or obsolete inventory, and amortization of acquired intangibles. We outsource our manufacturing, warehousing, and distribution logistics. We also outsource certain components of the required infrastructure to support our cloud-based back-end IT infrastructure. We believe this outsourcing strategy allows us to better manage our product and service costs and gross margin.

The following table presents cost of revenue and gross margin for the periods indicated:
  Three Months Ended
  April 3,
2022		 % Change March 28,
2021
  (In thousands, except percentage data)
Cost of revenue:
Products $ 80,777  71.3  % $ 47,157 
Services 10,399  8.4  % 9,592 
Total cost of revenue $ 91,176  60.7  % $ 56,749 

Cost of product revenue increased for the three months ended April 3, 2022 compared to the prior year period, primarily due to increases in product revenue and freight-in expense as a result of COVID-19 related supply chain disruption and price inflation. Cost of service revenue increased for the three months ended April 3, 2022 compared to the prior year period, as a result of service revenue growth, offset by cost optimizations.

Gross Profit

The following table presents gross profit for the periods indicated:
  Three Months Ended
  April 3,
2022		 % Change March 28,
2021
  (In thousands, except percentage data)
Gross profit:
Products $ 14,048  11.5  % $ 12,604 
Services 19,527  47.9  % 13,203 
Total gross profit $ 33,575  30.1  % $ 25,807 
Gross margin percentage:
Products 14.8  % 21.1  %
Services 65.3  % 57.9  %
Total gross margin percentage 26.9  % 31.3  %

Gross profit increased for the three months ended April 3, 2022, compared to the prior year period, due to a combination of both product and service revenue increases. The product gross profit increase is primarily due to an increase in product revenue, partially offset by higher freight-in costs as a result of COVID-19 related supply chain disruption. The service gross profit increase is primarily due to growth in paid service revenue and cost optimizations implemented. Product gross margin reduced for the three months ended April 3, 2022, compared to the prior year period, due to higher warranty expense and higher freight-in costs as a result of COVID-19 related supply chain disruption. Service gross margin increased for the three months ended April 3, 2022, compared to the prior year period, due to cost optimizations and a higher mix of recurring paid service revenue.

Operating Expenses

Research and Development 

Research and development expense consists primarily of personnel-related expense, safety, security, regulatory services and testing, other research and development consulting fees, and corporate IT and facilities overhead. We
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recognize research and development expense as it is incurred. We have invested in and expanded our research and development organization to enhance our ability to introduce innovative products and services. We believe that innovation and technological leadership are critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies, products, and services, including our hardware devices, cloud-based software, AI-based algorithms, and machine learning capabilities. We expect research and development expense to increase in absolute dollars as we develop new product and service offerings and compete for engineering talent. Research and development expense directly attributable to delivering the Verisure NRE is recognized in cost of service.

The following table presents research and development expense for the periods indicated:
  Three Months Ended
  April 3,
2022		 % Change March 28,
2021
  (In thousands, except percentage data)
Research and development expense $ 16,379  10.7  % $ 14,791 

Research and development expense increased $1.6 million for the three months ended April 3, 2022, compared to the prior year period, primarily due to increases of $0.9 million in outside professional services and $0.2 million in personnel-related expenses and a decrease in certain research and development expenses amounting to $0.4 million, which were attributed to the Verisure NRE projects, and are classified as cost of service revenue.

Sales and Marketing
 
Sales and marketing expense consists primarily of personnel expense for sales and marketing staff; technical support expense; advertising; trade shows; corporate communications and other marketing expense; product marketing expense; IT and facilities overhead; outbound freight costs; and credit card processing fees. We expect our sales and marketing expense to significantly increase in the future as we invest in marketing to drive awareness of our brand and drive demand for our products and services.

The following table presents sales and marketing expense for the periods indicated:
  Three Months Ended
  April 3,
2022		 % Change March 28,
2021
  (In thousands, except percentage data)
Sales and marketing expense $ 13,168  17.5  % $ 11,207 

Sales and marketing expense increased $2.0 million for the three months ended April 3, 2022, compared to the prior year period, primarily due to increases of $0.9 million in marketing expenditures, $0.8 million in personnel-related expenses, $0.5 million in credit card processing fees and $0.3 million in freight-out expenses, partially offset by a decrease of $0.6 million in outside professional services.

General and Administrative

General and administrative expense consists primarily of personnel-related expense for certain executives, finance and accounting, investor relations, human resources, legal, information technology, professional fees, corporate IT and facilities overhead, strategic initiative expense and other general corporate expense. We expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense.

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The following table presents general and administrative expense for the periods indicated: