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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 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)
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Delaware |
38-4061754 |
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(State or other jurisdiction of incorporation or
organization) |
(I.R.S. Employer Identification Number) |
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2200 Faraday Ave., |
Suite #150 |
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Carlsbad, |
California |
92008 |
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(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number including area code
(408)
890-3900
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Common Stock, par value $0.001 per share |
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ARLO |
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New York Stock Exchange |
Securities registered pursuant to 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ☐ No ☑
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 ☑ 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 ☑ 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 the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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| Large accelerated filer |
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Accelerated filer |
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☑ |
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Non-accelerated filer |
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☐ |
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Smaller reporting company |
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Emerging growth company |
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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. |
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☐ |
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its audit
report. ☐
If securities are registered pursuant to Section 12(b) of the Act,
indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an
error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are
restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers
during the relevant recovery period pursuant to § 240.10D-1(b).
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the
Act.) Yes ☐ No ☑
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant as of July 3,
2022 was $527.6 million. Such aggregate market value was computed
by reference to the closing price of the common stock as reported
on the New York Stock Exchange on July 1, 2022 (the last business
day of the Registrant's most recently completed fiscal second
quarter). Shares of the registrant's common stock held by each
executive officer and director and certain entities that own 15% or
more of the outstanding common stock have been excluded in that
such persons may be deemed to be affiliates. The determination of
affiliate status is not necessarily a conclusive determination for
other purposes.
The number of outstanding shares of the registrant’s Common Stock,
$0.001 par value, was 89,602,003 shares as of March 3,
2023.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its
2023 annual meeting of stockholders, which will be filed within 120
days of the registrant’s fiscal year end, are incorporated by
reference into Part III of this Annual Report on Form
10-K.
Arlo Technologies, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2022
TABLE OF CONTENTS
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Page |
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PART I |
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Item 1. |
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Item 1A. |
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Item 1B. |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II |
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Item 5. |
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Item 6. |
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Item 7. |
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Item 7A. |
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Item 8. |
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Item 9. |
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Item 9A. |
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Item 9B. |
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Item 9C. |
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PART III |
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Item 10. |
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Item 11. |
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Item 12. |
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Item 13. |
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Item 14. |
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PART IV |
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Item 15. |
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Item 16. |
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Note About Forward-Looking Statements
This Annual Report on Form 10-K (“Form 10-K”), including the
Management’s Discussion and Analysis of Financial Condition and
Results of Operations in Part II, Item 7 below, includes
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”).
All statements other than statements of historical facts contained
in this Form 10-K, including statements regarding our future
financial position, business strategy and plans and objectives of
management for future operations, are forward-looking statements.
The words “believe,” “may,” “will,” “estimate,” “continue,”
“anticipate,” “intend,” “should,” “plan,” “expect” and similar
expressions, as they relate to us, are intended to identify
forward-looking statements. We have based these forward-looking
statements largely on our current expectations and projections
about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy
and financial needs. These forward-looking statements are subject
to a number of risks, uncertainties and assumptions described in
“Risk Factors” in Part I, Item 1A below, and elsewhere in this
Annual Report on Form 10-K, including, among other things: health
epidemics, including the COVID-19 pandemic and its variants, and
other outbreaks could significantly disrupt our
operations; future demand for our products may be lower than
anticipated; consumers may choose not to adopt our new product
offerings or adopt competing products; the actual price,
performance and ease of use of our products may not meet the price,
performance and ease of use requirements of consumers; our
dependence on certain significant customers; our reliance on a
limited number of third-party suppliers and manufacturers; new
cyber threats may challenge the effectiveness or threaten the
security of our products; the collaboration with Verisure may not
be successful; we may overestimate our ability to maintain,
protect, and enhance our intellectual property; our efforts to
retain key personnel and to attract, retain and motivate qualified
personnel with technical, operational and leadership expertise may
not be successful; and the impact and timing of the restructuring
plan and our business strategies and development plans may not be
successful. In light of these risks, uncertainties and assumptions,
the forward-looking events and circumstances discussed in this
Annual Report on Form 10-K may not occur and actual results could
differ materially from those anticipated or implied in the
forward-looking statements. All forward-looking statements in this
Annual Report on Form 10-K are based on information available to us
as of the date hereof, such information may be limited or
incomplete, and we assume no obligation to update any such
forward-looking statements. These statements are inherently
uncertain and investors are cautioned not to unduly rely upon these
statements. The following discussion should be read in conjunction
with our consolidated financial statements and the accompanying
notes contained in this Annual Report on Form 10-K.
Summary of Risk Factors
Below is a summary of the principal factors that make an investment
in our common stock speculative or risky. This summary does not
address all of the risks that we face. The risks are discussed more
fully below and included, but are not limited to, risks related
to:
•We
obtain several key components from limited or sole sources, and if
these sources fail to satisfy our supply requirements or we are
unable to properly manage our supply requirements with our
third-party manufacturers, we may lose sales and experience
increased component costs.
•We
depend on a limited number of third-party manufacturers for
substantially all of our manufacturing needs. If these third-party
manufacturers experience any delay, disruption, or quality control
problems in their operations, including due to the COVID-19
pandemic, we could lose or fail to grow our market share and our
brand may suffer.
•If
disruptions in our transportation network occur or our shipping
costs substantially increase, including due to the COVID-19
pandemic, we may be unable to sell or timely deliver our products,
and our operating expenses could increase.
•The
effects of health epidemics, including the COVID-19 pandemic and
its variants, could have an adverse impact on our business,
operations and the markets and communities in which we, our
partners and customers operate.
•If
we lose the services of key personnel, we may not be able to
execute our business strategy effectively.
•We
expect our results of operations to fluctuate on a quarterly and
annual basis, which could cause our stock price to fluctuate or
decline.
•If
we fail to continue to introduce or acquire new products or
services that achieve broad market acceptance on a timely basis, or
if our products or services are not adopted as expected, we will
not be able to compete effectively and we will be unable to
increase or maintain revenue and gross margin.
•We
may need additional financing to meet our future long-term capital
requirements and may be unable to raise sufficient capital on
favorable terms or at all.
•Some
of our competitors have substantially greater resources than we do,
and to be competitive we may be required to lower our prices or
increase our sales and marketing expenses, which could result in
reduced margins and loss of market share.
•We
entered into an asset purchase agreement (the “Asset Purchase
Agreement”) and supply agreement (the “Supply Agreement”) with
Verisure Sàrl (“Verisure”) that gives Verisure exclusive marketing
and distribution rights for our products in Europe as well as the
ability to sell our products through their direct channel globally.
We cannot provide assurance that the arrangement with Verisure will
continue to be a successful collaboration.
•We
are dependent on information technology systems, infrastructure and
data. If our information technology systems or data, or those of
third parties upon which we rely, are or were compromised, we could
experience adverse consequences resulting from such compromise,
including but not limited to regulatory investigations or actions;
litigation; fines and penalties; disruptions of our business
operations; reputational harm; loss of customers or sales; reduced
revenue or profits; increased expenses; significant decline in our
stock price; and other adverse consequences.
•Our
future success depends on our ability to increase sales of our paid
subscription services.
•Interruptions
with the cloud-based systems that we use in our operations provided
by an affiliate of Amazon.com, Inc. (“Amazon”), which is also one
of our primary competitors, may materially and adversely affect our
business, results of operations, and financial
condition.
•Our
current and future products may experience quality problems,
including defects or errors, from time to time that can result in
adverse publicity, product recalls, litigation, regulatory
proceedings, and warranty claims and could lead to significant
direct or indirect costs, decreased revenue, and operating margin,
and harm to our brand.
•We
rely on a limited number of traditional and online retailers and
wholesale distributors for a substantial portion of our sales, and
our revenue could decline if they refuse to pay our requested
prices or reduce their level of purchases or if there is
significant consolidation in our sales channels, which results in
fewer sales channels for our products.
PART I
Item 1. Business
Overview
Arlo Technologies, Inc. (“we” or “Arlo”) combines an intelligent
cloud infrastructure and mobile app with a variety of smart
connected devices that are transforming the way people experience
the connected lifestyle. Arlo’s deep expertise in product design,
wireless connectivity, cloud infrastructure and cutting-edge AI
capabilities focuses on delivering a seamless, smart home
experience for Arlo users that is easy to setup and interact with
every day. Our cloud-based platform provides users with visibility,
insight and a powerful means to help protect and connect in
real-time with the people and things that matter most, from any
location with a Wi-Fi or a cellular connection. Since the launch of
our first product in December 2014, we have shipped over 27.5
million smart connected devices. As of December 31, 2022, the
Arlo platform had approximately 7.2 million cumulative registered
accounts across more than 100 countries around the world, 1.9
million of which were paid services subscribers. To date, we have
launched several categories of award-winning smart connected
devices, including wired and wire-free smart Wi-Fi and LTE-enabled
cameras, audio and video doorbells, floodlight cameras and home
security systems. In addition, Arlo’s broad compatibility allows
the platform to seamlessly integrate with third-party
internet-of-things (“IoT”) products and protocols, such as Amazon
Alexa, Apple HomeKit, Apple TV, Google Assistant, IFTTT, Stringify
and Samsung SmartThings. We plan to continue to introduce new smart
connected devices to the Arlo platform both in cameras and other
categories, increase the number of registered accounts on our
platform, keep them highly engaged through our mobile app and
generate incremental recurring revenue by offering them paid
subscription services.
Market
Our total addressable market consists of individuals and business
owners who use connected devices to enhance their lives and
businesses. Outside of the home, we have seen adoption of our
cellular-enabled products in a variety of use cases, such as
neighborhood watch, construction site monitoring, wildlife and
outdoor trail surveillance and event monitoring. We believe the
small business, government and direct home monitoring channels
provide growth areas for us in addition to our retail and
e-commerce presence. Our Software as a Service (“SaaS”) solution
includes Arlo Secure, a service plan with coverage for unlimited
cameras and an enhanced Emergency Response solution, Arlo Safe, a
personal safety app with panic button accessory, and Arlo
SmartCloud, a solution that delivers highly efficient and secure
cloud services at scale. We believe we are well-positioned to
extend our current reach to the broader connected lifestyle market
both within and beyond the home as we continue to launch new
products and services within our connected lifestyle
platform.
Services
Arlo Secure
Arlo Secure is our service plan that provides advanced AI-based
detection, DIY home security as well as professional monitoring,
and an enhanced Emergency Response capability. The premium services
boast support for unlimited household security devices, along with
advanced AI object detection, and smarter, more interactive
notifications. Additionally, the new 24/7, one-touch Emergency
Response is available with the Secure Plus and Safe and Secure Pro
plans, enabling Arlo users to directly dispatch first responders
during an emergency for quicker action. A trial period of Arlo
Secure is provided with various Arlo camera, home security, and
doorbell products. The features of Arlo Secure subscriptions
include:
•Emergency
Response (Secure Plus plan)
– With one touch, dispatch fire, police, or medical responders to
the camera’s location. If directed by the user, Arlo’s Emergency
Response team can also provide critical location
information to responders en route to better prepare them, such as
gate codes, medical conditions of family members, and pet
details.
•2K
(Secure plan) and 4K (Secure Plus plan) Cloud-based Video
Recording
– View 30 days of recordings securely stored on Arlo’s SmartCloud
platform, for ultimate peace of mind and protection even if the
device is damaged or stolen in a break-in, storm or other physical
incident.
•Unlimited
Cameras
– Users can enjoy Arlo Secure service for all cameras in their home
with one all-encompassing plan and can add newly purchased Arlo
cameras for no additional service charge.
•Advanced
Object Detection
– Arlo processes and filters 120 million events each day through
advanced object detection backed by visual artificial intelligence,
allowing for better recognition of people, packages, vehicles, and
animals to add key context to notifications and reduce unwanted
alerts.
•Smart
Interactive Notifications
– Users can take quicker action by responding to rich notifications
or viewing an animated preview of a notification video through the
lock screen on their smartphone.
•Smoke
and CO Alarm Detection
– Users can get notified when the camera hears a smoke or CO alarm
triggered.
•Cloud-based
Activity Zones
– Users can reduce unwanted notifications by highlighting specific
areas on their property where they want motion to be
detected.
•Call
a Friend
– Users can instantly call a friend through the Arlo App from their
notification screen with one tap.
•24/7
Priority Support
– Users get priority technical support through the in-app Help
Center with omnichannel access to phone, chat, Community or
self-help articles.
•24/7
Professional Monitoring
(Secure Pro plan)
– Users have access to Live Security Experts who swiftly assist in
an emergency, regardless of whether a user is home or away. Through
Emergency Response, live agents can access authorized camera video
to verify emergencies, potentially reducing false alarms,
expediting response from emergency personnel in a
crisis.
Arlo Safe
In the fourth quarter of 2022, we announced an all-new personal
safety app with a panic button accessory featuring one-tap, 24/7
Emergency Response, family safety, automatic crash detection and
more. Ideal for everyone from city dwellers walking home at night,
to college students out with friends, teenagers walking to/from
school, daily commuters, or even elderly family members, Arlo Safe
is an all-encompassing 24/7 personal safety solution for ultimate
peace of mind while on the go. Features including 24/7 live agent
emergency support, location sharing, family check-ins, and safety
alerts provide on-the-go protection to keep the user safe in a time
of need. Working in tandem with the Arlo Safe app, the Arlo Safe
button can be used to alert safety experts and rapidly send
emergency responders to the user’s location anytime, day or night.
The features of Arlo Safe subscriptions include:
•One-Touch
Emergency Response
– Access live safety experts 24/7 to rapidly send fire, police, or
medical responders directly to the user’s exact
location.
•Family
Safety
– Never miss a moment with the ability to know where opt-in family
members have been, see their current location, or send help
directly to them in an emergency situation.
•Crash
Detection and Response
– Advanced impact detection can expedite emergency response in the
event of a vehicle accident by sharing appropriate location and
medical information with first responders.
Other services
Arlo SmartCloud is a SaaS solution to deliver scalable security
cloud services for business. Its comprehensive offering includes
computer vision, multi-object detection, audio analysis, security
services, scaled storage and numerous ecosystem integrations. Arlo
SmartCloud is a fully managed robust global platform of
capabilities built for security, scalability, and reliability that
can be deployed as part of advanced subscription services for
hardware companies, automotive companies, service providers,
insurance companies, home builders, smart communities, smart
cities, traditional security companies, and other related
verticals.
Our services also include certain development services provided to
Verisure Sàrl (“Verisure”) under a Non-recurring Engineering
(“NRE”) arrangement, including development of certain custom
products specified by Verisure.
Products
Smart Connected Devices
Arlo Home Security System,
released in the fourth quarter of 2022, is a first-of-its-kind,
all-in-one multi-sensor capable of eight different sensing
functions. The system, which is managed through the redesigned Arlo
Secure App, pairs with Arlo's new 24/7 Professional Monitoring
service, granting one-tap access to highly trained Security Experts
who monitor and respond to emergency situations. Able to be placed
anywhere, from walls to windows and doors, to under sinks and water
heaters, the simple-to-install wireless multi-sensor can detect
motion, door/window openings and tilt, water leaks, freezing
temperatures, lighting changes and T3/T4 smoke/CO alarm audio
sirens.
Arlo Pro 5S,
released in the fourth quarter of 2022, is an all-new Pro 5S 2K
Security Camera. The latest addition to the award-winning Pro
series, Pro 5S boasts tri-band connectivity - operating off
dual-band Wi-Fi and Arlo SecureLink technology. Pro 5S is backed by
the redesigned Arlo Secure App which features an all-new, highly
intuitive interface that streamlines access to critical tools like
Emergency Response. Since Pro 5S operates on the lowest power band
when in sleep mode, users will appreciate significant battery life
improvements. Additionally, tri-band connectivity provides longer
Wi-Fi range, and mitigates RF interference and active jamming
attempts while maximizing picture quality. Pro 5S seamlessly pairs
with other SecureLink devices for continuous security and
connectivity, even during power and internet outages.
Arlo Go 2,
released in the second quarter of 2022, is designed for monitoring
remote areas, large properties, construction sites, vacation homes,
boat or RV slips and hard-to-access areas. Go 2 works with a 4G LTE
cellular data plan to provide continuous connectivity and
uninterrupted security. Arlo Go 2 features a 100% wire-free,
weather-resistant design, swappable, rechargeable battery and the
ability to directly connect to Wi-Fi, when in range. Users can view
and record 1080p full HD video day and night, capturing important
details with color night vision thanks to an integrated spotlight.
Two-way, full-duplex audio ensures clear communication with
visitors, while a built-in siren can be triggered remotely or
automatically to ward off intruders. Additionally, Arlo Go 2 is
equipped with GPS positioning to track the camera’s whereabouts,
allowing users to locate devices across an expansive area, or in
the event of theft.
Arlo Video Doorbell,
released in the fourth quarter of 2019, is designed to capture what
traditional video doorbells cannot, and boasts an industry-leading
vertical field-of-view, allowing users to get a bigger, more
precise picture of their front porch. The Arlo Video Doorbell
captures footage in a square aspect ratio to allow users to fully
view packages on the ground, or visitors from head to toe. It also
offers features such as HD resolution image quality along with
clear, two-way audio for users to simultaneously see and speak to
visitors. Unlike conventional doorbell cameras, the Arlo Video
Doorbell delivers direct-to-mobile video calls and personalized
alerts when packages, people, vehicles, or animals are detected,
allowing for users to quickly reply or take action provided they
are an Arlo Secure subscriber or in a trial period. The Arlo Video
Doorbell connects to an existing mechanical or digital chime for
simple installation and continuous power.
Arlo Floodlight Camera,
released in the first quarter of 2020, is the first wire-free
floodlight camera on the market. The floodlight camera brings
powerful LEDs, an integrated 2K HDR camera, 160-degree field of
view, two-way audio, custom lighting configurations and a built-in
siren to any home or small business. The floodlight camera can
automatically measure the amount of surrounding light to allow for
true customization for when the floodlight automatically turns on.
The floodlight camera also offers three different light patterns –
constant, flashing, and pulsating – which users can control
manually on-demand or via automation rules.
Arlo Ultra 2,
released in the second quarter of 2020, is designed to deliver an
enhanced user experience with improved range, building on advanced
features such as 4K video with HDR, an ultra-wide, 180-degree field
of view, auto zoom and tracking on moving objects with clarity and
detail, color night vision allowing the user to see video in color
rather than traditional black and white, built-in siren that is
automatically triggered by motion or audio, or manually triggered
via the Arlo App and more. Arlo Ultra 2 works with Amazon Alexa,
Google Assistant, Apple Homekit, and IFTTT for easy interaction,
automation and control.
Arlo Essential,
released in the third quarter of 2020, features an integrated,
wire-free, extended-life battery that works for up to one year on
one charge, an integrated spotlight with color night vision, HD
video, two-way audio, motion detection alerts and a built-in siren.
A direct Wi-Fi connection enables the Arlo Essential XL Spotlight
camera to function as a stand-alone home security solution without
the need for a separate Arlo SmartHub or Base Station.
Arlo Essential Video Doorbell,
released in the third quarter of 2020, features an easy-to-install,
wire-free, battery-powered design.
Arlo’s latest front-entry solution – which joins a robust ecosystem
of home security products and services – captures what conventional
video doorbells can’t. An industry-leading, 180-degree viewing
angle with a square, 1:1 aspect ratio ensures users can see
packages on the ground or visitors from head-to-toe on their mobile
devices. HD video resolution combined with direct-to-mobile video
calls, clear, two-way audio and personalized alerts, allow users to
quickly reply to guests or take action. Able to connect directly to
Wi-Fi, the latest solution can be powered by its rechargeable
battery
or be hardwired for continuous charging.
Arlo Pro 4,
released in the fourth quarter of 2020, is designed with weather
resistance, wide 160-degree field of view, 2K video resolution with
HDR, and up to a six-month battery life. Pro 4 also includes
two-way audio, built-in siren, and integrated spotlight. The
updated Pro 4 has the ability to connect directly to home Wi-Fi
networks without the need for a dedicated Arlo SmartHub or Base
Station, which allows the camera to work as a standalone system for
easier installation and setup.
Arlo Essential Indoor,
released in the first quarter of 2021, features 1080p HD video with
enhanced night vision that allows users to capture important
details day or night, a 130-degree diagonal field-of-view, motion
and audio protection and full duplex audio for two-way
conversations. The Arlo Essential Indoor Camera’s unique automated
privacy shield is a reassuring feature designed to ease privacy
concerns around having a security camera indoors. When the privacy
shield is in the disarm mode, recording, motion and audio detection
is disabled and won’t be enabled until the shield is opened by the
user via the Arlo app. Users can also signal the privacy shield to
open automatically and begin recording by starting a live stream or
changing the camera to arm mode. This gives users the power to
decide when their camera is monitoring a room and recording
video/audio, and when it is not. Arlo Essential Indoor Camera also
has built-in siren and works compatibly with Amazon Alexa, Google
Assistant and IFTTT for easy interaction, automation and
control.
Arlo Go 2 LTE/Wi-Fi Security Camera,
released in the fourth quarter of 2021, delivers smarter security
for remote or hard-to-access locations and enables LTE and Wi-Fi
connectivity for monitoring vacation homes, construction sites,
commercial properties, trails and more. Arlo Go 2 LTE/Wi-Fi
Security Camera works with 4G cellular data plans to provide
continuous connectivity and uninterrupted security and provides
users with 100% wire-free setup, weather-resistant design, a
swappable, rechargeable battery and the ability to connect to Wi-Fi
when in range. Users can view and record 1080p full HD video day
and night, as well as capture important details with color night
vision thanks to an integrated spotlight. The two-way, full-duplex
audio ensures clear communication with visitors, while a built-in
siren can be triggered remotely or automatically to ward off
intruders. Arlo Go 2 is also equipped with GPS positioning to track
the camera’s whereabouts, allowing users to locate multiple devices
across an expansive area, or in the event of theft.
Arlo Accessories
Charging Accessories
are designed to offer additional convenient ways to keep Arlo
wire-free cameras up and running even longer. With the Arlo
Charging Station, users can charge up to two Arlo Pro, Arlo Pro 2
or Arlo Go batteries with fast-charging technology so there is
always a battery ready to go. For those looking to eliminate
battery swaps entirely, the mountable and weather-resistant Arlo
Solar Panel connects to various Arlo cameras to keep batteries
charged with just a few hours of direct sunlight.
Mounts
feature innovative designs that allow users to mount their cameras
outdoors or indoors, on ceilings or countertops. The Arlo Quadpod
is a flexible mount featuring four legs crafted from flexible
stainless steel and silicone that allows users to mount their
camera even in challenging spots such as tree branches or metal
poles.
Sales Channels
We sell our products through multiple sales channels worldwide,
including traditional and online retailers, wholesale distributors,
broadcast channels, wireless carriers, security solution providers
as well as directly to consumers through our own online
store.
Retailers.
We sell to traditional and online retailers, either directly or
through wholesale distributors. We work directly with our retail
channels on market development activities, such as co-advertising,
including digital and traditional media, online promotions and
video demonstrations, instant rebate programs, event sponsorship
and sales associate training. Our largest retailer is Best Buy and
its affiliates.
Wholesale Distributors.
Our distribution channel supplies our products to retailers,
e-commerce resellers, wireless carriers and broadcast channels. We
sell directly to our distributors, including Ingram Micro, Inc.,
D&H Distributing Company and Synnex Corporation.
Broadcast Channels.
We also sell our products through TV shopping networks such as HSN
and QVC.
Wireless Carriers.
We supply our products to major wireless carriers around the world,
including AT&T, T-Mobile, Verizon, Telstra and Vodafone. This
sales channel is and will continue to be the key route-to-market
for our current portable LTE-enabled camera and any future
cellular-enabled connected lifestyle devices.
Security Solution Providers.
We sell our products and services to security solution providers,
including Verisure, from which we derived 40.1% of our revenue in
2022.
Arlo.com.
In the third quarter of 2019, we launched our online direct to
consumer store to sell our products directly to our customers. We
also sell our services, such as Arlo Secure and Arlo Safe, directly
to consumers.
Agreements with Verisure
Verisure is the exclusive distributor of our products in Europe for
all retail channels and direct channels in connection with
Verisure’s security business. During the five-year period
commencing January 1, 2020, Verisure has an aggregate purchase
commitment of $500.0 million. As of December 31, 2022, $336.7
million of the purchase commitment has been fulfilled with a
backlog of $97.9 million. In December 2020, Verisure prepaid $40.0
million for product purchases in fiscal 2021 and fiscal 2022. The
Supply Agreement also provides for certain development services to
Verisure under the NRE arrangement, including development of
certain custom products specified by Verisure.
Competition
We believe we are well-positioned to compete within the broader
connected lifestyle market, both within and beyond the home as we
continue to launch new product lines and services within our smart
platform. However, our market is highly competitive and evolving,
and we expect competition to increase in the future. We believe the
principal competitive factors impacting the market for our products
and services include price, service offerings, functionality,
brand, technology, design, distribution channels and customer
service.
We believe that we compete favorably in these areas on the basis of
our market position in the U.S. consumer network connected camera
systems market, best-in-class technology, direct relationship with
users and user engagement, trusted Arlo platform, strong Arlo brand
and channel partners and deep strategic partnerships with key
suppliers, such as Infineon Technologies AG, OmniVision
Technologies Inc. and Qualcomm Incorporated. Moreover, our focus on
building a connected lifestyle platform, combined with our
leadership in innovation in the consumer network connected camera
systems market, has led to the strength of our Arlo brand
worldwide. We believe this focus allows us to compete favorably
with companies that have introduced or have announced plans to
introduce devices with connected lifestyle functionalities.
Nevertheless, the connected lifestyle market remains highly
competitive, and has a multitude of participants, including: large
global technology companies, such as Amazon (Ring and Blink) and
Google (Nest); security service vendors, such as ADT; telecom
service providers, such as AT&T and Comcast; and other
companies, such as Eufy and Wyze.
Many of our existing and potential competitors have longer
operating histories, greater name recognition and substantially
greater financial, technical, sales, marketing and other resources
than we do. We anticipate that current and potential competitors
will also intensify their efforts to penetrate our target markets.
For additional information, see “Risk
Factors-Risks Related to Our Business-Some of our competitors have
substantially greater resources than we do, and to be competitive
we may be required to lower our prices or increase our sales and
marketing expenses, which could result in reduced margins and loss
of market share.”
Research and Development
We are passionate about developing new and innovative products and
services that enable the connected lifestyle. Our research and
development team collaborates with our product team to design and
build differentiated new products and improve upon our existing
products and services. Our goal is to create unique user
experiences within the connected lifestyle. For example, our
original Arlo camera was the world’s first commercially available
100% battery-operated Wi-Fi security camera with 720p HD video,
IP65-rated weather resistance and night vision. The groundbreaking
nature of the product, first launched in December 2014, gathered
critical acclaim and market success. Our research and development
team has taken this same approach to all of our subsequent product
releases, constantly innovating to stay competitive.
As of December 31, 2022, our research and development staff
consisted of 133 employees, located in our offices worldwide, and
was comprised of front-end and back-end software engineers, radio
frequency engineers, electrical engineers, mechanical engineers,
system test engineers, computer vision scientists and data analysis
engineers, UX and industrial design engineers and mobile app
developers. We also engage and contract with certain third parties,
such as ITS Partner LLC, e-Infochips Ltd., and Elinext Software
Ltd. on research and development. We intend to continue to invest
in research and development to expand our platform and capabilities
in the future.
Manufacturing
While all of our products are primarily designed in North America,
we currently outsource manufacturing to Foxconn Cloud Network
Technology Singapore Pte. Ltd., Pegatron Corporation, and Chicony
Electronics Co., Ltd., which are all headquartered in Asia.
Although we do not have any long-term purchase contracts, we have
executed master product supply agreements with these manufacturers,
which typically provide indemnification for intellectual property
infringement, epidemic failure clauses, agreed-upon price
concessions, division of each party’s intellectual property and
product quality requirements. As we expand our product portfolio,
we continue to explore new potential manufacturing partners that
may provide us with competitive advantages on technology and cost.
Since we outsource our manufacturing,
we have the flexibility and ability to adapt to market changes,
product supply and component pricing while keeping our costs low.
In addition to their responsibility for the manufacturing of our
products, our manufacturers typically purchase all necessary parts
and materials to produce finished goods. To maintain quality
standards for our suppliers, we have established our own product
quality organization based in Vietnam, Hong Kong, Taiwan, and
Indonesia, which is responsible for auditing and inspecting process
and product quality on the premises of our manufacturers. Our
strategic relationships with our manufacturers are an important
component of our ability to introduce new products and grow our
business.
We focus on driving alignment of our product roadmaps with our
manufacturers and determining what we can do collectively to reduce
costs across the supply chain. Our operations teams based in the
United States, Hong Kong, Taiwan, Vietnam, and Indonesia coordinate
with our manufacturers’ engineering, manufacturing and quality
control personnel to develop the requisite manufacturing processes,
quality checks and testing and general oversight of the
manufacturing activities. We believe this model has enabled us to
quickly and efficiently deliver high-quality and innovative
products, while enabling us to minimize costs and manage
inventory.
Our products are manufactured and packaged for retail sale by our
manufacturers mostly in Vietnam, Thailand, and Indonesia, and
shipped to our logistics hubs located in the United States, Hong
Kong, and Australia. Our operations team coordinates with our
manufacturers to ensure that the shipment of our products from the
manufacturers to these logistics hubs meets customer
demand.
In November 2022, we announced a restructuring plan to reduce our
cost structure to better align the operational needs of the
business. As a result, we have ceased operations of our Hong Kong
office during the fourth quarter of 2022.
Marketing
Our marketing programs are focused on building global brand
awareness, increasing product adoption and driving sales. Our
marketing efforts target individuals interested in a connected
lifestyle. We also increase brand awareness by augmenting
word-of-mouth recommendations from Arlo customers and key
influencers, interact digitally with current and prospective
customers and maintain and develop our strong channel partnerships
and strong shelf presence. We collaborate with our retail partners
on market development activities to drive in-store and online
engagement with the brand and drive purchases.
Customer Care
We provide customer care to Arlo users globally through a variety
of communication channels, including phone, chat, email, social
media and our Arlo Community, as well as self-guided resources such
as knowledge-base articles, how-to videos and technical
documentation on our website. We believe that providing timely,
responsive customer support and educational content to our users
helps foster an ongoing engagement that builds loyalty to our brand
and also enables us to understand user needs as they evolve. The
online Arlo Community in particular serves as an efficient and
engaging platform through which we can deliver customer care and
receive feedback from users. We gather and analyze user feedback
from all platforms to help inform our design and engineering teams
about future enhancements to our products and
services.
In order to best serve our users globally, we manage and
continually adjust our resources worldwide through a mixture of
permanent employees and subcontracted, outsourced resources. As our
installed base continues to grow in new geographies, categories and
technologies, we will continue to focus on building a scalable
support infrastructure that enables our users to engage with us
through the channel that is most convenient and efficient for their
needs.
Arlo Cloud Engineering Operations
We currently serve our users from third-party data center hosting
facilities. Our cloud platform runs in data centers in the United
States and a data center in Ireland to serve our European Union
users. We also utilize data centers in Singapore and Australia. We
have designed our cloud environments to be highly resilient with
built-in redundancy and provide failover to other data centers in
our network.
Fiscal periods
Our fiscal year begins on January 1 of the year stated and
ends on December 31 of the same year. We report our 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.
Seasonality
Historically, we have generated higher product revenue in the third
and fourth quarters of each year compared to the first and second
quarters due to seasonal demand from consumer markets, primarily
relating to the beginning of the school year and the holiday
season. For example, for the years ended December 31, 2022,
2021 and 2020, our third and fourth quarters collectively
represented 50.3%, 58.4% and 63.0%, respectively, of our revenue
for such years. Therefore, timely and effective product
introductions are critical to our results of
operations.
Intellectual Property
Our ability to protect our intellectual property will be an
important factor in the success and continued growth of our
business. We rely upon a combination of patent, copyright, trade
secret, and trademark laws and contractual restrictions, such as
confidentiality agreements and licenses, to establish and protect
our proprietary rights. Some of our technology relies upon
third-party licensed intellectual property.
We currently hold 106 issued United States patents, 43 pending
United States patent applications, 33 international patents,
including patents issued by China and the EU, 30 pending patent
applications outside of the United States. All the patents and
patent applications generally relate to certain aspects of our
hardware devices, accessories, software and services. We
continually review our development efforts to assess the existence
and patentability of new intellectual property.
We also pursue the registration of our domain names and trademarks
and service marks in the United States and in certain locations
outside the United States. We currently have seven registered
trademarks and three pending trademark applications in the United
States, as well as 62 registered trademarks and 43 pending
trademark applications outside of the United States. We currently
hold trademark registrations for “ARLO” in 13 countries: the United
States, Argentina, Australia, Brazil, Canada, Chile, China, Japan,
Mexico, New Zealand, Peru, Singapore, and Trinidad and Tobago, as
well as the World Intellectual Property
Organization.
For more information, see “Risk
Factors-Risks Related to Our Business-If we are unable to secure
and protect our intellectual property rights, our ability to
compete could be harmed.”
Environmental Laws
Our products and manufacturing processes are subject to numerous
governmental regulations, which cover both the use of various
materials and environmental concerns. Environmental issues such as
pollution and climate change have had significant legislative and
regulatory efforts on a global basis, and there are expected to be
additional changes to the regulations in these areas. These changes
could directly increase the cost of energy, which may have an
impact on the way we manufacture products. In addition, any new
regulations or laws in the environmental area might increase the
cost of the raw materials we use in our products and the cost of
compliance. Other regulations in the environmental area may require
us to continue to monitor and ensure proper disposal or recycling
of our products. To the best of our knowledge, we maintain
compliance with all current government regulations concerning our
production processes for all locations in which we operate. Since
we operate on a global basis, this is also a complex process that
requires continual monitoring of regulations and an ongoing
compliance process to ensure that we and our suppliers are in
compliance with all existing regulations.
Culture and Human Capital Resources
Our culture, mission and values are a critical part of our success.
In fact, core to our vision of bringing peace of mind by connecting
and protecting what people care about the most is creating the
right environment for our people. We strive to ensure that our
employees are continually connected to our vision and mission
through appropriate communication, throughout our talent
proposition and as we serve our customers.
Our culture focuses on connecting our people in an inclusive and
flexible workforce, connecting our employees with the right
development opportunities, and linking our group success with
individual performance. It is founded on an employee value
proposition that puts people and teams at the center of our
business. Through radical collaboration, trust, and conscious
leadership, our diverse teams continue to create innovative
solutions for our customers.
We protect our culture through leadership excellence and developing
the right leadership behaviors that are both conscious and
strategic in their impact on our performance. We value creativity,
agility, hard work, transparency, and integrity, as we focus on
continually innovating and improving our technology, solutions,
brand, and partnerships.
Human capital measures and objectives used to manage our business
focus on employee safety and wellness, talent acquisition and
retention, employee engagement, development and training, diversity
and inclusion, and compensation and pay equity. We strive to
attract and retain exceptionally talented, diverse, and ethical
employees, and we are proud of the culture we have built. Our
talented employees, located throughout the United States, Canada,
Asia, Australia, and Europe communicate, connect and work together
to deliver a world-class end-to-end connected lifestyle solution.
We believe that we maintain a good working relationship with our
employees, and we have not experienced any labor disputes. As of
December 31, 2022, we had a total of 343 full-time employees,
of which approximately 68% were based in the United States, and
approximately 32% were based in other global regions.
Diversity and Inclusion
Arlo is proud to be an equal opportunity workplace and an
affirmative action employer. We always strive to treat all
employees and job applicants based on merit, qualifications,
personality, and talent, and to draw from a diverse candidate pool
as we recruit new talent across all levels. We deeply connect
people from all backgrounds and beliefs and strive for a truly
inclusive and collaborative working environment.
We have taken action alongside a group of more than 1,200
businesses in a collective commitment to make progress towards
advancing diversity and inclusion in our workplace, communities,
and country. We value diversity and integrate it into our business
by striving to ensure that our company is representative of the
customers we serve and that inclusion is at the core of our
workplace culture. In 2020, our Chief Executive Officer signed the
CEO Action for Diversity & Inclusion pledge, the largest
CEO-driven business commitment to advance diversity and inclusion
within the workplace
to underscore our commitment. By making the pledge, we go beyond
accepting diversity and committed to the following
actions:
•Continue
to cultivate our workplace to support open dialogue on complex, and
sometimes difficult conversations about diversity and
inclusion.
•Make
unconscious bias education available to everyone.
•Share
best known—and unsuccessful—actions.
•Create
and share strategic inclusion and diversity plans with our board of
directors as a way to prioritize diversity and inclusion and to
drive accountability in our organization.
For the third year running, we are partnering with the GEM
Consortium (“GEM”). GEM connects highly qualified students from
underrepresented groups to STEM graduate programs with much-needed
financial support that is often the deciding factor in pursuing
graduate education. We have welcomed a number of GEM interns at
Arlo.
We host a number of events and days of observance with guest and
internal speakers at Arlo. Each Spring, for example, we hold a
“Week of Understanding” with speakers on key diversity and
inclusion topics. These events provide a platform for dialogue and
an opportunity for every employee to learn, discuss, and appreciate
differences between colleagues as we grow to drive greater
inclusion at Arlo and truly reflect the customers we
serve.
Employee Safety, Health and Well-being
We look to safeguard the safety, health and well-being of all of
our employees. We have managed the continuing impact of COVID-19,
including continuous updates to our health and safety policies and
processes and migrating all but a limited number of our global
workforce to work remotely. We are focused 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. The
health and well-being of our workforce remains our top priority
while we ensure productivity while working from home.
Company Information
We were incorporated in Delaware in January 2018. Our principal
executive offices are located at 2200 Faraday Ave., Suite #150,
Carlsbad, California 92008, and our telephone number is (408)
890-3900. Our website is http://www.arlo.com. Our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and amendments to reports filed pursuant to Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) are available free of charge on our website as soon
as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities Exchange Commission
(the “SEC”). The contents of our website are not incorporated into
this Annual Report. Further, our references to the URLs for these
websites are intended to be inactive textual reference
only.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to reports filed
pursuant to Sections 13(a) and 15(d) of the Exchange Act are filed
with the SEC. We are subject to the informational requirements of
the Exchange Act and file or furnish reports, proxy statements, and
other information with the SEC. Our filings are also available to
the public over the Internet at the SEC’s website at
http://www.sec.gov.
Our website provides a link to our SEC filings, which are available
free of charge on the same day such filings are made. The specific
location on the website where these reports can be found is
http://investor.arlo.com. Our website also provides a link to
Section 16 filings which are available free of charge on the same
day as such filings are made. Information contained on these
websites is not a part of this Annual Report on Form
10-K.
Item 1A. Risk Factors
Investing in our common stock involves substantial risk. You should
consider carefully the risks and uncertainties described below,
together with all of the other information in this Annual Report on
Form 10-K, including our financial statements and the related notes
and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” when evaluating our business and before
deciding whether to invest in shares of our common stock. We
describe below what we believe are currently the material risks and
uncertainties we face, but they are not the only risks and
uncertainties we face. Additional risks and uncertainties that we
are unaware of, or that we currently believe are not material, may
also become important factors that adversely affect our business.
If any of the following risks actually occur, our business,
financial condition, results of operations, and future prospects
could be materially and adversely affected. In that event, the
market price of our common stock could decline and you could lose
part or all of your investment.
Risks Related to Our Business
We obtain several key components from limited or sole sources, and
if these sources fail to satisfy our supply requirements or we are
unable to properly manage our supply requirements with our
third-party manufacturers, we may lose sales and experience
increased component costs.
Any shortage or delay in the supply of key product components would
harm our ability to meet scheduled product deliveries. Many of the
components used in our products are specifically designed for use
in our products, some of which are obtained from sole source
suppliers. These components include lens, lens-sensors, and passive
infrared sensors that have been customized for the Arlo
application, as well as custom-made batteries that provide power
conservation and safety features. In addition, the components used
in our end products have been optimized to extend battery life. Our
third-party manufacturers generally purchase these components on
our behalf, and we do not have any contractual commitments or
guaranteed supply arrangements with our suppliers. If demand for a
specific component increases, we may not be able to obtain an
adequate number of that component in a timely manner or at all. In
addition, if worldwide demand for the components increases
significantly, the availability of these components could be
limited. Further, our suppliers may experience financial or other
difficulties as a result of uncertain and weak worldwide economic
conditions. Other factors that may affect our suppliers’ ability or
willingness to supply components to us include internal management
or reorganizational issues, such as roll-out of new equipment which
may delay or disrupt supply of previously forecasted components, or
industry consolidation and divestitures, which may result in
changed business and product priorities among certain suppliers. It
could be difficult, costly, and time consuming to obtain
alternative sources for these components, or to change product
designs to make use of alternative components. In addition,
difficulties in transitioning from an existing supplier to a new
supplier could create delays in component availability that would
have a significant impact on our ability to fulfill orders for our
products.
We generally provide our third-party manufacturers with a rolling
forecast of demand, which they use to determine our material and
component requirements. Lead times for ordering materials and
components vary significantly and depend on various factors, such
as the specific supplier, contract terms, and demand and supply for
a component at a given time. Some of our components have long lead
times, such as wireless local area network chipsets, physical layer
transceivers, connector jacks, and metal and plastic enclosures. If
our forecasts are not timely provided or are less than our actual
requirements, our third-party manufacturers may be unable to
manufacture products in a timely manner or at all. If our forecasts
are too high, our third-party manufacturers will be unable to use
the components they have purchased on our behalf. The cost of the
components used in our products tends to drop rapidly as volumes
increase and the technologies mature. Therefore, if our third-party
manufacturers are unable to promptly use components purchased on
our behalf, our cost of producing products may be higher than our
competitors due to an oversupply of higher-priced components.
Moreover, if they are unable to use components ordered at our
direction, we will need to reimburse them for any losses they
incur.
If we are unable to obtain a sufficient supply of components, or if
we experience any interruption in the supply of components, our
product shipments could be reduced or delayed or our cost of
obtaining these components may increase.
In addition, sole suppliers of highly specialized components may
provide, or have provided components that were either defective or
did not meet the criteria required by us or our manufacturers,
retailers, distributors, or other channel partners, resulting in
delays, lost revenue opportunities, and potentially substantial
write-offs.
We depend on a limited number of third-party manufacturers for
substantially all of our manufacturing needs. If these third-party
manufacturers experience any delay, disruption, or quality control
problems in their operations, including due to the COVID-19
pandemic, we could lose or fail to grow our market share and our
brand may suffer.
All of our products are manufactured, assembled, tested and
generally packaged by a limited number of third-party original
design manufacturers (“ODMs”). In most cases, we rely on these
manufacturers to procure components and, in some cases, subcontract
engineering work. We currently outsource manufacturing to Foxconn
Cloud Network Technology Singapore Pte. Ltd., Pegatron Corporation,
and Chicony Electronics Co., Ltd.. We do not have any long-term
contracts with any of these third-party manufacturers, although we
have executed product supply agreements with these manufacturers,
which typically provide indemnification for intellectual property
infringement, epidemic failure clauses, agreed-upon price
concessions, and certain product quality requirements. Some of
these third-party manufacturers produce products for our
competitors. Due to changing economic conditions, including due to
the COVID-19 pandemic, the viability of some of these third-party
manufacturers may be at risk. The loss of the services of any of
our primary third-party manufacturers could cause a significant
disruption in operations and delays in product shipments.
Qualifying a new manufacturer and commencing volume production is
expensive and time consuming. Ensuring that a contract manufacturer
is qualified to manufacture our products to our standards is time
consuming. In addition, there is no assurance that a contract
manufacturer can scale its production of our products at the
volumes and in the quality that we require. If a contract
manufacturer is unable to do these things, we may have to move
production for the products to a new or existing third-party
manufacturer, which would take significant effort and our business,
results of operations, and financial condition could be materially
and adversely affected. In addition, as we contemplate moving
manufacturing into different jurisdictions, we may be subject to
additional significant challenges in ensuring that quality,
processes, and costs, among other issues, are consistent with our
expectations. For example, while we expect our manufacturers to be
responsible for penalties assessed on us because of excessive
failures of the products, there is no assurance that we will be
able to collect such reimbursements from these manufacturers, which
causes us to take on additional risk for potential failures of our
products.
Our reliance on third-party manufacturers also exposes us to the
following risks over which we have limited control:
•unexpected
increases in manufacturing and repair costs;
•inability
to control the quality and reliability of finished
products;
•inability
to control delivery schedules;
•potential
liability for expenses incurred by third-party manufacturers in
reliance on our forecasts that later prove to be
inaccurate;
•potential
lack of adequate capacity to manufacture all or a part of the
products we require; and
•potential
labor unrest affecting the ability of the third-party manufacturers
to produce our products.
All of our products must satisfy safety and regulatory standards
and some of our products must also receive government
certifications. Our third-party manufacturers are primarily
responsible for conducting the tests that support our applications
for most regulatory approvals for our products. If our third-party
manufacturers fail to timely and accurately conduct these tests, we
would be unable to obtain the necessary domestic or foreign
regulatory approvals or certificates to
sell our products in certain jurisdictions. As a result, we would
be unable to sell our products and our sales and profitability
could be reduced, our relationships with our sales channel could be
harmed, and our reputation and brand would suffer.
Specifically, substantially all of our manufacturing and assembly
occurs in the Asia Pacific region, primarily in Vietnam, and any
disruptions due to natural disasters, health epidemics, and
political, social, and economic instability in the region would
affect the ability of our third-party manufacturers to manufacture
our products. In particular, in the event the labor market in
Vietnam becomes saturated, our third-party manufacturers in Vietnam
may increase our costs of production. If these costs increase, it
may affect our margins and ability to lower prices for our products
to stay competitive. Labor unrest may also affect our third-party
manufacturers, as workers may strike and cause production delays.
If our third-party manufacturers fail to maintain good relations
with their employees or contractors, and production and
manufacturing of our products are affected, then we may be subject
to shortages of products and the quality of products delivered may
be affected. Further, if our manufacturers or warehousing
facilities are disrupted or destroyed, we could have no other
readily available alternatives for manufacturing and assembling our
products, and our business, results of operations, and financial
condition could be materially and adversely affected.
In the future, we may work with more third-party manufacturers on a
contract manufacturing basis, which could result in our exposure to
additional risks not inherent in a typical ODM arrangement. Such
risks may include our inability to properly source and qualify
components for the products, lack of software expertise resulting
in increased software defects, and lack of resources to properly
monitor the manufacturing process. In our typical ODM arrangement,
our ODMs are generally responsible for sourcing the components of
the products and warranting that the products will work according
to a product’s specification, including any software
specifications. In a contract manufacturing arrangement, we would
take on much more, if not all, of the responsibility around these
areas. If we are unable to properly manage these risks, our
products may be more susceptible to defects, and our business,
results of operations, and financial condition could be materially
and adversely affected.
If disruptions in our transportation network occur or our shipping
costs substantially increase, including due to the COVID-19
pandemic, we may be unable to sell or timely deliver our products,
and our operating expenses could increase.
We are highly dependent upon the transportation systems we use to
ship our products, including surface, ocean and air freight. Our
attempts to closely match our inventory levels to our product
demand intensify the need for our transportation systems to
function effectively and without delay. On a quarterly basis, our
shipping volume also tends to steadily increase as the quarter
progresses, which means that any disruption in our transportation
network in the latter half of a quarter will likely have a more
material effect on our business than a disruption at the beginning
of a quarter.
The transportation network is subject to disruption or congestion
from a variety of causes, including labor disputes or port strikes,
international conflicts, such as the potential escalating conflict
between Russia and Ukraine, acts of war or terrorism, natural
disasters, and congestion resulting from higher shipping volumes.
Labor disputes among freight carriers and at ports of entry are
common, particularly in Europe, and we expect labor unrest and its
effects on shipping our products to be a continuing challenge for
us. A port worker strike, work slow-down, or other transportation
disruption in Long Beach, California, where we import our products
to fulfill our American orders, could significantly disrupt our
business. Our international freight is regularly subject to
inspection by governmental entities. As a result of the COVID-19
pandemic, international freight capacity has dropped, causing air
and ocean freight rates to materially increase. Transit times have
also increased. If our delivery times increase unexpectedly for
these or any other reasons, our ability to deliver products on time
would be materially and adversely affected and result in delayed or
lost revenue as well as customer imposed penalties. In addition, if
increases in fuel prices occur, our transportation costs would
likely increase. Moreover, the cost of shipping our products by air
freight is greater than by other methods. From time to time in the
past and increasingly more common during the COVID-19 pandemic, we
have shipped products using extensive air freight to meet
unexpected spikes in demand and shifts in demand between product
categories, to bring new product introductions to market quickly
and to timely ship products previously ordered. If we continue to
rely more heavily upon air freight to deliver our products, our
overall shipping costs will increase. A prolonged transportation
disruption or a significant increase in the cost of freight could
materially and adversely affect our business, results of
operations, and financial
condition.
The effects of health epidemics, including the COVID-19 pandemic
and its variants, could have an adverse impact on our business,
operations and the markets and communities in which we, our
partners and customers operate.
Our business and operations could be adversely affected by health
epidemics, including the recent COVID-19 pandemic, impacting the
markets and communities in which we, our partners and our customers
operate. On March 11, 2020, the World Health Organization announced
that COVID-19, a respiratory illness, caused by a novel coronavirus
is a pandemic. In response to the COVID-19 pandemic, many state,
local and foreign governments have put in place, and others in the
future may put in place, quarantines, executive orders,
shelter-in-place orders and similar government orders and
restrictions in order to control the spread of the disease. Such
orders or restrictions, or the perception that such orders or
restrictions could occur, have resulted in business closures, work
stoppages, slowdowns and delays, work-from-home policies, travel
restrictions and cancellation of events, among other effects that
could negatively impact productivity and disrupt our operations and
those of our partners and our customers. For example, we have
implemented a work-from-home policy for the vast majority of
employees, and we may take further actions that alter our
operations as may be required by federal, state or local
authorities, or which we determine are in the best interests of our
employees, customers, partners and stockholders.
In addition, while the potential impact and duration of the
COVID-19 pandemic on the global economy and our business in
particular may be difficult to assess or predict, the pandemic has
resulted in, and may continue to result in significant disruption
of global financial markets, reducing our ability to access
capital, which could in the future negatively affect our liquidity.
The COVID-19 pandemic also could reduce demand for our products and
services as our largest channel partners focus on selling essential
goods, temporarily close stores or experience decreases in foot
traffic. In addition, a recession or market correction resulting
from the spread of COVID-19 could further decrease technology
spending, adversely affecting demand for our products and services,
our business and the value of our common stock.
The COVID-19 pandemic may adversely affect the ability of our
third-party manufacturers and other suppliers to fulfill their
obligations to us. We rely on these manufacturers to procure
components and, in some cases, subcontract engineering work. We
cannot guarantee that our third-party manufacturers or other
suppliers will be able to meet our near-term or long-term
manufacturing requirements. If we experience supply constraints
from our third-party manufacturers, we may be required to allocate
the affected products amongst our customers, which could have a
material adverse effect on our relationships with these customers
and on our financial condition. In addition, if we are unable to
meet customer demand due to fluctuating or late supply from our
third-party manufacturers and other suppliers, it could result in
lost sales and have a material adverse effect on our business. We
also rely on other suppliers such as cloud infrastructure services
providers, distribution centers and logistics and transportation
services providers. If our manufacturers and other suppliers are
unable to fulfill their obligations to us, we could face products
shortages, delay in new product introductions, services to our
customers could be interrupted, and our products distribution could
be delayed and thus adversely affecting our revenue. For example,
increased demand for electronics as a result of the COVID-19
pandemic, effects of the U.S. trade war with China, 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.
While we have been 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.
The global pandemic of COVID-19 continues to rapidly evolve, and we
will continue to monitor the COVID-19 situation closely. The
ultimate impact of the COVID-19 pandemic or a similar health
epidemic is highly uncertain and
subject to change. We do not yet know the full extent of potential
delays or impacts on our business, operations or the global economy
as a whole.
If we lose the services of key personnel, we may not be able to
execute our business strategy effectively.
Our future success depends in large part upon the continued
services of our key technical, engineering, sales, marketing,
finance, and senior management personnel. The competition for
qualified personnel with significant experience in the design,
development, manufacturing, marketing, and sales in the markets in
which we operate is intense, both where our U.S. operations are
based, including Silicon Valley, and in global markets in which we
operate. Our inability to attract qualified personnel, including
hardware and software engineers and sales and marketing personnel,
could delay the development and introduction of, and harm our
ability to sell, our products and services. Decreases in our stock
price may negatively affect our efforts to attract and retain
qualified personnel. Changes to U.S. immigration policies that
restrict our ability to attract and retain technical personnel may
negatively affect our research and development efforts. We will
continue to replace key personnel, from within or looking outside,
wherever we find the best candidates.
We do not maintain any key person life insurance policies. Our
business model requires extremely skilled and experienced senior
management who are able to withstand the rigorous requirements and
expectations of our business. Our success depends on senior
management being able to execute at a very high level. The loss of
any of our senior management or other key engineering, research,
development, sales, or marketing personnel, particularly if lost to
competitors, could harm our ability to implement our business
strategy and respond to the rapidly changing needs of our business.
If we suffer the loss of services of any key executive or key
personnel, our business, results of operations, and financial
condition could be materially and adversely affected. In addition,
we may not be able to have the proper personnel in place to
effectively execute our long-term business strategy if key
personnel retire, resign or are otherwise terminated.
We expect our results of operations to fluctuate on a quarterly and
annual basis, which could cause our stock price to fluctuate or
decline.
Our results of operations are difficult to predict and may
fluctuate substantially from quarter-to-quarter or year-to-year for
a variety of reasons, many of which are beyond our control. If our
actual results were to fall below our estimates or the expectations
of public market analysts or investors, our quarterly and annual
results would be negatively impacted and the price of our stock
could decline. Other factors that could affect our quarterly and
annual operating results include, but are not limited
to:
•changes
in the pricing policies of, or the introduction of new products by,
us or our competitors;
•delays
in the introduction of new products by us or market acceptance of
these products;
•health
epidemics and other outbreaks, including the COVID-19 pandemic,
which could significantly disrupt our operations;
•introductions
of new technologies and changes in consumer preferences that result
in either unanticipated or unexpectedly rapid product category
shifts;
•competition
with greater resources may cause us to lower prices and in turn
could result in reduced margins and loss of market
share;
•epidemic
or widespread product failure, or unanticipated safety issues, in
one or more of our products;
•slow
or negative growth in the connected lifestyle, home electronics,
and related technology markets;
•seasonal
shifts in end-market demand for our products;
•unanticipated
decreases or delays in purchases of our products by our significant
retailers, distributors, and other channel partners;
•component
supply constraints from our vendors;
•unanticipated
increases in costs, including air freight, associated with shipping
and delivery of our products;
•the
inability to maintain stable operations by our suppliers and other
parties with whom we have commercial relationships;
•discovery
of security vulnerabilities in our products, services or systems,
leading to negative publicity, decreased demand, or potential
liability;
•foreign
currency exchange rate fluctuations in the jurisdictions where we
transact sales and expenditures in local currency;
•excess
levels of inventory and low turns;
•changes
in or consolidation of our sales channels and wholesale distributor
relationships or failure to manage our sales channel inventory and
warehousing requirements;
•delay
or failure to fulfill orders for our products on a timely
basis;
•delay
or failure of our retailers, distributors, and other channel
partners to purchase at their historic volumes or at the volumes
that they or we forecast;
•changes
in tax rates or adverse changes in tax laws that expose us to
additional income tax liabilities;
•changes
in U.S. and international tax policy, including changes that
adversely affect customs, tax or duty rates such as tariffs on
product imports, as well as income tax legislation and regulations
that affect the countries where we conduct business;
•operational
disruptions, such as transportation delays or failure of our order
processing system, particularly if they occur at the end of a
fiscal quarter;
•disruptions
or delays related to our financial and enterprise resource planning
systems;
•our
inability to accurately forecast product demand, resulting in
increased inventory exposure;
•allowance
for credit losses exposure with our existing retailers,
distributors and other channel partners and new retailers,
distributors and other channel partners, particularly as we expand
into new international markets;
•geopolitical
disruption, including sudden changes in immigration policies,
leading to disruption in our workforce or delay or even stoppage of
our operations in manufacturing, transportation, technical support,
and research and development;
•terms
of our contracts with channel partners or suppliers that cause us
to incur additional expenses or assume additional
liabilities;
•an
increase in price protection claims, redemptions of marketing
rebates, product warranty and stock rotation returns or allowance
for credit losses;
•litigation
involving alleged patent infringement;
•failure
to effectively manage our third-party customer support partners,
which may result in customer complaints and/or harm to the Arlo
brand;
•our
inability to monitor and ensure compliance with our code of ethics,
our anti-corruption compliance program, and domestic and
international anti-corruption laws and regulations, whether in
relation to our employees or with our suppliers or retailers,
distributors, or other channel partners;
•labor
unrest at facilities managed by our third-party
manufacturers;
•workplace
or human rights violations in certain countries in which our
third-party manufacturers or suppliers operate, which may affect
the Arlo brand and negatively affect our products’ acceptance by
consumers;
•unanticipated
shifts or declines in profit by geographical region that would
adversely impact our tax rate;
•failure
to implement and maintain the appropriate internal controls over
financial reporting, which may result in restatements of our
financial statements; and
•any
changes in accounting rules.
As a result, period-to-period comparisons of our results of
operations may not be meaningful, and you should not rely on them
as an indication of our future performance.
If we fail to continue to introduce or acquire new products or
services that achieve broad market acceptance on a timely basis, or
if our products or services are not adopted as expected, we will
not be able to compete effectively and we will be unable to
increase or maintain revenue and gross margin.
We operate in a highly competitive, quickly changing environment,
and our future success depends on our ability to develop or acquire
and introduce new products and services that achieve broad market
acceptance. Our future success will depend in large part upon our
ability to identify demand trends in the connected lifestyle market
and quickly develop or acquire, and design, manufacture and sell,
products and services that satisfy these demands in a
cost-effective manner.
In order to differentiate our products and services from our
competitors’ products, we must continue to increase our focus and
capital investment in research and development, including software
development. We have committed a substantial amount of resources to
the manufacture, development and sale of our Arlo Secure services
and our wire-free smart Wi-Fi cameras, advanced baby monitors, and
smart lights, and to introducing additional and improved models in
these lines. In addition, we plan to continue to introduce new
categories of smart connected devices to the Arlo platform in the
near future. If our existing products and services do not continue,
or if our new products or services fail, to achieve widespread
market acceptance, if existing customers do not subscribe to our
paid subscription services such as Arlo Secure, if those services
do not achieve widespread market acceptance, or if we are
unsuccessful in capitalizing on opportunities in the connected
lifestyle market, as well as in the related market in the small
business segment, our future growth may be slowed and our business,
results of operations, and financial condition could be materially
and adversely affected. Successfully predicting demand trends is
difficult, and it is very difficult to predict the effect that
introducing a new product or service will have on existing product
or service sales. It is possible that Arlo may not be as successful
with its new products and services, and as a result our future
growth may be slowed and our business, results of operations and
financial condition could be materially and adversely affected.
Also, we may not be able to respond effectively to new product or
service announcements by our competitors by quickly introducing
competitive products and services.
In addition, we may acquire companies and technologies in the
future and, consistent with our vision for Arlo, introduce new
product and service lines in the connected lifestyle market. In
these circumstances, we may not be able to successfully manage
integration of the new product and service lines with our existing
suite of products and services. If we are unable to effectively and
successfully further develop these new product and service lines,
we may not be able to increase or maintain our sales, and our gross
margin may be adversely affected.
We may experience delays and quality issues in releasing new
products and services, which may result in lower quarterly revenue
than expected. In addition, we may in the future experience product
or service introductions that fall short of our projected rates of
market adoption. Currently, reviews of our products and services
are a significant factor in the success of our new product and
service launches. If we are unable to generate a high number of
positive reviews or quickly respond to negative reviews, including
end-user reviews posted on various prominent online retailers, our
ability to sell our products and services will be harmed. Any
future delays in product and service development and introduction,
or product and service introductions that do not meet broad market
acceptance, or unsuccessful launches of new product and service
lines could result in:
•loss
of or delay in revenue and loss of market share;
•negative
publicity and damage to our reputation and brand;
•a
decline in the average selling price of our products and
services;
•adverse
reactions in our sales channels, such as reduced shelf space,
reduced online product visibility, or loss of sales channels;
and
•increased
levels of product returns.
Throughout the past few years, Arlo has significantly increased the
rate of new product and service introductions, with the
introduction of new lines of Arlo cameras, smart lights, and
doorbell products, as well as the introduction of our Arlo Secure
services and Arlo Home Security System. If we cannot sustain that
pace of product and service introductions, either through rapid
innovation or acquisition of new products and services or product
and service lines, we may not be able to maintain or increase the
market share of our products and services or expand further into
the connected lifestyle market in accordance with our current
plans. In addition, if we are unable to successfully introduce or
acquire new products and services with higher gross margin, our
revenue and overall gross margin would likely decline.
We may need additional financing to meet our future long-term
capital requirements and may be unable to raise sufficient capital
on favorable terms or at all.
We have recorded a net loss of $56.6 million for the year ended
December 31, 2022, and we have a history of losses and may
continue to incur operating and net losses for the foreseeable
future. As of December 31, 2022, our accumulated deficit was
$345.4 million.
As of December 31, 2022, our cash and cash equivalents and
short-term investments totaled $113.7 million. In October 2021, we
entered into a Loan and Security Agreement with Bank of America,
N.A. (the "Credit Agreement"), providing for a credit facility of
up to $40.0 million and as of December 31, 2022, we have
not borrowed against this credit facility. Refer to Note 7,
Revolving Credit Facility
in the Notes to Consolidated Financial Statements in Item 8 of Part
II of this Annual Report on Form 10-K for further details on the
Credit Agreement. While based on our current plans, the Credit
Agreement with Bank of America, N.A., and market conditions, we
believe that such sources of liquidity will be sufficient to
satisfy our anticipated cash requirements for at least the next 12
months, we may require additional funds, either through equity or
debt financings or collaborative agreements or from other sources.
We have no commitments to obtain such additional financing, and we
may not be able to obtain any such additional financing on terms
favorable to us, or at all. If adequate financing is not available,
we may further delay, postpone or terminate product and service
expansion and curtail
certain selling, general and administrative operations. The
inability to raise additional financing may have a material adverse
effect on our future performance. In addition, the COVID-19
pandemic has already resulted in a significant disruption of global
financial markets. If the disruption persists and deepens, we could
experience an inability to access additional capital.
Some of our competitors have substantially greater resources than
we do, and to be competitive we may be required to lower our prices
or increase our sales and marketing expenses, which could result in
reduced margins and loss of market share.
We compete in a rapidly evolving and fiercely competitive market,
and we expect competition to continue to be intense, including
price competition. Our principal competitors include Amazon (Blink
and Ring), Canary, D-Link, Eufy, Google (Nest), Foxconn Corporation
(Belkin), Night Owl, Samsung, SimpliSafe, Swann, and Wyze. Other
competitors include numerous local vendors such as Netatmo,
Logitech, Bosch, Instar, and Uniden. In addition, these local
vendors may target markets outside of their local regions and may
increasingly compete with us in other regions worldwide. Many of
our existing and potential competitors have longer operating
histories, greater brand recognition, and substantially greater
financial, technical, sales, marketing, and other resources. These
competitors may, among other things, undertake more extensive
marketing campaigns, adopt more aggressive pricing policies, obtain
more favorable pricing from suppliers and manufacturers, and exert
more influence on sales channels than we can. In addition, certain
competitors may have different business models, such as integrated
manufacturing capabilities, that may allow them to achieve cost
savings and to compete on the basis of price. Other competitors may
have fewer resources, but may be more nimble in developing new or
disruptive technology or in entering new markets.
We anticipate that current and potential competitors will also
intensify their efforts to penetrate our target markets. For
example, price competition is intense in our industry in certain
geographical regions and product categories. Many of our
competitors price their products significantly below our product
costs. Average sales prices have declined in the past and may again
decline in the future. These competitors may have more advanced
technology, more extensive distribution channels, stronger brand
names, greater access to shelf space in retail locations, bigger
promotional budgets, and larger retailers, distributors, and other
channel partners, and end-user bases than we do.
In addition, many of these competitors leverage a broader product
portfolio and offer lower pricing as part of a more comprehensive
end-to-end solution. These companies could devote more capital
resources to develop, manufacture, and market competing products
than we could.
Amazon is both a competitor and a distribution channel for our
products as well as a provider of services to support our
cloud-based storage. If Amazon decided to end our distribution
channel relationship or ceased providing cloud storage services to
us, our sales and product performance could be harmed, which could
seriously harm our business, financial condition, results of
operations, and cash flows.
Our competitors may also acquire other companies in the market and
leverage combined resources to gain market share. If any of these
companies are successful in competing against us, our sales could
decline, our margins could be negatively impacted, and we could
lose, or fail to grow, our market share, any of which could
seriously harm our business, financial condition, and results of
operations.
We entered into an asset purchase agreement (the “Asset Purchase
Agreement”) and supply agreement (the “Supply Agreement”) with
Verisure Sàrl (“Verisure”) that gives Verisure exclusive marketing
and distribution rights for our products in Europe as well as the
ability to sell our products through their direct channel globally.
We cannot provide assurance that the arrangement with Verisure will
continue to be a successful collaboration.
Verisure has the exclusive right to market and distribute our
products in Europe. Our results of operations may be
negatively impacted if Verisure is not successful in continuing to
sell our products in Europe. Even though the Supply Agreement
provides for minimum purchase commitments, if Verisure fails to pay
on a timely basis, or at all, including because of effects from
COVID-19, or otherwise does not perform under the Supply Agreement,
our cash flow would be
reduced. We are also exposed to increased credit risk if Verisure
fails or becomes insolvent. We also cannot provide any assurance
that we will successfully develop custom products as specified by
Verisure under the Supply Agreement.
The Asset Purchase Agreement and Supply Agreement with Verisure
contain customary representations and warranties regarding, the
Business and the Assets, indemnification provisions, termination
rights, certain financial covenants and other customary provisions.
Additionally, we have agreed not to engage in any business that
competes with the Business for a period of three years. Our failure
to comply with these provisions may have a material adverse effect
on our future performance.
We are dependent on information technology systems, infrastructure
and data. If our information technology systems or data, or those
of third parties upon which we rely, are or were compromised, we
could experience adverse consequences resulting from such
compromise, including but not limited to regulatory investigations
or actions; litigation; fines and penalties; disruptions of our
business operations; reputational harm; loss of customers or sales;
reduced revenue or profits; increased expenses; significant decline
in our stock price; and other adverse consequences.
In the ordinary course of our business, we and the third parties
upon which we rely, collect, receive, store, process, generate,
use, transfer, disclose, make accessible, protect, secure, dispose
of, transmit, and share (collectively, “processing”) proprietary,
confidential, and sensitive data, including personal data about our
customers, employees, and others, intellectual property, and trade
secrets (collectively, “sensitive information”).
Cyber-attacks, malicious internet-based activity, online and
offline fraud, and other similar activities threaten the
confidentiality, integrity, and availability of our sensitive
information and information technology systems, and those of the
third parties upon which we rely. These information security risks
have significantly increased in recent years in part due to the
proliferation of new technologies and the increased sophistication
and activities of organized crime, hackers, terrorists, threat
actors, “hacktivists,” personnel (such as through theft or misuse),
sophisticated nation states, and nation-state-supported actors and
other external parties. Some actors now engage and are expected to
continue to engage in cyber-attacks, including without limitation
nation-state actors for geopolitical reasons and in conjunction
with military conflicts and defense activities. During times of war
and other major conflicts, we, the third parties upon which we rely
may be vulnerable to a heightened risk of these attacks, including
retaliatory cyber-attacks, that could materially disrupt our
systems and operations, supply chain, and ability to produce, sell
and distribute our products and services.
We and the third parties upon which we rely are subject to a
variety of evolving threats, including but not limited to
social-engineering attacks (including through phishing attacks),
malicious code (such as viruses and worms), malware (including as a
result of advanced persistent threat intrusions), denial-of-service
attacks (such as credential stuffing), credential harvesting,
personnel misconduct or error, ransomware attacks, supply-chain
attacks, software bugs, server malfunctions, software or hardware
failures, loss of data or other information technology assets,
adware, telecommunications failures, earthquakes, fires, floods,
and other similar threats. In particular, severe ransomware attacks
are becoming increasingly prevalent and can lead to significant
interruptions in our operations, loss of sensitive data and income,
reputational harm, and diversion of funds. Extortion payments may
alleviate the negative impact of a ransomware attack, but we may be
unwilling or unable to make such payments due to, for example,
applicable laws or regulations prohibiting such
payments.
Remote work has become more common and has increased risks to our
information technology systems and data, as more of our employees
utilize network connections, computers and devices outside our
premises or network, including working at home, while in transit
and in public locations. Future or past business transactions (such
as acquisitions or integrations) could expose us to additional
cybersecurity risks and vulnerabilities, as our systems could be
negatively affected by vulnerabilities present in acquired or
integrated entities’ systems and technologies. Furthermore, we may
discover security issues that were not found during due diligence
of such acquired or integrated entities, and it may be difficult to
integrate companies into our information technology environment and
security program.
We may rely on third-party service providers and technologies to
operate critical business systems to process sensitive information
in a variety of contexts, including, without limitation,
cloud-based infrastructure, data center
facilities, encryption and authentication technology, employee
email, content delivery to customers, and other functions. We may
also rely on third-party service providers to provide other
products, services, parts, or otherwise to operate our business.
Our ability to monitor these third parties’ information security
practices is limited, and these third parties may not have adequate
information security measures in place. If our third-party service
providers experience a security incident or other interruption, we
could experience adverse consequences. While we may be entitled to
damages if our third-party service providers fail to satisfy their
privacy or security-related obligations to us, any award may be
insufficient to cover our damages, or we may be unable to recover
such award. In addition, supply-chain attacks have increased in
frequency and severity, and we cannot guarantee that third parties’
infrastructure in our supply chain or our third-party partners’
supply chains have not been compromised.
Any of the previously identified or similar threats could cause a
security incident or other interruption that could result in
unauthorized, unlawful, or accidental acquisition, modification,
destruction, loss, alteration, encryption, disclosure of, or access
to our sensitive information or our information technology systems,
or those of the third parties upon whom we rely. A security
incident or other interruption could disrupt our ability (and that
of third parties upon whom we rely) to provide our products and
services.
We may expend significant resources or modify our business
activities to try to protect against security incidents. Certain
data privacy and security obligations may require us to implement
and maintain specific security measures or industry-standard or
reasonable security measures to protect our information technology
systems and sensitive information.
Maintaining the security of our computer information systems and
communication systems is a critical issue for us and our customers
and we devote considerable internal and external resources to
network security, data encryption, and other security measures to
protect our systems, customers, and users, but these security
measures cannot provide absolute security. We have established a
crisis management plan and business continuity program. While we
regularly test the plan and the program, there can be no assurance
that the plan and program can withstand an actual disruption in our
business, including a cyber-attack, hacking, fraud, social
engineering, or other forms of deception. While we have established
service-level and geographic redundancy for our critical systems,
our ability to utilize these redundant systems must be tested
regularly, failing over to such systems always carries risk and we
cannot be assured that such systems are fully functional. For
example, much of our order fulfillment process is automated and the
order information is stored on our servers. A significant business
interruption could result in losses or damages and harm our
business. If our computer systems and servers become unavailable at
the end of a fiscal quarter, for example, our ability to recognize
revenue may be delayed until we are able to utilize back-up systems
and continue to process and ship our orders. This could cause our
stock price to decline significantly. Changes in how our employees
work and access our systems during the current COVID-19 pandemic
also could lead to additional opportunities for bad actors to
launch cyberattacks or for employees to cause inadvertent security
risks or incidents. While we have implemented security measures
designed to protect against security incidents, including those
described above, there can be no assurance that these measures will
be effective.
Our products and services may contain unknown security
vulnerabilities. We take steps to detect and remediate
vulnerabilities, but we have not always been able in the past and
may not be able in the future to detect and remediate all
vulnerabilities in our information technology systems (including
our products) because such threats and techniques used to exploit
vulnerabilities change frequently and are often sophisticated in
nature. Therefore such vulnerabilities could be exploited but may
not be detected until after a security incident has occurred. These
vulnerabilities pose a material risk to our business. For example,
the firmware, software, and open source software that we or our
manufacturing partners have installed on our products may be
susceptible to hacking, unauthorized manipulation, or misuse. In
addition, we offer a comprehensive online cloud management service,
Arlo Secure, paired with our end products, including our cameras,
baby monitors, and smart lights and we recently launched our direct
to consumer store to sell our products directly to our customers.
If malicious actors compromise this cloud service or our direct to
consumer store, or if customer confidential information is accessed
without authorization, our business will be harmed. Operating an
online cloud service and direct to consumer store are a relatively
new businesses for us, and we may not have the expertise to
properly manage risks related to data security and systems
security. We rely on third-party providers for a number of critical
aspects of our cloud services and customer support, including web
hosting services, billing, and payment processing, and consequently
we do not maintain direct control over the security or stability of
the associated systems.
Applicable data privacy and security obligations may require us to
notify relevant stakeholders of security incidents. Such
disclosures are costly, and the disclosure or the failure to comply
with such requirements could lead to adverse consequences. If we
(or a third party upon whom we rely) experience a security incident
or are perceived to have experienced a security incident, we may
experience adverse consequences such as: government enforcement
actions (for example, investigations, fines, penalties, audits, and
inspections); additional reporting requirements and/or oversight;
restrictions on processing sensitive information (including
personal data); litigation (including class claims);
indemnification obligations; negative publicity; reputational harm;
diversion of management’s attention; monetary fund diversions;
interruptions in our operations (including availability of data);
negative impacts to our business, results of operations and
financial condition; financial loss; and other similar harms.
Security incidents and attendant consequences may cause customers
to stop using our products and services, deter new customers from
using our products and services, and negatively impact our ability
to grow and operate our business.
The effects of a security breach or privacy violation could be
further amplified during the current COVID-19 pandemic. In
addition, the cost and operational consequences of implementing
further data protection measures could be significant and theft of
our intellectual property or proprietary business information could
require substantial expenditures to remedy. Our contracts may not
contain limitations of liability, and even where they do, there can
be no assurance that limitations of liability in our contracts are
sufficient to protect us from liabilities, damages, or claims
related to our data privacy and security obligations. Further, we
cannot be certain that (a) our liability insurance will be adequate
or sufficient in type or amount to protect us from or to mitigate
liabilities arising out of our privacy and security practices or
security breaches, cyberattacks and other related breaches; (b)
such coverage will cover any indemnification claims against us
relating to any incident, will continue to be available to us on
economically reasonable terms, or at all; or (c) any insurer will
not deny coverage as to any future claim. The successful assertion
of one or more large claims against us that exceed available
insurance coverage, or the occurrence of changes in our insurance
policies, including premium increases or the imposition of large
deductible or co-insurance requirements, could adversely affect our
reputation, business, financial condition and results of
operations.
Our future success depends on our ability to increase sales of our
paid subscription services.
Our future success is largely dependent on increasing sales of our
paid subscription services. Even if we are successful in selling
our smart connected devices and accessories, if we are unable to
maintain or increase sales of Arlo Secure and Arlo Safe services,
our revenue and overall gross margin would likely
decline.
Interruptions with the cloud-based systems that we use in our
operations provided by an affiliate of Amazon.com, Inc. (“Amazon”),
which is also one of our primary competitors, may materially and
adversely affect our business, results of operations, and financial
condition.
We host our platform using Amazon Web Services (“AWS”) data
centers, a provider of cloud infrastructure services, and may in
the future use other third-party cloud-based systems in our
operations. All of our solutions currently reside on systems leased
and operated by us in these data center locations. Accordingly, our
operations depend on protecting the virtual cloud infrastructure
hosted in AWS by maintaining its configuration, architecture,
features, and interconnection specifications, as well as the
information stored in these virtual data centers and which
third-party internet service providers transmit. Although we have
disaster recovery plans that utilize multiple AWS locations, any
incident affecting their infrastructure that may be caused by human
error, fire, flood, severe storm, earthquake, or other natural
disasters, cyber-attacks, terrorist or other attacks, and other
similar events beyond our control could negatively affect our
platform. A prolonged AWS service disruption affecting our platform
for any of the foregoing reasons would negatively impact our
ability to serve our end-users and could damage our reputation with
current and potential end-users, expose us to liability, cause us
to lose customers, or otherwise harm our business. We may also
incur significant costs for using alternative equipment or taking
other actions in preparation for, or in reaction to, events that
damage the AWS services we use. Further, if we were to make updates
to our platforms that were not compatible with the configuration,
architecture, features, and interconnection specifications of the
third-party platform, our service could be disrupted.
Amazon previously produced the Amazon Cloud Cam, which competed
with our security camera products, and acquired two of our
competitors, Blink and Ring, in 2017 and 2018, respectively. Amazon
may choose to hamper our competitive efforts, using provision of
AWS services as leverage. In the event that there is a lapse of
service, elimination of AWS services or features that we use,
interruption of internet service provider connectivity, or damage
to such facilities, we could experience interruptions in access to
our platform as well as significant delays and additional expense
in arranging or creating new facilities and services and/or
re-architecting our solutions for deployment on a different cloud
infrastructure service provider, which could materially and
adversely affect our business, results of operations, and financial
condition.
Our current and future products may experience quality problems,
including defects or errors, from time to time that can result in
adverse publicity, product recalls, litigation, regulatory
proceedings, and warranty claims and could lead to significant
direct or indirect costs, decreased revenue, and operating margin,
and harm to our brand.
We sell complex products that could contain design and
manufacturing defects in their materials, hardware, and firmware.
These defects could include defective materials or components that
can unexpectedly interfere with the products’ intended operations
or cause injuries to users or property damage. Although we
extensively and rigorously test new and enhanced products and
services before their release, we cannot assure we will be able to
detect, prevent, or fix all defects. Failure to detect, prevent, or
fix defects, or an increase in defects, could result in a variety
of consequences, including a greater number of product returns than
expected from users and retailers, increases in warranty costs,
regulatory proceedings, product recalls, and litigation, each of
which could materially and adversely affect our business, results
of operations, and financial condition. We generally provide a
one-year hardware warranty on all of our products. The occurrence
of real or perceived quality problems or material defects in our
current and future products could expose us to warranty claims in
excess of our current reserves. If we experience greater returns
from retailers or users, or greater warranty claims, in excess of
our reserves, our business, financial condition, and results of
operations could be harmed. In addition, any negative publicity or
lawsuits filed against us related to the perceived quality and
safety of our products could also adversely affect our brand,
decrease demand for our products and services, and materially and
adversely affect our business, results of operations, and financial
condition.
In addition, epidemic failure clauses are found in certain of our
customer contracts. If invoked, these clauses may entitle the
customer to return for replacement or obtain credits for products
and inventory, as well as assess liquidated damage penalties and
terminate an existing contract and cancel future or then-current
purchase orders. In such instances, we may also be obligated to
cover significant costs incurred by the customer associated with
the consequences of such epidemic failure, including freight and
transportation required for product replacement and out-of-pocket
costs for truck rolls to end-user sites to collect the defective
products. Costs or payments we make in connection with an epidemic
failure could materially and adversely affect our business, results
of operations, and financial condition.
If our products contain defects or errors, or are found to be
noncompliant with industry standards, we could experience decreased
sales and increased product returns, loss of customers and market
share, and increased service, warranty, and insurance costs. In
addition, defects in, or misuse of, certain of our products could
cause safety concerns, including the risk of property damage or
personal injury. If any of these events occurred, our reputation
and brand could be damaged, and we could face product liability or
other claims regarding our products, resulting in unexpected
expenses and adversely impacting our operating results. For
instance, if a third party were able to successfully overcome the
security measures in our products, such a person or entity could
misappropriate end-user data, third-party data stored by our users,
and other information, including intellectual property. If that
happens, affected end-users or others may file actions against us
alleging product liability, tort, or breach of warranty
claims.
We rely on a limited number of traditional and online retailers and
wholesale distributors for a substantial portion of our sales, and
our revenue could decline if they refuse to pay our requested
prices or reduce their level of purchases or if there is
significant consolidation in our sales channels, which results in
fewer sales channels for our products.
We sell a substantial portion of our products through traditional
and online retailers, including Amazon, Best Buy Co., Inc. ("Best
Buy"), and Costco Wholesale Corporation (“Costco”); and to security
solutions provider, including Verisure and their respective
affiliates. For the year ended December 31, 2022, we derived
40.1% of our revenue from Verisure and its affiliates,
respectively. In addition, we sell to wholesale distributors,
including Ingram Micro, Inc., D&H Distributing Company, and
Synnex Corporation. We expect that a significant portion of our
revenue will continue to come from sales to a small number of such
retailers, distributors, and other channel partners. In addition,
because our accounts receivable are often concentrated within a
small group of retailers, distributors, and other channel partners,
the failure of any of them to pay on a timely basis, or at all,
would reduce our cash flow. If Best Buy or other retailers closes
any of its retail stores due to COVID-19 pandemic, our revenue
could be adversely impacted. We are also exposed to increased
credit risk if any one of these limited numbers of retailer and
distributor channel partners fails or becomes insolvent. Verisure
has an aggregate purchase commitment of $500.0 million during a
five-year period commencing January 1, 2020. Other than with
Verisure, we generally have no minimum purchase commitments or
long-term contracts with our retailers, distributors and other
channel partners. These purchasers could decide at any time to
discontinue, decrease, or delay their purchases of our products. If
our retailers, distributors, and other channel partners increase
the size of their product orders without sufficient lead-time for
us to process the order, our ability to fulfill product orders
would be compromised. These channel partners have a variety of
suppliers to choose from and therefore can make substantial demands
on us, including demands on product pricing and on contractual
terms, which often results in the allocation of risk to us as the
supplier. Accordingly, the prices that they pay for our products
are subject to negotiation and could change at any time. Our
ability to maintain strong relationships with these channel
partners is essential to our future performance. If any of our
major channel partners reduce their level of purchases or refuse to
pay the prices that we set for our products, our revenue and
results of operations could be harmed. The traditional retailers
that purchase from us have faced increased and significant
competition from online retailers. If our key traditional retailers
continue to reduce their level of purchases from us, our business,
results of operations, and financial condition could be
harmed.
Additionally, concentration and consolidation among our channel
partner base may allow certain retailers and distributors to
command increased leverage in negotiating prices and other terms of
sale, which could adversely affect our profitability. In addition,
if, as a result of increased leverage, channel partner pressures
require us to reduce our pricing such that our gross margin is
diminished, we could decide not to sell our products to a
particular channel partner, which could result in a decrease in our
revenue. Consolidation among our channel partner base may also lead
to reduced demand for our products, elimination of sales
opportunities, replacement of our products with those of our
competitors, and cancellations of orders, each of which could
materially and adversely affect our business, results of
operations, and financial condition. If consolidation among the
retailers, distributors, or other channel partners who purchase our
products becomes more prevalent, our business, results of
operations, and financial condition could be materially and
adversely affected.
In particular, the retail and connected home markets in some
countries, including the United States, are dominated by a few
large retailers with many stores. These retailers have in the past
increased their market share and may continue to do so in the
future by expanding through acquisitions and construction of
additional stores. These situations concentrate our credit risk
with a relatively small number of retailers, and, if any of these
retailers were to experience a shortage of liquidity, it could
increase the risk that their outstanding payables to us may not be
paid. In addition, increasing market share concentration among one
or a few retailers in a particular country or region increases the
risk that if any one of them substantially reduces its purchases of
our devices, we may be unable to find a sufficient number of other
retail outlets for our products to sustain the same level of sales.
Any reduction in sales by our retailers could materially and
adversely affect our business, results of operations, and financial
condition.
We depend on large, recurring purchases from certain significant
retailers, distributors, and other channel partners, and a loss,
cancellation, or delay in purchases by these channel partners could
negatively affect our revenue.
The loss of recurring orders from any of our more significant
retailers, distributors, and other channel partners could cause our
revenue and profitability to suffer. Our ability to attract new
retailers, distributors, and other channel partners will depend on
a variety of factors, including the cost-effectiveness,
reliability, scalability, breadth, and depth of our products. In
addition, a change in the mix of our retailers, distributors, and
other channel partners, or a change in the mix of direct and
indirect sales, could adversely affect our revenue and gross
margin.
Although our financial performance may depend on large, recurring
orders from certain retailers, distributors, and other channel
partners, we do not generally have binding commitments from them.
For example:
•our
channel partner agreements generally do not require minimum
purchases;
•our
retailers, distributors, and other channel partners can stop
purchasing and stop marketing our products at any time;
and
•our
channel partner agreements generally are not
exclusive.
Further, our revenue may be impacted by significant one-time
purchases that are not intended to be repeatable. While such
purchases are reflected in our financial statements, we do not rely
on and do not forecast for continued significant one-time
purchases. As a result, lack of repeatable one-time purchases will
adversely affect our revenue. Additionally, we may from time to
time grant our retailers, distributors, and other channel partners
the exceptional right to return certain products, based on the best
interests of our mutual businesses, and such returns, if material,
could adversely affect our revenue and gross margin.
Because our expenses are based on our revenue forecasts, a
substantial reduction or delay in sales of our products to, or
unexpected returns from, channel partners, or the loss of any
significant channel partners, could materially and adversely affect
our business, results of operations, and financial condition.
Although our largest channel partners may vary from period to
period, we anticipate that our results of operations for any given
period will continue to depend on large orders from a small number
of channel partners.
The average selling prices of our products typically decrease
rapidly over the sales cycle of the product, which may negatively
affect our revenue and gross margin.
Our products typically experience price erosion, a fairly rapid
reduction in the average unit selling prices over their sales
cycles. In order to sell products that have a falling average unit
selling price and maintain margins at the same time, we need to
continually reduce product and manufacturing costs. To manage
manufacturing costs, we must partner with our third-party
manufacturers to engineer the most cost-effective design for our
products. In addition, we must carefully manage the price paid for
components used in our products, and we must also successfully
manage our freight and inventory costs to reduce overall product
costs. We also need to continually introduce new products with
higher sales prices and gross margin in order to maintain our
overall gross margin. If we are unable to manage the cost of older
products or successfully introduce new products with higher gross
margin, our revenue and overall gross margin would likely
decline.
We have spent, and expect to continue to spend, significant amounts
on advertising and other marketing campaigns, which may not be
successful or cost effective.
We have spent, and expect to continue to spend, significant amounts
on advertising and other marketing campaigns, such as television,
print advertising, and social media, as well as increased
promotional activities, to acquire new customers. For the years
ended December 31, 2022 and 2021, sales and marketing expenses
were $70.1 million, including a brand awareness campaign of $15.6
million, and $48.9 million, respectively, representing
approximately 14% and 11% of our revenue, respectively. While we
seek to structure our advertising campaigns in the manner that we
believe is most likely to encourage people to purchase our products
and services, we may fail to identify advertising opportunities
that satisfy our anticipated return on advertising spend as we
scale our investments in marketing or to fully understand or
estimate the conditions and behaviors that drive customer behavior.
If any of our advertising campaigns prove less successful than
anticipated in attracting customers, we may not be able to recover
our advertising spend, and our revenue may fail to meet market
expectations, either of which could have an adverse effect on our
business. There can be no assurance that our advertising and other
marketing efforts will result in increased sales of our products or
services.
Introducing new products and services may be difficult and
expensive. If we are unable to do so successfully, our brand may be
adversely affected and we may not be able to maintain or grow our
current revenue and profit levels.
To successfully evolve our product offerings of smart connected
devices to appeal to our consumers, we will be required to predict,
understand, and react to the rapidly changing tastes of consumers
and provide appealing products in a timely manner. New product
models that we introduce may not be successful with consumers or
our brand may fall out of favor with consumers. If we are unable to
anticipate, identify, or react appropriately to changes in consumer
preferences, our revenue may decrease, our brand image may suffer,
our operating performance may decline, and we may not be able to
execute our growth plans.
We have increased the rate of new product and service
introductions, including new lines of Arlo cameras, smart lights,
and doorbell products, and we may encounter difficulties that we
did not anticipate during the product development stage. If we are
not able to efficiently manufacture new products in quantities
sufficient to support wholesale, retail, and e-commerce
distribution, especially in light of the ongoing COVID-19 pandemic
and its variants, we may not be able to recover our investment in
the development of new product and service iterations and product
lines, and we would continue to be subject to the risks inherent to
having a limited product line. Even if we develop and manufacture
new products and services that consumers find appealing, the
ultimate success of any new products or services may depend on our
pricing. We may not provide the appropriate level of marketing in
order to educate the market and potential consumers about our new
products and services. Achieving market acceptance will require us
to exert substantial product development and marketing efforts,
which could result in a material increase in our research and
development and sales and marketing expenses. There can be no
assurance that we will have the resources necessary to undertake
such efforts effectively or that such efforts will be successful or
that we will dedicate our limited marketing resources to the right
product lines and services. Failure to gain market acceptance for
new products and services could impede our ability to maintain or
grow current revenue levels, reduce profits, adversely affect the
image of our brand, erode our competitive position, and result in
long-term harm to our business and financial results.
If we fail to enhance our brand, our ability to expand our customer
base will be impaired and our operating results may
suffer.
We believe that developing and maintaining awareness of the Arlo
brand is critical to achieving widespread acceptance of our
existing and future products and is an important element in
attracting new customers. Furthermore, we expect the importance of
global brand recognition to increase as competition increases. If
customers do not perceive our products to be of high quality, our
brand and reputation could be harmed, which could adversely impact
our financial results. In addition, brand promotion efforts may not
yield significant revenue or increased revenue sufficient to offset
the additional expenses incurred in building our brand.
Maintaining, protecting, and enhancing our brand may require us to
make substantial investments, and these investments may not be
successful or we may suspend or reduce the amount of
investment spent on brand promotion and awareness efforts. If we
fail to successfully maintain, promote, and position our brand and
protect our reputation, or if we incur significant expenses in this
effort, our business, financial condition and operating results may
be adversely affected.
The reputation of our services may be damaged, and we may face
significant direct or indirect costs, decreased revenue, and
operating margins if our services contain significant defects or
fail to perform as intended.
Our services, including our intelligent cloud and App platform and
our Arlo Secure services, are complex, and may not always perform
as intended due to outages of our systems or defects affecting our
services. Systems outages could be disruptive to our business and
damage the reputation of our services and result in potential loss
of revenue.
Significant defects affecting our services may be found following
the introduction of new software or enhancements to existing
software or in software implementations in varied information
technology environments. Internal quality assurance testing and
end-user testing may reveal service performance issues or desirable
feature enhancements that could lead us to reallocate service
development resources or postpone the release of new versions of
our software. The reallocation of resources or any postponement
could cause delays in the development and release of future
enhancements to our currently available software, damage the
reputation of our services in the marketplace, and result in
potential loss of revenue. Although we attempt to resolve all
errors that we believe would be considered serious by our partners
and customers, the software powering our services is not
error-free. Undetected errors or performance problems may be
discovered in the future, and known errors that we consider minor
may be considered serious by our channel partners and
end-users.
System disruptions and defects in our services could result in lost
revenue, delays in customer deployment, or legal claims and could
be detrimental to our reputation.
We are subject to stringent and evolving U.S. and foreign laws,
regulations, rules, contractual obligations, policies and other
obligations related to data privacy and security. Our actual or
perceived failure to comply with such obligations could lead to
regulatory investigations or actions; litigation; fines and
penalties; disruptions of our business operations; reputational
harm; loss of revenue or profits; loss of customers or sales; and
other adverse business consequences.
In the ordinary course of business, we process personal data about
our customers, employees, and others and other sensitive
information, including proprietary and confidential business data,
trade secrets, intellectual property, and sensitive third-party
data. Our data processing activities may subject us to numerous
data privacy and security obligations, such as various laws,
regulations, guidance, industry standards, external and internal
privacy and security policies, contractual requirements, and other
obligations relating to data privacy and security, including with
respect to user privacy, rights of publicity, data protection,
content, protection of minors, and consumer
protection.
In the United States, federal, state, and local governments have
enacted numerous data privacy and security laws, including data
breach notification laws, personal data privacy laws, consumer
protection laws (e.g., Section 5 of the Federal Trade Commission
Act), and other similar laws (e.g., wiretapping and recording
laws).
For example, the California Consumer Privacy Act of 2018 (“CCPA”)
applies to personal information of consumers, business
representatives and employees and requires businesses to provide
specific disclosures in privacy notices and honor requests of
California residents to exercise certain privacy rights. The CCPA
provides for civil penalties of up to $7,500 per violation and
allows private litigants affected by certain data breaches to
recover significant statutory damages. In addition, the California
Privacy Rights Act of 2020 (“CPRA”), which became operative January
1, 2023, expands the CCPA’s requirements, including by adding a new
right for individuals to correct their personal information and
establishing a new regulatory agency to implement and enforce the
law. Other states, such as Colorado, Connecticut, Virginia and
Utah, have also passed comprehensive privacy laws, and similar laws
are being considered in several other states, as well as at the
federal and local levels. These developments further complicate
compliance efforts, and increase legal risk and compliance costs
for us, the third parties upon whom we rely. Additionally, under
various privacy laws and
other obligations, we may be required to obtain certain consents to
process personal data. Our inability or failure to do so could
result in adverse consequences.
Outside the United States, an increasing number of laws,
regulations, and industry standards may govern data privacy and
security. For example, the European Union’s General Data Protection
Regulation (“EU GDPR”), the United Kingdom’s GDPR (“UK GDPR”),
Australia’s Privacy Act 1988 (Privacy Act), and Canada’s Personal
Information Protection and Electronic Documents Act (“PIPEDA”) and
various related provincial laws, as well as Canada’s Anti-Spam
Legislation (“CASL”), may apply to our operations and impose strict
requirements for processing personal data. For example, under the
EU GDPR, companies may face temporary or definitive bans on data
processing and other corrective actions; fines of up to 20 million
Euros or 4% of annual global revenue, whichever is greater; or
private litigation related to processing of personal data brought
by classes of data subjects or consumer protection organizations
authorized at law to represent their interests.
In the ordinary course of business, we may transfer personal data
from Europe and other jurisdictions to the United States or other
countries. Europe and other jurisdictions have enacted laws
requiring data to be localized or limiting the transfer of personal
data to other countries. In particular, the European Economic Area
(EEA) and the United Kingdom (UK) have significantly restricted the
transfer of personal data to the United States and other countries
whose privacy laws it believes are inadequate. Other jurisdictions
may adopt similarly stringent interpretations of their data
localization and cross-border data transfer laws. Although there
are currently various mechanisms that may be used to transfer
personal data from the EEA and UK to the United States in
compliance with law, such as the EEA and UK’s standard contractual
clauses, these mechanisms are subject to legal challenges, and
there is no assurance that we can satisfy or rely on these measures
to lawfully transfer personal data to the United States. If there
is no lawful manner for us to transfer personal data from the EEA,
the UK or other jurisdictions to the United States, or if the
requirements for a legally-compliant transfer are too onerous, we
could face significant adverse consequences, including the
interruption or degradation of our operations, the need to relocate
part of or all of our business or data processing activities to
other jurisdictions at significant expense, increased exposure to
regulatory actions, substantial fines and penalties, the inability
to transfer data and work with partners, vendors and other third
parties, and injunctions against our processing or transferring of
personal data necessary to operate our business. Some European
regulators have prevented companies from transferring personal data
out of Europe for allegedly violating the GDPR’s cross-border data
transfer limitations.
In addition to data privacy and security laws, we may be
contractually subject to industry standards adopted by industry
groups and may become subject to such obligations in the future.
For example, we may also be subject to the Payment Card Industry
Data Security Standard (“PCI DSS”). The PCI DSS requires companies
to adopt certain measures to ensure the security of cardholder
information, including using and maintaining firewalls, adopting
proper password protections for certain devices and software, and
restricting data access. Noncompliance with PCI-DSS can result in
penalties ranging from $5,000 to $100,000 per month by credit card
companies, litigation, damage to our reputation, and revenue
losses. We also rely on vendors to process payment card data, and
those vendors may be subject to PCI DSS, and our business may be
negatively affected if our vendors are fined or suffer other
consequences as a result of PCI DSS noncompliance.
We may also be bound by contractual obligations related to data
privacy and security, and our efforts to comply with such
obligations may not be successful. For example, certain privacy
laws, such as the GDPR and the CCPA, require our customers to
impose specific contractual restrictions on their service
providers. We may publish privacy policies, marketing materials and
other statements, such as compliance with certain certifications or
self-regulatory principles, regarding data privacy and security. If
these policies, materials or statements are found to be deficient,
lacking in transparency, deceptive, unfair, or misrepresentative of
our practices, we may be subject to investigation, enforcement
actions by regulators or other adverse consequences.
Obligations related to data privacy and security are quickly
changing, becoming increasingly stringent, and creating regulatory
uncertainty. Additionally, these obligations may be subject to
differing applications and interpretations, which may be
inconsistent or conflict among jurisdictions. Preparing for and
complying with these obligations requires us to devote significant
resources, which may necessitate changes to our services,
information technologies, systems, and
practices and to those of any third parties that process personal
data on our behalf. In addition, these obligations may require us
to change our business model. Our business model materially depends
on our ability to process personal data, so we are particularly
exposed to the risks associated with the rapidly changing legal
landscape. For example, we may be at heightened risk of regulatory
scrutiny, and any changes in the regulatory framework could require
us to fundamentally change our business model.
We may at times fail (or be perceived to have failed) in our
efforts to comply with our data privacy and security obligations.
We have in the past received inquiries and/or been the subject of
reports regarding our data privacy and security practices and
processing. Moreover, despite our efforts, our personnel or third
parties on whom we rely may fail to comply with such obligations,
which could negatively impact our business operations. If we or the
third parties on which we rely fail, or are perceived to have
failed, to address or comply with applicable data privacy and
security obligations, we could face significant consequences,
including but not limited to: government enforcement actions (e.g.,
investigations, fines, penalties, audits, inspections, and
similar); litigation (including class-action claims); additional
reporting requirements and/or oversight; bans on processing
personal data; orders to destroy or not use personal data; and
imprisonment of company officials. Any of these events could have a
material adverse effect on our reputation, business, or financial
condition, including but not limited to: loss of customers;
interruptions or stoppages in our business operations; inability to
process personal data or to operate in certain jurisdictions;
limited ability to develop or commercialize our products;
expenditure of time and resources to defend any claim or inquiry;
adverse publicity; or substantial changes to our business model or
operations.
We are subject to financial and operating covenants in the Credit
Agreement with Bank of America, N.A. and any failure to comply with
such covenants, or obtain waivers in the event of non-compliance,
could limit our borrowing availability under the Credit Agreement,
resulting in our being unable to borrow under the Credit Agreement
and materially and adversely impact our liquidity. In addition, our
operations may not provide sufficient cash to meet the repayment
obligations of debt incurred under the Credit
Agreement.
The Credit Agreement contains provisions that limit our future
borrowing availability to the lesser of (x) $40.0 million and (y)
an amount equal to the sum of (i) 90% of investment grade eligible
receivables and (ii) 85% of non-investment grade eligible accounts,
less applicable reserves established by the lender. The Credit
Agreement also includes a $5.0 million sublimit for the issuance by
the lender of letters of credit. In addition, the Credit Agreement
includes an uncommitted accordion feature that allows us to from
time to time request 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.
The Credit Agreement contains other customary covenants, including
certain restrictions on maintaining a minimum cash balance,
achieving certain fixed charge coverage ratio for two consecutive
quarters, our ability to incur additional indebtedness, consolidate
or merge, enter into acquisitions, pay any dividend or distribution
on our capital stock, redeem, retire or purchase shares of our
capital stock, make investments or pledge or transfer assets, in
each case subject to limited exceptions.
There can be no assurance that we will be able to comply with the
financial and other covenants in the Credit Agreement, and the
effects of the COVID-19 pandemic may increase the risk of our
inability to comply with such covenants. Our failure to comply with
these covenants could cause us to be unable to borrow under the
Credit Agreement and may constitute an event of default which, if
not cured or waived, could result in the acceleration of the
maturity of any indebtedness then outstanding under the Credit
Agreement, which would require us to pay all amounts then
outstanding. If we are unable to repay those amounts, the Lender
could proceed against the collateral granted to them to secure that
debt, which would seriously harm our business. Such an event
could materially and adversely affect our financial condition and
liquidity. Additionally, such events of non-compliance could impact
the terms of any additional borrowings and/or any credit renewal
terms. Any failure to comply with such covenants may be a
disclosable event and may be perceived negatively. Such perception
could adversely affect the market price for our common stock and
our ability to obtain financing in the future.
Instability in geographies where we have operations and personnel
or where we derive amounts of revenue could have a material adverse
effect on our business, customers, operations and financial
results.
Economic, civil, military and political uncertainty exists and may
increase in regions where we operate and derive our revenue.
Various countries in which we operate are experiencing and may
continue to experience military action and civil and political
unrest. We have operations in the emerging market economies of
Eastern Europe, previously including operations in Belarus,
utilizing employees and contractors who perform services relating
to new product releases. In late February 2022, Russian military
forces launched significant military action against Ukraine.
Sustained conflict and disruption in the region is likely. The
impact to Belarus, Russia and Ukraine, as well as actions taken by
other countries, including new and stricter export controls and
sanctions by Canada, the United Kingdom, the European Union, the
U.S. and other countries and organizations against officials,
individuals, regions, and industries in Russia, Belarus and
Ukraine, and each country’s potential response to such sanctions,
tensions and military actions, could have a material adverse effect
on our product development timelines and increase our research and
development expenditure. Material adverse effects from the conflict
and enhanced sanctions activity has caused us to transition our
operations out of Belarus to other countries. We are actively
monitoring the security of our remaining employees and contractors
in Eastern Europe and the stability of our infrastructure,
including communications and internet availability. To date we have
not experienced any material interruptions in our operations there,
but if we are unable to effectively replicate the capabilities
previously provided by our Belarusian operations in other
countries, our ability to timely introduce new products and
financial results may be harmed.
Global geopolitical, economic and business conditions could
materially and adversely affect our revenue and results of
operations.
Our business has been, and may continue to be, affected by a number
of factors that are beyond our control, including but not limited
to general geopolitical, economic and business conditions,
conditions in the financial markets, and changes in the overall
demand for connected lifestyle products. Our products and services
may be considered discretionary items for our consumer and small
business end-users. A severe and/or prolonged economic downturn,
including as a result of the COVID-19 pandemic, the ongoing
conflict in Ukraine, inflation, supply chain disruptions, rising
interest rates, or lower consumer confidence, among other things,
could adversely affect our customers’ financial condition and their
levels of business activity. As a result of stimulus programs put
in place over the past two years, the U.S. and many countries are
currently experiencing an inflationary environment. In addition,
the U.S. Federal Reserve has raised, and may again raise, interest
rates in response to concerns about inflation, which in turn has
negatively impacted equity values. The U.S. capital markets
experienced and continue to experience extreme volatility and
disruption following the global outbreak of COVID-19, the Russian
invasion of Ukraine, and inflationary pressures. Weakness in, and
uncertainty about, global economic conditions may also cause
businesses to postpone spending in response to tighter credit,
rising interest rates, inflation, lower consumer confidence,
negative financial news and/or general declines in income or asset
values, which could have a material negative effect on the demand
for our products and services.
In the recent past, various regions worldwide have experienced slow
economic growth. In addition, current economic challenges in China
may continue to put negative pressure on global economic
conditions. If conditions in the global economy, including in
Europe, China, Australia and the United States, or other key
vertical or geographic markets deteriorate, such conditions could
materially and adversely affect our business, results of
operations, and financial condition. If we are unable to
successfully anticipate changing economic and political conditions,
we may be unable to effectively plan for and respond to those
changes, which could materially and adversely affect our business,
results of operations, and financial condition. In addition, the
economic problems affecting the financial markets and the
uncertainty in global economic conditions resulted in a number of
adverse effects, including a low level of liquidity in many
financial markets, extreme volatility in credit, equity, currency,
and fixed income markets, instability in the stock market, and high
unemployment.
In addition, the challenges faced by the European Union to
stabilize some of its member state economies, such as Greece,
Portugal, Spain, Hungary, and Italy, have had international
implications, affecting the stability of global financial markets
and hindering economies worldwide. Many member states in the
European Union have been addressing the issues
with controversial austerity measures. In addition, the potential
consequences of the “Brexit” process in the United Kingdom have led
to significant uncertainty in the region. Should the European Union
monetary policy measures be insufficient to restore confidence and
stability to the financial markets, or should the United Kingdom’s
“Brexit” decision lead to additional economic or political
instability, the global economy, including the U.S. and European
Union economies where we have a significant presence, could be
hindered, which could have a material adverse effect on our
business, results of operations, and financial condition. There
could also be a number of other follow-on effects from these
economic developments on our business, including the inability of
customers to obtain credit to finance purchases of our products,
customer insolvencies, decreased customer confidence to make
purchasing decisions, decreased customer demand, and decreased
customer ability to pay their trade obligations.
In addition, availability of our products from third-party
manufacturers and our ability to distribute our products into
non-U.S. jurisdictions may be impacted by factors such as ongoing
supply chain disruptions, an increase in duties, tariffs, or other
restrictions on trade; raw material shortages, work stoppages,
strikes and political unrest; economic crises and international
disputes or conflicts; changes in leadership and the political
climate in countries from which we import products. Further, the
imposition of and changes in the U.S.' and other governments'
duties, trade regulations, trade wars, tariffs, other restrictions
or other geopolitical events, including the evolving relations
between U.S. and China and evolving relations with Russia due to
the current hostilities between Russia and Ukraine, create
uncertainty regarding our ability to market and distribute our
products into non-U.S. jurisdictions and any failure to effectively
anticipate or respond to such events could materially and adversely
affect our business, results of operations, and financial
condition.
A portion of our global and U.S. sales are comprised of goods
assembled and manufactured in our facilities in Taiwan and the
People’s Republic of China, and components for a number of our
goods are sourced from suppliers in the People’s Republic of China.
When tariffs, duties, or other restrictions are placed on goods
imported into the United States from China or any related
counter-measures are taken by China, our revenue and results of
operations may be materially harmed.
In recent years, the U.S. Government has imposed increases to the
ad valorem duties applicable to certain products imported from
China, including increases of up to 25% for some items. We are
actively addressing the risks related to these additional duties,
which have affected, or have the potential to affect, at least some
of our imports from China. Although we have already taken some
steps to mitigate these risks, including by moving a significant
portion of our manufacturing and assembly to Vietnam and other
areas in the Asia Pacific region outside of China, if these duties
are imposed, the cost of our products may increase. These duties
may also make our products more expensive for consumers, which may
reduce consumer demand. We may need to offset the financial impact
by, among other things, moving even more of our product
manufacturing to other locations, modifying other business
practices or raising prices. If we are not successful in offsetting
the impact of any such duties, our revenue, gross margins, and
operating results may be materially and adversely
affected.
Our stock price may be volatile and your investment in our common
stock could suffer a decline in value.
There has been significant volatility in the market price and
trading volume of securities of technology and other companies,
including recently in connection with the ongoing COVID-19
pandemic, which may be unrelated to the financial performance of
these companies. These broad market fluctuations may negatively
affect the market price of our common stock.
Some specific factors that may have a significant effect on the
market price of our common stock include:
•actual
or anticipated fluctuations in our results of operations or our
competitors’ operating results;
•actual
or anticipated changes in the growth rate of the connected
lifestyle market, our growth rate or our competitors’ growth
rates;
•delays
in the introduction of new products by us or market acceptance of
these products;
•conditions
in the financial markets in general or changes in general economic
conditions, including due to the COVID-19 pandemic;
•changes
in governmental regulation, including taxation and tariff
policies;
•interest
rate or currency exchange rate fluctuations;
•our
ability to forecast or report accurate financial results;
and
•changes
in stock market analyst recommendations regarding our common stock,
other comparable companies, or our industry generally.
We depend substantially on our sales channels, and our failure to
maintain and expand our sales channels would result in lower sales
and reduced revenue.
To maintain and grow our market share, revenue, and brand, we must
maintain and expand our sales channels. Our sales channels consist
primarily of traditional retailers, online retailers, and wholesale
distributors, but also include service providers such as wireless
carriers and telecommunications providers. We generally have no
minimum purchase commitments or long-term contracts with any of
these third parties.
Traditional retailers have limited shelf space and promotional
budgets, and competition is intense for these resources. A
competitor with more extensive product lines and stronger brand
identity may have greater bargaining power with these retailers.
Any reduction in available shelf space or increased competition for
such shelf space would require us to increase our marketing
expenditures simply to maintain current levels of retail shelf
space, which would harm our operating margin. Our traditional
retail customers have faced increased and significant competition
from online retailers. If we cannot effectively manage our business
amongst our online customers and traditional retail customers, our
business would be harmed. The recent trend in the consolidation of
online retailers has resulted in intensified competition for
preferred product placement, such as product placement on an online
retailer’s internet home page. In addition, our efforts to realign
or consolidate our sales channels may cause temporary disruptions
in our product sales and revenue, and these efforts may not result
in the expected longer-term benefits that prompted
them.
In addition, to the extent our retail and distributor channel
partners supply products that compete with our own, it is possible
that these channel partners may choose not to offer our products to
end-users or to offer our products to end-users on less favorable
terms, including with respect to product placement. If this were to
occur, we may not be able to increase or maintain our sales, and
our business, results of operations, and financial condition could
be materially and adversely affected. For example, Amazon, one of
our primary retailers, competes with our security camera products,
and also acquired two of our competitors, Blink and Ring. For the
year ended December 31, 2022, we derived 40.1% of our revenue
from Verisure and its affiliates.
We must also continuously monitor and evaluate emerging sales
channels. If we fail to establish a presence in an important
developing sales channel, our business, results of operations, and
financial condition could be materially and adversely
affected.
If we do not effectively manage our sales channel inventory and
product mix, we may incur costs associated with excess inventory,
or lose sales from having too few products.
If we are unable to properly monitor, control, and manage our sales
channel inventory and maintain an appropriate level and mix of
products with our distributors and within our sales channels, we
may incur increased and unexpected costs associated with this
inventory. We generally allow distributors and traditional
retailers to return a limited amount of our products in exchange
for other products. Under our price protection policy, if we reduce
the list price of a product, we are often required to issue a
credit in an amount equal to the reduction for each of the products
held in inventory by our wholesale distributors and retailers. If
our wholesale distributors and retailers are unable to sell their
inventory in a timely manner, we might lower the price of the
products, or these parties may exchange the products for newer
products. Also, during the transition from an existing product to a
new replacement product, we must accurately predict the demand for
the existing and the new product.
We determine production levels based on our forecasts of demand for
our products. Actual demand for our products depends on many
factors, which makes it difficult to forecast. We have experienced
differences between our actual and our forecasted demand in the
past and expect differences to arise in the future. If we
improperly forecast demand for our products, we could end up with
too many products and be unable to sell the excess inventory in a
timely manner, if at all, or, alternatively, we could end up with
too few products and not be able to satisfy demand. This problem is
exacerbated because we attempt to closely match inventory levels
with product demand, leaving limited margin for error. If these
events occur, we could incur increased expenses associated with
writing off excessive or obsolete inventory, lose sales, incur
penalties for late delivery, or have to ship products by air
freight to meet immediate demand, thereby incurring incremental
freight costs above the sea freight costs, a preferred method, and
suffering a corresponding decline in gross margin.
If we are unable to secure and protect our intellectual property
rights, our ability to compete could be harmed.
We rely on a combination of copyright, trademark, patent, and trade
secret laws, nondisclosure agreements with employees, consultants,
and suppliers, and other contractual provisions to establish,
maintain, and protect our intellectual property and technology.
Despite efforts to protect our intellectual property, unauthorized
third parties may attempt to design around, copy aspects of our
product design or obtain and use technology or other intellectual
property associated with our products. Furthermore, our competitors
may independently develop similar technology or design around our
intellectual property. Our inability to secure and protect our
intellectual property rights could materially and adversely affect
our brand and business, results of operations, and financial
condition.
We rely upon third parties for technology that is critical to our
products, and if we are unable to continue to use this technology
and future technology, our ability to develop, sell, maintain, and
support technologically innovative products would be
limited.
We rely on third parties to obtain non-exclusive patented hardware
and software license rights in technologies that are incorporated
into and necessary for the operation and functionality of most of
our products. In these cases, because the intellectual property we
license is available from third parties, barriers to entry into
certain markets may be lower for potential or existing competitors
than if we owned exclusive rights to the technology that we license
and use. Moreover, if a competitor or potential competitor enters
into an exclusive arrangement with any of our key third-party
technology providers, or if any of these providers unilaterally
decides not to do business with us for any reason, our ability to
develop and sell products containing that technology would be
severely limited. In addition, certain of Arlo’s firmware and the
AI-based algorithms that we use in our Arlo Secure services
incorporate open source software, the licenses for which may
include customary requirements for, and restrictions on, use of the
open source software.
If we are offering products or services that contain third-party
technology that we subsequently lose the right to license, then we
will not be able to continue to offer or support those products or
services. In addition, these licenses may require royalty payments
or other consideration to the third-party licensor. Our success
will depend, in part, on our continued ability to access these
technologies, and we do not know whether these third-party
technologies will continue to
be licensed to us on commercially acceptable terms, if at all. In
addition, if these third-party licensors fail or experience
instability, then we may be unable to continue to sell products and
services that incorporate the licensed technologies, in addition to
being unable to continue to maintain and support these products and
services. We do require escrow arrangements with respect to certain
third-party software which entitle us to certain limited rights to
the source code, in the event of certain failures by the third
party, in order to maintain and support such software. However,
there is no guarantee that we would be able to fully understand and
use the source code, as we may not have the expertise to do so. We
are increasingly exposed to these risks as we continue to develop
and market more products containing third-party technology and
software. If we are unable to license the necessary technology, we
may be forced to acquire or develop alternative technology, which
could be of lower quality or performance standards. The acquisition
or development of alternative technology may limit and delay our
ability to offer new or competitive products and services and
increase our costs of production. As a result, our business,
results of operations, and financial condition could be materially
and adversely affected.
We also utilize third-party software development companies and
contractors to develop, customize, maintain, and support software
that is incorporated into our products and services. If these
companies and contractors fail to timely deliver or continuously
maintain and support the software, as we require of them, we may
experience delays in releasing new products and services or
difficulties with supporting existing products, services, and our
users.
Our sales and operations in international markets expose us to
operational, financial and regulatory risks.
International sales comprise a significant amount of our overall
revenue. International sales were 45.3% and 38.9% of overall
revenue for the years ended December 31, 2022 and 2021,
respectively. We continue to be committed to growing our
international sales, and while we have committed resources to
expanding our international operations and sales channels, these
efforts may not be successful and could be impacted by COVID-19
pandemic. International operations are subject to a number of
risks, including but not limited to:
•exchange
rate fluctuations;
•political
and economic instability, international terrorism, and
anti-American sentiment, particularly in emerging
markets;
•potential
for violations of anti-corruption laws and regulations, such as
those related to bribery and fraud;
•preference
for locally branded products, and laws and business practices
favoring local competition;
•potential
consequences of, and uncertainty related to, the “Brexit” process
in the United Kingdom, which could lead to additional expense and
complexity in doing business there;
•increased
difficulty in managing inventory;
•delayed
revenue recognition;
•less
effective protection of intellectual property;
•stringent
consumer protection and product compliance regulations, including
but not limited to General Data Protection Regulation in the
European Union, European competition law, the Restriction of
Hazardous Substances directive, the Waste Electrical and Electronic
Equipment directive and the European Ecodesign directive, that are
costly to comply with and may vary from country to
country;
•difficulties
and costs of staffing and managing foreign operations;
•business
difficulties, including potential bankruptcy or liquidation, of any
of our worldwide third-party logistics providers; and
•changes
in local tax and customs duty laws or changes in the enforcement,
application, or interpretation of such laws.
We are also required to comply with local environmental
legislation, and those who sell our products rely on this
compliance in order to sell our products. If those who sell our
products do not agree with our interpretations and requirements of
new legislation, they may cease to order our products and our
business, results of operations, and financial condition could be
materially and adversely affected.
Governmental regulations of imports or exports affecting internet
security could affect our revenue.
Any additional governmental regulation of imports or exports or
failure to obtain required export approval of our encryption
technologies could adversely affect our international and domestic
sales. The United States and various foreign governments have
imposed controls, export license requirements, and restrictions on
the import or export of some technologies, particularly encryption
technology. In addition, from time to time, governmental agencies
have proposed additional regulation of encryption technology, such
as requiring the escrow and governmental recovery of private
encryption keys. In response to terrorist activity, governments
could enact additional regulation or restriction on the use,
import, or export of encryption technology. This additional
regulation of encryption technology could delay or prevent the
acceptance and use of encryption products and public networks for
secure communications, resulting in decreased demand for our
products and services. In addition, some foreign competitors are
subject to less stringent controls on exporting their encryption
technologies. As a result, they may be able to compete more
effectively than we can in the United States and the international
internet security market.
We are involved in litigation matters in the ordinary course and
may in the future become involved in additional litigation,
including litigation regarding intellectual property rights, which
could be costly and subject us to significant
liability.
Our industry is characterized by the existence of a large number of
patents and frequent claims and related litigation regarding
infringement of patents, trade secrets, and other intellectual
property rights. From time to time, third parties have asserted,
and may continue to assert, exclusive patent, copyright, trademark,
and other intellectual property rights against us, demanding
license or royalty payments or seeking payment for damages,
injunctive relief, and other available legal remedies through
litigation. These also include third-party non-practicing entities
who claim to own patents or other intellectual property that they
believe cover our products. If we are unable to resolve these
matters or obtain licenses on acceptable or commercially reasonable
terms, we could be sued or we may be forced to initiate litigation
to protect our rights. The cost of any necessary licenses and
litigation related to alleged infringement could materially and
adversely affect our business, results of operations, and financial
condition.
In the event successful claims of infringement are brought by third
parties, and we are unable to obtain licenses or independently
develop alternative technology on a timely basis, we may be subject
to indemnification obligations, be unable to offer competitive
products, or be subject to increased expenses. If we do not resolve
these claims on a favorable basis, our business, results of
operations, and financial condition could be materially and
adversely affected.
As part of growing our business, we may make acquisitions. If we
fail to successfully select, execute, or integrate our
acquisitions, then our business, results of operations, and
financial condition could be materially and adversely affected and
our stock price could decline.
From time to time, we may undertake acquisitions to add new product
and service lines and technologies, acquire talent, gain new sales
channels, or enter into new sales territories. Acquisitions involve
numerous risks and challenges, including relating to the successful
integration of the acquired business, entering into new territories
or markets with which
we have limited or no prior experience, establishing or maintaining
business relationships with new retailers, distributors, or other
channel partners, vendors, and suppliers, and potential
post-closing disputes.
We cannot ensure that we will be successful in selecting,
executing, and integrating acquisitions. Failure to manage and
successfully integrate acquisitions could materially harm our
business, financial condition, and results of operations. In
addition, if stock market analysts or our stockholders do not
support or believe in the value of the acquisitions that we choose
to undertake, our stock price may decline.
The success of our business depends on customers’ continued and
unimpeded access to our platform on the internet.
Our users must have internet access in order to use our platform.
Some providers may take measures that affect their customers’
ability to use our platform, such as degrading the quality of the
data packets we transmit over their lines, giving those packets
lower priority, giving other packets higher priority than ours,
blocking our packets entirely, or attempting to charge their
customers more for using our platform.
In December 2010, the Federal Communications Commission (the
“FCC”), adopted net neutrality rules barring internet providers
from blocking or slowing down access to online content, protecting
services like ours from such interference. Recently, the FCC voted
in favor of repealing the net neutrality rules, and it is currently
uncertain how the U.S. Congress will respond to this decision. To
the extent network operators attempt to interfere with our
services, extract fees from us to deliver our solution, or
otherwise engage in discriminatory practices, our business, results
of operations, and financial condition could be materially and
adversely affected. Within such a regulatory environment, we could
experience discriminatory or anti-competitive practices that could
impede our domestic and international growth, cause us to incur
additional expense, or otherwise materially and adversely affect
our business, results of operations, and financial
condition.
Changes in tax laws or exposure to additional income tax
liabilities could affect our future profitability.
Factors that could materially affect our future effective tax rates
include, but are not limited to:
•changes
in tax laws or the regulatory environment;
•changes
in the valuation allowance against deferred tax
assets;
•increases
in interests and penalties related to income taxes;
•changes
in accounting and tax standards or practices;
•changes
in the composition of operating income by tax jurisdiction;
and
•changes
in our operating results before taxes.
We are subject to income taxes in the United States and numerous
foreign jurisdictions. Future effective tax rates could be affected
by operating losses in jurisdictions where no tax benefit can be
recognized under GAAP, changes in the composition of earnings in
countries with differing tax rates, changes in deferred tax assets
and liabilities, or changes in tax laws.
As of December 31, 2022, our U.S. federal and state net
operating loss carryforwards were approximately $91.2 million and
approximately $61.3 million, respectively. These amounts have been
reduced by the amount of net operating losses expected to be
utilized to reduce taxable income for such year. Moreover, our U.S.
federal and state research and development tax credits were
approximately $6.5 million and approximately $6.4 million,
respectively, with the amount of federal credit already reduced by
the expected utilization for such year. The utilization of our net
operating loss and tax
credit carryforwards may be subject to annual limitation due to
ownership changes as provided by Sections 382 and 383 of the Code
and similar state provisions. Such an annual limitation could
result in the expiration of portions of our net operating loss and
tax credit carryforwards before utilization. In the event that we
experience ownership changes due to future transactions in our
stocks, the utilization of net operating loss and tax credit
carryforwards to reduce our future taxable income and tax
liabilities may be limited, which could affect our
profitability.
The Internal Revenue Services ("IRS") and several foreign tax
authorities have increasingly focused attention on intercompany
transfer pricing with respect to sales of products and services and
the use of intangibles. Tax authorities could disagree with our
intercompany charges, cross-jurisdictional transfer pricing or
other matters and assess additional taxes. If we do not prevail in
any such disagreements, our profitability may be
affected.
In addition, the Organization for Economic Co-operation and
Development (“OECD”) has been working on new laws on the taxation
of the digital economy to provide taxing rights to jurisdictions
where the customers or users are located. Some countries have
enacted, and others have proposed the new laws to tax digital
transactions. These developments may result in material impacts to
our financial statements.
We are subject to income tax examinations by taxing authorities
globally. We apply judgment in determining our provision for income
taxes and other tax liabilities. While we believe our estimates are
reasonably adequate, there are many transactions where the final
tax determination is uncertain. If any adverse outcome from an
examination determines the taxes we owe are higher than accrued or
drives an increase in our effective tax rates, our results of
operations could be affected.
We must comply with indirect tax laws in multiple jurisdictions, as
well as complex customs duty regimes worldwide. Audits of our
compliance with these rules may result in additional liabilities
for taxes, duties, interest and penalties related to our
international operations which would reduce our
profitability.
Our operations are routinely subject to audit by tax authorities in
various countries. Many countries have indirect tax systems where
the sale and purchase of goods and services are subject to tax
based on the transaction value. These taxes are commonly referred
to as value-added tax (“VAT”) or goods and services tax (“GST”). In
addition, the distribution of our products subjects us to numerous
complex customs regulations, which frequently change over time.
Failure to comply with these systems and regulations can result in
the assessment of additional taxes, duties, interest, and
penalties. While we believe we are in compliance with local laws,
we cannot assure that tax and customs authorities will agree with
our reporting positions and upon audit such tax and customs
authorities may assess additional taxes, duties, interest, and
penalties against us. Adverse action by any government agencies
related to indirect tax laws could materially and adversely affect
our business, results of operations and financial
condition.
We are subject to governmental export and import controls, economic
sanctions, and anti-corruption laws regulations,
that could impair our ability to compete in international markets
and subject us to liability if we are not in full compliance with
applicable laws.
Our business activities are subject to various restrictions under
U.S. export controls and similar laws and regulations, including
the Export Administration Regulations and economic sanctions
administered by the Office of Foreign Assets Control. We also
incorporate encryption technology into certain of our solutions.
These encryption solutions and underlying technology may be
exported outside of the United States only with the required export
authorizations or exceptions, including by license, a license
exception, appropriate classification notification requirement, and
encryption authorization.
Furthermore, our activities are subject to U.S. economic sanctions
laws and regulations that prohibit the shipment of certain products
and services without the required export authorizations, including
to countries, governments, and persons targeted by U.S. embargoes
or sanctions. Obtaining the necessary export license or other
authorization for a particular sale may be time consuming, and may
result in delay or loss of sales opportunities even if the export
license ultimately is granted. While we take precautions to prevent
our solutions from being exported in violation of these
laws,
including using authorizations or exceptions for our encryption
products and implementing IP address blocking and screenings
against U.S. government and international lists of restricted and
prohibited persons and countries, we have not been able to
guarantee, and cannot guarantee, that the precautions we take will
prevent all violations of export control and sanctions laws,
including if purchasers of our products bring our products and
services into sanctioned countries without our knowledge.
Violations of U.S. sanctions or export control laws can result in
significant fines or penalties and incarceration could be imposed
on employees and managers for criminal violations of these
laws.
Also, various countries, in addition to the United States, regulate
the import and export of certain encryption and other technology,
including import and export licensing requirements, and have
enacted laws that could limit our ability to distribute our
products and services or our end-users’ ability to utilize our
solutions in their countries. Changes in our products and services
or changes in import and export regulations may create delays in
the introduction of our products in international markets. Any
decreased use of our solutions or limitation on our ability to
export or sell our solutions could adversely affect our business,
results of operations and financial condition.
We are also subject to various domestic and international
anti-corruption laws, such as the United States Foreign Corrupt
Practices Act, as well as other similar anti-bribery laws and
regulations. These laws and regulations generally prohibit
companies and their employees and intermediaries from authorizing,
offering, providing, and accepting improper payments or benefits
for improper purposes. These laws also require that we keep
accurate books and records and maintain compliance procedures
designed to prevent any such actions. Although we take precautions
to prevent violations of these laws, our exposure for violating
these laws increases as our international presence expands and as
we increase sales and operations in foreign
jurisdictions.
We are subject to, and must remain in compliance with, numerous
laws and governmental regulations concerning the manufacturing,
use, distribution, and sale of our products, as well as any such
future laws and regulations. Some of our customers also require
that we comply with their own unique requirements relating to these
matters. Any failure to comply with such laws, regulations, and
requirements, and any associated unanticipated costs, could
materially and adversely affect our business, results of
operations, and financial condition.
We manufacture and sell products which contain electronic
components, and such components may contain materials that are
subject to government regulation in both the locations where we
manufacture and assemble our products, as well as the locations
where we sell our products. For example, certain regulations limit
the use of lead in electronic components. To our knowledge, we
maintain compliance with all applicable current government
regulations concerning the materials utilized in our products for
all the locations in which we operate. Since we operate on a global
basis, this is a complex process which requires continual
monitoring of regulations and an ongoing compliance process to
ensure that we and our suppliers are in compliance with all
existing regulations. There are areas where new regulations have
been enacted which could increase our cost of the components that
we utilize or require us to expend additional resources to ensure
compliance. For example, the SEC’s “conflict minerals” rules apply
to our business, and we are expending resources to ensure
compliance. The implementation of these requirements by government
regulators and our partners and/or customers could adversely affect
the sourcing, availability and pricing of minerals used in the
manufacture of certain components used in our products. In
addition, the supply-chain due diligence investigation required by
the conflict minerals rules will require expenditures of resources
and management attention regardless of the results of the
investigation. If there is an unanticipated new regulation which
significantly impacts our use of various components or requires
more expensive components, that regulation could materially and
adversely affect our business, results of operations, and financial
condition.
One area that has a large number of regulations is environmental
compliance. Management of environmental pollution and climate
change has produced significant legislative and regulatory efforts
on a global basis, and we believe this will continue both in scope
and in the number of countries participating. These changes could
directly increase the cost of energy, which may have an impact on
the way we manufacture products or utilize energy to produce our
products. In addition, any new regulations or laws in the
environmental area might increase the cost of raw materials we use
in our products. Environmental regulations require us to reduce
product energy usage, monitor and exclude an expanding list of
restricted substances, and participate in required recovery and
recycling of our products. While future changes in regulations are
certain, we are currently unable to predict how any such changes
will impact us and if such impacts will be
material to our business. If there is a new law or regulation that
significantly increases our costs of manufacturing or causes us to
significantly alter the way that we manufacture our products, this
could have a material adverse effect on our business, financial
condition, and results of operations.
Our selling and distribution practices are also regulated in large
part by U.S. federal and state as well as foreign, antitrust and
competition laws and regulations. In general, the objective of
these laws is to promote and maintain free competition by
prohibiting certain forms of conduct that tend to restrict
production, raise prices or otherwise control the market for goods
or services to the detriment of consumers of those goods and
services. Potentially prohibited activities under these laws may
include unilateral conduct or conduct undertaken as the result of
an agreement with one or more of our suppliers, competitors, or
customers. The potential for liability under these laws can be
difficult to predict as it often depends on a finding that the
challenged conduct resulted in harm to competition, such as higher
prices, restricted supply, or a reduction in the quality or variety
of products available to consumers. We utilize a number of
different distribution channels to deliver our products to
customers and end-users and regularly enter into agreements with
resellers of our products at various levels in the distribution
chain that could be subject to scrutiny under these laws in the
event of private litigation or an investigation by a governmental
competition authority. In addition, many of our products are sold
to consumers via the internet. Many of the competition-related laws
that govern these internet sales were adopted prior to the advent
of the internet and, as a result, do not contemplate or address the
unique issues raised by online sales. New interpretations of
existing laws and regulations, whether by courts or by the state,
federal, or foreign governmental authorities charged with the
enforcement of those laws and regulations, may also impact our
business in ways we are currently unable to predict. Any failure on
our part or on the part of our employees, agents, distributors, or
other business partners to comply with the laws and regulations
governing competition can result in negative publicity and
diversion of management time and effort and may subject us to
significant litigation liabilities and other
penalties.
We are exposed to the credit risk of some of our customers and
sublease counterparties and to credit exposures in certain markets,
which could result in material losses.
A substantial portion of our sales are on an open credit basis,
with typical payment terms of 30 to 60 days in the United States
and, because of local customs or conditions, longer in some markets
outside the United States. We monitor individual customer financial
viability in granting such open credit arrangements, seek to limit
such open credit to amounts we believe the customers can pay and
maintain reserves we believe are adequate to cover exposure for
doubtful accounts.
Any bankruptcies or illiquidity among our customer base or sublease
counterparties could harm our business and have a material adverse
effect on our financial condition and results of operations. To the
degree that turmoil in the credit markets makes it more difficult
for some customers or sublease counterparties to obtain financing,
our customers’ or sublease counterparties' ability to pay could be
adversely impacted, which in turn could materially and adversely
affect our business, results of operations, and financial
condition.
In June, 2021, we entered into a sublease agreement, with a term
that runs concurrent with the term of the head lease, for our San
Jose office space in light of the COVID-19 pandemic and its impact
on the changing nature of office space use by our workforce. We
believe we have secured a quality subtenant with appropriate
sublease terms. However, if the subtenant default on their sublease
obligations with us or otherwise terminate their sublease with us,
we may experience a loss of planned sublease rental income, which
could result in a material charge against our operating results. If
that were to happen, we may be unable to enter into a new sublease
on acceptable terms or at all and even if we do, such sublease may
result in our incurring liabilities and expenses in future periods
or the rent payments we receive from a new subtenant being less
than our rent obligations under the head lease. Under these
circumstances, we would be responsible for any
shortfall.
If our products are not compatible with some or all leading
third-party IoT products and protocols, we could be materially and
adversely affected.
A core part of our solution is the interoperability of our platform
with third-party IoT products and protocols. We have designed the
Arlo platform to seamlessly integrate with third-party IoT products
and protocols, such as Amazon
Alexa, Apple HomeKit, Apple TV, Google Assistant, IFTTT, Stringify,
and Samsung SmartThings. If these third parties were to alter their
products, we could be adversely impacted if we fail to timely
create compatible versions of our products, and such
incompatibility could negatively impact the adoption of our
products and solutions. A lack of interoperability may also result
in significant redesign costs, and harm relations with our
customers. Further, the mere announcement of an incompatibility
problem relating to our products could materially and adversely
affect our business, results of operations, and financial
condition.
In addition, to the extent our competitors supply products that
compete with our own, it is possible these competitors could design
their technologies to be closed or proprietary systems that are
incompatible with our products or work less effectively with our
products than their own. As a result, end-users may have an
incentive to purchase products that are compatible with the
products and technologies of our competitors over our
products.
The marketability of our products may suffer if wireless
telecommunications operators do not deliver acceptable wireless
services.
The success of our business depends, in part, on the capacity,
affordability, reliability, and prevalence of wireless data
networks provided by wireless telecommunications operators and on
which our IoT hardware products and solutions operate. Growth in
demand for wireless data access may be limited if, for example,
wireless telecommunications operators cease or materially curtail
operations, fail to offer services that customers consider valuable
at acceptable prices, fail to maintain sufficient capacity to meet
demand for wireless data access, delay the expansion of their
wireless networks and services, fail to offer and maintain reliable
wireless network services, or fail to market their services
effectively.
We are exposed to adverse currency exchange rate fluctuations in
jurisdictions where we transact in local currency, which could
materially and adversely affect our business, results of
operations, and financial condition.
Because a significant portion of our business is conducted outside
the United States, we face exposure to adverse movements in foreign
currency exchange rates. These exposures may change over time as
business practices evolve, and they could have a material adverse
impact on our financial condition, results of operations, and cash
flows. Although a portion of our international sales are currently
invoiced in U.S. dollars, we have implemented and continue to
implement for certain countries and customers both invoicing and
payment in foreign currencies. Our primary exposure to movements in
foreign currency exchange rates relates to non-U.S.
dollar-denominated sales primarily in Australia, as well as our
global operations, and non-U.S. dollar-denominated operating
expenses and certain assets and liabilities. In addition,
weaknesses in foreign currencies for U.S. dollar-denominated sales
could adversely affect demand for our products. Conversely, a
strengthening in foreign currencies against the U.S. dollar could
increase foreign currency-denominated costs. As a result, we may
attempt to renegotiate pricing of existing contracts or request
payment to be made in U.S. dollars. We cannot be sure that our
customers would agree to renegotiate along these lines. This could
result in customers eventually terminating contracts with us or in
our decision to terminate certain contracts, which would adversely
affect our sales.
We established a hedging program after our initial public offering
(the "IPO") to hedge our exposure to fluctuations in foreign
currency exchange rates as a response to the risk of changes in the
value of foreign currency-denominated assets and liabilities. We
may enter into foreign currency forward contracts or other
instruments. We expect that such foreign currency forward contracts
will reduce, but will not eliminate, the impact of currency
exchange rate movements. For example, we may not execute forward
contracts in all currencies in which we conduct business. In
addition, we may hedge to reduce the impact of volatile exchange
rates on revenue, gross profit and operating profit for limited
periods of time. However, the use of these hedging activities may
only offset a portion of the adverse financial effect resulting
from unfavorable movements in foreign exchange rates.
Risks Related to Our Separation from NETGEAR
If the Distribution (as defined below), together with certain
related transactions, does not qualify as a transaction that is
generally tax-free for U.S. federal income tax purposes, NETGEAR,
Arlo and Arlo stockholders could be subject to significant tax
liabilities, and, in certain circumstances, we could be required to
indemnify
NETGEAR for material taxes and other related amounts pursuant to
indemnification obligations under the tax matters
agreement.
In November 2018, NETGEAR announced that its board of directors had
approved a special stock dividend (the “Distribution”) to its
stockholders, consisting of 62,500,000 shares of our common stock
owned by NETGEAR. In connection with the Distribution, NETGEAR
received an opinion from outside tax counsel regarding
qualification of the Distribution, together with certain related
transactions, as a transaction that is generally tax-free for U.S.
federal income tax purposes under Sections 355 and
368(a)(1)(D) of the Code. The opinion was based upon and relied on,
among other things, certain facts and assumptions, as well as
certain representations, statements and undertakings of NETGEAR and
us, including those relating to the past and future conduct of
NETGEAR and us. If any of these representations, statements or
undertakings are, or become, incomplete or inaccurate, or if we or
NETGEAR breach any of the respective covenants in any of the
separation-related agreements, the opinion of the outside tax
counsel could be invalid and the conclusions reached therein could
be jeopardized.
As of December 31, 2022, the 2018 IRS audit had been closed without
any adjustments and the 2018 California Franchise Tax Board audit
is still ongoing.
We entered into the tax matters agreement with NETGEAR to indemnify
NETGEAR for any taxes (and any related costs and other damages)
resulting from the Separation and Distribution, and certain other
related transactions, to the extent such amounts were to result
from (i) an acquisition after the Distribution of all or a
portion of our equity securities, whether by merger or otherwise
(and regardless of whether we participated in or otherwise
facilitated the acquisition), (ii) other actions or failures to act
by us or (iii) any of the representations or undertakings
contained in any of the Separation-related agreements or in the
documents relating to the opinion of counsel being incorrect or
violated. Any such indemnity obligations arising under the tax
matters agreement could be material.
NETGEAR has agreed to indemnify us for certain liabilities.
However, we cannot assure that the indemnity will be sufficient to
insure us against the full amount of such liabilities, or that
NETGEAR’s ability to satisfy its indemnification obligation will
not be impaired in the future.
Pursuant to the master separation agreement entered into between us
and NETGEAR and certain other agreements with NETGEAR, NETGEAR has
agreed to indemnify us for certain liabilities. The master
separation agreement provides for cross-indemnities principally
designed to place financial responsibility for the obligations and
liabilities of our business with us 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 us and NETGEAR, each party, in its
capacity as a licensee, indemnifies the other party, in its
capacity as a licensor, as well as 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 such indemnifying party
under the intellectual property rights cross-license agreement.
Also, under the tax matters agreement entered into between us 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 such party under the tax matters agreement. In
addition, we have agreed in the tax matters agreement that each
party will generally be responsible for any taxes and related
amounts imposed on us or NETGEAR as a result of the failure of the
Distribution, 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 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,
we have 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
us 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.
However, third parties could also seek to hold us responsible for
any of the liabilities that NETGEAR has agreed to retain, and we
cannot assure that an indemnity from NETGEAR will be sufficient to
protect us against the full amount of such liabilities, or that
NETGEAR will be able to fully satisfy its indemnification
obligations in the future. Even if we ultimately succeed in
recovering from NETGEAR any amounts for which we are held liable,
we may be temporarily required to bear these losses. Each of these
risks could materially and adversely affect our business, results
of operations, and financial condition.
Risks Related to Ownership of Our Common Stock
We may change our dividend policy at any time.
Although we currently intend to retain future earnings to finance
the operation and expansion of our business and therefore do not
anticipate paying cash dividends on our capital stock in the
foreseeable future, our dividend policy may change at any time
without notice to our stockholders. The declaration and amount of
any future dividends to holders of our common stock will be at the
discretion of our board of directors in accordance with applicable
law and after taking into account various factors, including our
financial condition, results of operations, current and anticipated
cash needs, cash flows, impact on our effective tax rate,
indebtedness, contractual obligations, legal requirements, and
other factors that our board of directors deems relevant. As a
result, we cannot assure you that we will pay dividends at any rate
or at all.
Future sales, or the perception of future sales, of our common
stock may depress the price of our common stock.
The market price of our common stock could decline significantly as
a result of sales or other distributions of a large number of
shares of our common stock in the market. The perception that these
sales might occur could depress the market price of our common
stock. These sales, or the possibility that these sales may occur,
might also make it more difficult for us to sell equity securities
in the future at a time and at a price that we deem
appropriate.
The 11,747,250 shares of our common stock sold in the IPO are
freely tradable in the public market. On December 31, 2018, NETGEAR
completed the Distribution to its stockholders of the 62,500,000
shares of Arlo common stock that it owned. As of December 31,
2022, we have 88,887,139 shares of common stock
outstanding.
In the future, we may issue our securities in connection with
investments or acquisitions. The amount of shares of our common
stock issued in connection with an investment or acquisition could
constitute a material portion of our then-outstanding shares of our
common stock.
Any impairment of goodwill, other intangible assets, and long-lived
assets could negatively impact our results of
operations.
Under generally accepted accounting principles, we review our
intangible assets and long-lived assets for impairment when events
or changes in circumstances indicate the carrying value may not be
recoverable. Goodwill is required to be tested for impairment at
least annually. Factors that may be considered when determining if
the carrying value of our goodwill, other intangible assets and
long-lived assets may not be recoverable include a significant
decline in our expected future cash flows or a sustained,
significant decline in our stock price and market
capitalization.
If, in any period our stock price decreases to the point where the
fair value of our assets (as partially indicated by our market
capitalization) is less than our book value, this could indicate a
potential impairment and we may be required to
record an impairment charge in that period. Our valuation
methodology for assessing impairment requires management to make
judgments and assumptions based on projections of future operating
performance. We operate in highly competitive environments and
projections of future operating results and cash flows may vary
significantly from actual results. As a result, we may incur
substantial impairment charges to earnings in our financial
statements should an impairment of our goodwill, other intangible
assets and long-lived assets be determined resulting in an adverse
impact on our results of operations. If there is a decline in our
stock price based on market conditions and deterioration of our
business, we may have to record a charge to our earnings for the
associated goodwill impairment of up to $11.0 million.
We are subject to securities class action and derivative
litigation.
We are subject to various securities class action and derivative
complaints, as more fully discussed in the heading under
“Litigation and Other Legal Matters” in Note
8, Commitments
and Contingencies, in
the Notes to Consolidated Financial Statements in Item 8 of Part II
of this Annual Report on Form 10-K.
Regardless of the merits or ultimate results of the above-described
litigation matters, they could result in substantial costs, which
would hurt our financial condition and results of operations and
divert management’s attention and resources from our business. At
this point, however, it is too early to reasonably estimate any
financial impact to us resulting from these litigation
matters.
Your percentage ownership in Arlo may be diluted in the
future.
In the future, your percentage ownership in Arlo may be diluted
because of equity awards that Arlo may grant to Arlo’s directors,
officers, and employees or otherwise as a result of equity
issuances for acquisitions or capital market transactions. In
addition, following the Distribution, Arlo and NETGEAR employees
hold awards in respect of shares of our common stock as a result of
the conversion of certain NETGEAR stock awards (in whole or in
part) to Arlo stock awards in connection with the Distribution.
Such awards have a dilutive effect on Arlo’s earnings per share,
which could adversely affect the market price of Arlo common stock.
From time to time, Arlo will issue additional stock-based awards to
its employees under Arlo’s employee benefits plans.
In addition, Arlo’s amended and restated certificate of
incorporation authorizes Arlo to issue, without the approval of
Arlo’s stockholders, one or more classes or series of preferred
stock having such designation, powers, preferences and relative,
participating, optional and other special rights, including
preferences over Arlo’s common stock respecting dividends and
distributions, as Arlo’s board of directors generally may
determine. The terms of one or more classes or series of preferred
stock could dilute the voting power or reduce the value of our
common stock. For example, Arlo could grant the holders of
preferred stock the right to elect some number of Arlo’s directors
in all events or on the happening of specified events or the right
to veto specified transactions. Similarly, the repurchase or
redemption rights or liquidation preferences that Arlo could assign
to holders of preferred stock could affect the residual value of
the common stock.
We are an emerging growth company, and we cannot be certain if the
reduced reporting requirements applicable to emerging growth
companies will make our common shares less attractive to
investors.
We are an “emerging growth company,” as defined in the Jumpstart
Our Business Act ("JOBS Act"). For as long as we continue to be an
emerging growth company, we may take advantage of exemptions from
various reporting requirements that are applicable to other public
companies that are not emerging growth companies, including
exemption from compliance with the auditor attestation requirements
of Section 404 of the Sarbanes Oxley Act of 2002 ("Section 404"),
reduced disclosure obligations regarding executive compensation and
exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and shareholder approval of any
golden parachute payments not previously approved. We will remain
an emerging growth company until the earliest of (1) December 31,
2023, (2) the last day of the fiscal year in which we have total
annual revenue of at least $1.235 billion, (3) the last day of the
fiscal year in which we become a large accelerated filer, which
means that we have been public for at least 12 months, have filed
at least one annual report and the market value of our common stock
that is held by non-affiliates exceeds $700 million
as of the
last day of our then most recently completed second fiscal quarter,
or (4) the date on which we have issued more than $1.0 billion in
non-convertible debt during the prior three-year
period.
Even after we no longer qualify as an emerging growth company, we
may still re-qualify as a “smaller reporting company,” which would
allow us to take advantage of many of the same exemptions from
disclosure requirements including exemption from compliance with
the auditor attestation requirements of Section 404 and reduced
disclosure obligations regarding executive compensation in our
periodic reports and proxy statements.
We cannot predict if investors will find our common stock less
attractive because we may rely on these exemptions. If some
investors find our common stock less attractive as a result, there
may be a less active trading market for our common stock and our
share price may be more volatile.
Certain provisions in our amended and restated certificate of
incorporation and amended and restated bylaws and of Delaware law
may prevent or delay an acquisition of Arlo, which could decrease
the trading price of our common stock.
Our amended and restated certificate of incorporation and amended
and restated bylaws contain, and Delaware law contains, provisions
that are intended to deter coercive takeover practices and
inadequate takeover bids by making such practices or bids
unacceptably expensive to the bidder and to encourage prospective
acquirers to negotiate with our board of directors rather than to
attempt a hostile takeover. These provisions include, among
others:
•the
inability of our stockholders to call a special
meeting;
•the
inability of our stockholders to act without a meeting of
stockholders;
•rules
regarding how stockholders may present proposals or nominate
directors for election at stockholder meetings;
•the
right of our board of directors to issue preferred stock without
stockholder approval;
•the
division of our board of directors into three classes of directors,
with each class serving a staggered three-year term, and this
classified board provision could have the effect of making the
replacement of incumbent directors more time consuming and
difficult;
•a
provision that stockholders may only remove directors with cause
while the board of directors is classified; and
•the
ability of our directors, and not stockholders, to fill vacancies
on our board of directors.
In addition, because we have not elected to be exempt from
Section 203 of the Delaware General Corporation Law (the
“DGCL”), this provision could also delay or prevent a change of
control that you may favor. Section 203 provides that, subject
to limited exceptions, persons that acquire, or are affiliated with
a person that acquires, more than 15% of the outstanding voting
stock of a Delaware corporation (an “interested stockholder”) shall
not engage in any business combination with that corporation,
including by merger, consolidation or acquisitions of additional
shares, for a three-year period following the date on which the
person became an interested stockholder, unless (i) prior to
such time, the board of directors of such corporation approved
either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of such corporation at the
time the transaction commenced (excluding for purposes of
determining the voting stock outstanding (but not the outstanding
voting stock owned by the interested stockholder) the voting stock
owned by directors who are also officers or held in employee
benefit plans in which the employees do not have a confidential
right to tender or vote stock held by the plan); or (iii) on
or subsequent to such time the business combination is approved by
the board of directors of such
corporation and authorized at a meeting of stockholders by the
affirmative vote of at least two-thirds of the outstanding voting
stock of such corporation not owned by the interested
stockholder.
We believe these provisions will protect our stockholders from
coercive or otherwise unfair takeover tactics by requiring
potential acquirers to negotiate with our board of directors and by
providing our board of directors with more time to assess any
acquisition proposal. These provisions are not intended to make
Arlo immune from takeovers. However, these provisions will apply
even if the offer may be considered beneficial by some stockholders
and could delay or prevent an acquisition that our board of
directors determines is not in the best interests of Arlo and its
stockholders. These provisions may also prevent or discourage
attempts to remove and replace incumbent directors.
Our amended and restated certificate of incorporation contains
exclusive forum provisions that may discourage lawsuits against us
and our directors and officers.
Our amended and restated certificate of incorporation provides that
unless the board of directors otherwise determines, the state
courts in the State of Delaware or, if no state court located
within the State of Delaware has jurisdiction, the federal court
for the District of Delaware, will be the sole and exclusive forum
for the following types of actions or proceedings under Delaware
statutory or common law: any derivative action or proceeding
brought on behalf of Arlo, any action asserting a claim of breach
of a fiduciary duty owed by any director or officer of Arlo to Arlo
or Arlo’s stockholders, any action asserting a claim against Arlo
or any director or officer of Arlo arising pursuant to any
provision of the DGCL or Arlo’s amended and restated certificate of
incorporation or bylaws, or any action asserting a claim against
Arlo or any director or officer of Arlo governed by the internal
affairs doctrine under Delaware law. This provision would not apply
to suits brought to enforce a duty or liability created by the
Exchange Act. Furthermore, Section 22 of the Securities Act creates
concurrent jurisdiction for federal and state courts over all such
Securities Act actions. Accordingly, both state and federal courts
have jurisdiction to entertain such claims. To prevent having to
litigate claims in multiple jurisdictions and the threat of
inconsistent or contrary rulings by different courts, among other
considerations, our amended and restated certificate of
incorporation further provides that the federal district courts of
the United States will be the exclusive forum for resolving any
complaint asserting a cause of action arising under the Securities
Act. While the Delaware courts have determined that such choice of
forum provisions are facially valid, a stockholder may nevertheless
seek to bring a claim in a venue other than those designated in the
exclusive forum provisions. In such instance, we would expect to
vigorously assert the validity and enforceability of the exclusive
forum provisions of our amended and restated certificate of
incorporation. This may require significant additional costs
associated with resolving such action in other jurisdictions and
there can be no assurance that the provisions will be enforced by a
court in those other jurisdictions. These exclusive forum
provisions may limit the ability of Arlo’s stockholders to bring a
claim in a judicial forum that such stockholders find favorable for
disputes with Arlo or Arlo’s directors or officers, which may
discourage such lawsuits against Arlo and Arlo’s directors and
officers. Alternatively, if a court were to find one or more of
these exclusive forum provisions inapplicable to, or unenforceable
in respect of, one or more of the specified types of actions or
proceedings described above, Arlo may incur further significant
additional costs associated with resolving such matters in other
jurisdictions or forums, all of which could materially and
adversely affect Arlo’s business, financial condition, or results
of operations.
Our board of directors has the ability to issue blank check
preferred stock, which may discourage or impede acquisition
attempts or other transactions.
Our board of directors has the power, subject to applicable law, to
issue series of preferred stock that could, depending on the terms
of the series, impede the completion of a merger, tender offer or
other takeover attempt. For instance, subject to applicable law, a
series of preferred stock may impede a business combination by
including class voting rights, which would enable the holder or
holders of such series to block a proposed transaction. Our board
of directors will make any determination to issue shares of
preferred stock on its judgment as to our and our stockholders’
best interests. Our board of directors, in so acting, could issue
shares of preferred stock having terms which could discourage an
acquisition attempt or other transaction that some, or a majority,
of the stockholders may believe to be in their best interests or in
which stockholders would have received a premium for their stock
over the then prevailing market price of the stock.
General Risks
The market price of our common stock could be volatile and is
influenced by many factors, some of which are beyond our
control.
The market price of our common stock could be volatile and is
influenced by many factors, some of which are beyond our control,
including those described above in “Risks
Related to Our Business”
and the following:
•the
failure of securities analysts to cover our common stock or changes
in financial estimates by analysts;
•the
inability to meet the financial estimates of securities analysts
who follow our common stock or changes in earnings estimates by
analysts;
•strategic
actions by us or our competitors;
•announcements
by us or our competitors of significant contracts, acquisitions,
joint marketing relationships, joint ventures or capital
commitments;
•our
quarterly or annual earnings, or those of other companies in our
industry;
•actual
or anticipated fluctuations in our operating results and those of
our competitors;
•general
economic and stock market conditions;
•the
public reaction to our press releases, our other public
announcements and our filings with the SEC;
•risks
related to our business and our industry, including those discussed
above;
•changes
in conditions or trends in our industry, markets or
customers;
•the
trading volume of our common stock;
•future
sales of our common stock or other securities; and
•investor
perceptions of the investment opportunity associated with our
common stock relative to other investment
alternatives.
In particular, the realization of any of the risks described in
these “Risk
Factors”
could have a material adverse impact on the market price of our
common stock in the future and cause the value of your investment
to decline. In addition, the stock market in general has
experienced extreme volatility that has often been unrelated to the
operating performance of particular companies. These broad market
and industry factors may materially reduce the market price of our
common stock, regardless of our operating performance. In addition,
price volatility may be greater if the public float and trading
volume of our common stock is low.
We incur significant costs as a result of operating as a public
company, and our management devotes substantial time to complying
with public company regulations.
Prior to the Separation, we historically operated our business as a
segment of a public company. As a standalone public company, we
have additional legal, accounting, insurance, compliance, and other
expenses that we had not incurred historically. We are obligated to
file with the SEC annual and quarterly reports and other reports
that are specified in Section 13 and other sections of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”).
We are also required to ensure that we have the ability to prepare
financial statements that are fully compliant with all SEC
reporting
requirements on a timely basis. In addition, we are and will
continue to become subject to other reporting and corporate
governance requirements, including certain requirements of the New
York Stock Exchange ("NYSE"), and certain provisions of the Section
404 and the regulations promulgated thereunder, which will impose
significant compliance obligations upon us.
Section 404, as well as rules subsequently implemented by the SEC
and the NYSE, have imposed increased regulation and disclosure and
required enhanced corporate governance practices of public
companies. We are committed to maintaining high standards of
corporate governance and public disclosure, and our efforts to
comply with evolving laws, regulations and standards in this regard
are likely to result in increased selling and administrative
expenses and a diversion of management’s time and attention from
revenue-generating activities to compliance activities. These
changes will require a significant commitment of additional
resources. We may not be successful in implementing these
requirements and implementing them could materially and adversely
affect our business, results of operations and financial condition.
In addition, if we fail to implement the requirements with respect
to our internal accounting and audit functions, our ability to
report our operating results on a timely and accurate basis could
be impaired. If we do not implement such requirements in a timely
manner or with adequate compliance, we might be subject to
sanctions or investigation by regulatory authorities, such as the
SEC and the NYSE. Any such action could harm our reputation and the
confidence of investors and customers in us and could materially
and adversely affect our business and cause our share price to
fall.
Failure to achieve and maintain effective internal controls in
accordance with Section 404 of Sarbanes-Oxley could materially
and adversely affect our business, results of operations, financial
condition, and stock price.
As a public company, we are required to document and test our
internal control procedures in order to satisfy the requirements of
Section 404, which requires annual management assessments of
the effectiveness of our internal control over financial reporting.
Upon loss of status as an “emerging growth company” as defined in
the JOBS Act, an annual report by our independent registered public
accounting firm that addresses the effectiveness of internal
control over financial reporting will be required. During the
course of our testing, we may identify deficiencies which we may
not be able to remediate in time to meet our deadline for
compliance with Section 404. Testing and maintaining internal
control can divert our management’s attention from other matters
that are important to the operation of our business. We also expect
the regulations under Section 404 to increase our legal and
financial compliance costs, make it more difficult to attract and
retain qualified officers and members of our board of directors,
particularly to serve on our audit committee, and make some
activities more difficult, time consuming, and costly. We may not
be able to conclude on an ongoing basis that we have effective
internal control over our financial reporting in accordance with
Section 404 or our independent registered public accounting
firm may not be able or willing to issue an unqualified report on
the effectiveness of our internal control over financial reporting.
If we conclude that our internal control over financial reporting
is not effective, we cannot be certain as to the timing of
completion of our evaluation, testing and remediation actions or
their effect on our operations because there is presently no
precedent available by which to measure compliance adequacy. If
either we are unable to conclude that we have effective internal
control over our financial reporting or our independent auditors
are unable to provide us with an unqualified report as required by
Section 404, then investors could lose confidence in our
reported financial information, which could have a negative effect
on the trading price of our stock.
If securities or industry analysts do not publish research or
reports about our business, if they adversely change their
recommendations regarding our stock, or if our operating results do
not meet their expectations, our stock price could
decline.
The trading market for our common stock will be influenced by the
research, reports and recommendations that industry or securities
analysts publish about us or our business. If one or more of these
analysts cease coverage of us or fail to publish reports on us
regularly, we could lose visibility in the financial markets, which
in turn could cause our stock price or trading volume to decline.
Moreover, if one or more of the analysts who cover us downgrades
our stock or if our operating results do not meet their
expectations, our stock price could decline.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We are a global company with corporate headquarters located in
Carlsbad, California, where we occupy approximately 43,500 square
feet of office space pursuant to a lease agreement that expires in
November 2029. We also lease approximately 77,800 square feet of
office space in San Jose pursuant to a lease agreement that expires
in June 2029. In June 2021, we entered into a sublease agreement,
with a term that runs concurrent with the term of the head lease,
for our San Jose office space in light of the COVID-19 pandemic and
its impact on the changing nature of office space use by our
workforce.
During fiscal 2022, our international sales personnel were based
out of local sales offices or home offices in Australia and Canada.
Our international operations personnel use leased facilities in
Hong Kong. We maintain our marketing and research and development
facilities in Milpitas (the United States), Irvine (the United
States), Carlsbad (the United States), Richmond (Canada) and Taipei
(Taiwan). In addition, we use third parties to provide warehousing
services to us, consisting of facilities in Southern California,
Texas, Tennessee, Mexico, Hong Kong, and Australia. We also
lease office space in Cork, Ireland.
In November 2022, we announced a restructuring plan to reduce our
cost structure to better align the operational needs of the
business to current economic conditions while continuing to support
our long-term strategy. As a result, we have reduced office space
in our headquarters located in Carlsbad, California and will not
renew the office leases in Australia, Hong Kong and India. We
believe that the facilities described above are suitable and
adequate for our present purposes and that the productive capacity
in our facilities is substantially being utilized or we have plans
to utilize it.
Item 3. Legal Proceedings
We are subject to legal proceedings and claims that have not been
fully resolved and that have arisen in the ordinary course of
business. Our material legal proceedings are described under the
heading “Litigation and Other Legal Matters” in Note 8,
Commitments and Contingencies,
in the Notes to Consolidated Financial Statements in Item 8 of Part
II of this Annual Report on Form 10-K. For additional discussion of
certain risks associated with legal proceedings, see Item 1A, Risk
Factors.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed and traded on the New York Stock
Exchange (“NYSE”) under the symbol “ARLO”.
Holders of Common Stock
On March 3, 2023, we had eight institutional stockholders of
record of our common stock. The number of record holders is based
upon the actual number of holders registered on our books at such
date and does not include holders of shares held by brokers in
“street names” or persons, partnerships, associations, corporations
or other entities identified in security position listings
maintained by depository trust companies, and we are unable to
estimate the total number of stockholders represented by these
record holders.
Dividends
We have not historically declared or paid cash dividends on our
common stock. We do not anticipate paying cash dividends in the
foreseeable future.
Securities Authorized for Issuance under Equity Compensation
Plans
See Item 12 of Part III of this Annual Report on Form 10-K
regarding information about securities authorized for issuance
under our equity compensation plans.
Recent Sales of Unregistered Securities and Purchases of Equity
Securities by the Issuer
None.
Stock Performance Graph
Notwithstanding any statement to the contrary in any of our
previous or future filings with the SEC, the following information
relating to the price performance of our common stock shall not be
deemed “filed” with the SEC or “soliciting material” under the
Exchange Act and shall not be incorporated by reference into any
such filings.
The following graph shows a comparison from December 31, 2018
through December 31, 2022 of cumulative total return for our
common stock, the NYSE Composite Index, the Standard and Poor’s 600
Information Technology Index, (“S&P 600 Information Technology
Index”), the Standard and Poor’s Small Cap 600 Index (“S&P
Small Cap 600 Index”) and the Russell 2000 Index. The graph assumes
that $100 was invested in Arlo common stock at the closing price of
$9.98 on December 31, 2018 and in the NYSE Composite Index,
the S&P 600 Information Technology Index, the S&P Small Cap
600 Index and the Russell 2000 Index on December 31, 2018, and
assumes reinvestment of any dividends. We have never paid dividends
on our common stock and have no present plans to do so. The stock
price performance shown in the following graph is not intended to
forecast or be indicative of possible future stock price
performance.
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
You should read the following discussion and analysis of our
financial condition and results of operations together with "Note
about Forward-Looking Statements", Part I, Item 1A "Risk Factors,"
and our audited consolidated financial statements and the
accompanying notes to the financial statements included under Item
8 of this Annual Report on Form 10-K.
This discussion contains forward-looking statements that involve
risks and uncertainties. The forward-looking statements are not
historical facts, but rather are based on current expectations,
estimates, assumptions and projections about our industry, business
and future financial results. Our actual results could differ
materially from the results contemplated by these forward-looking
statements due to a number of factors, including those discussed
under “Risk Factors” in Part I, Item 1A above.
Business and Executive Overview
Arlo combines an intelligent cloud infrastructure and mobile app
with a variety of smart connected devices that are transforming the
way people experience the connected lifestyle. Arlo’s deep
expertise in product design, wireless connectivity, cloud
infrastructure and cutting-edge AI capabilities focuses on
delivering a seamless, smart home experience for Arlo users that is
easy to setup and interact with every day. Our cloud-based platform
provides users with visibility, insight and a powerful means to
help protect and connect in real-time with the people and things
that matter most, from any location with a Wi-Fi or a cellular
connection. Since the launch of our first product in December 2014,
we have shipped over 27.5 million smart connected devices. As of
December 31, 2022, the Arlo platform had approximately 7.2
million cumulative registered accounts across more than 100
countries around the world coupled with 1.9 million cumulative paid
subscribers and annual recurring revenue of $137.8
million.
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. For the years ended
December 31, 2022 and 2021, we generated total revenue of
$490.4 million and $435.1 million, respectively. Loss from
operations was $56.9 million and $60.1 million for the
years ended December 31, 2022 and 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 channel partnerships and to
continue our global expansion. We expect to increase our investment
in research and development going forward as we continue to
introduce new and innovative products and services to enhance the
Arlo platform and compete for engineering talent. We also expect
our sales and marketing expense to increase in the future as we
invest in marketing to drive awareness of our brand and drive
demand for our products and services..
Key Business Metrics
In addition to the measures presented in our 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.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31, |
|
2022 |
|
% Change |
|
2021 |
|
(In thousands, except percentage data) |
|
Cumulative registered accounts |
7,220 |
|
|
17.8 |
% |
|
6,131 |
|
|
Cumulative paid accounts |
1,862 |
|
|
74.5 |
% |
|
1,067 |
|
|
Annual recurring revenue |
$ |
137,764 |
|
|
52.9 |
% |
|
$ |
90,100 |
|
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 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 end-users to monitor the
devices attached to that household.
Cumulative Paid Accounts.
Paid accounts are defined as any account worldwide where a
subscription to a paid service is being collected (either by us or
by our customers or channel partners, including Verisure), plus
paid service plans of a duration of more than three months bundled
with products (such bundles being counted as a paid account after
90 days have elapsed from the date of registration).
Annual Recurring Revenue (“ARR”).
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. ARR is a performance metric and should be viewed
independently of revenue and deferred revenue, and is not intended
to be a substitute for, or combined with, any of these
items.
Impact of COVID-19 and Global Geopolitical, Economic and Business
Conditions
During the year ended December 31, 2022, we remained focused
on navigating COVID-19 related challenges, the ongoing conflict in
Ukraine, supply chain disruptions, inflation, lower consumer
confidence and rising interest rates by preserving our liquidity
and managing our cash flow by taking preemptive action to enhance
our ability to meet our short-term liquidity needs. These actions
include, but are not limited to, proactively managing working
capital by closely monitoring customers’ credit and collections,
renegotiating payment terms with third-party manufacturers and key
suppliers, closely monitoring inventory levels and purchases
against forecasted demand, reducing or eliminating headcount and
non-essential spending, subleasing and not renewing excess office
space, and deferring hiring. We continue to monitor the situation
and may, as necessary, reduce expenditures further, borrow under
our revolving credit facility, or pursue other sources of capital
that may include other forms of external financing in order to
maintain our cash position and preserve financial flexibility in
response to the uncertainty in the United States and global markets
resulting from the COVID-19 pandemic, the ongoing conflict in
Ukraine, supply chain disruptions, the inflationary macro
environment, lower consumer confidence and rising interest
rates.
Components of Results of Operations
Revenue
Our gross revenue consists primarily of sales of devices, prepaid
and paid subscription service revenue and NRE service revenue. We
generally recognize revenue from product sales at the time the
product is shipped and transfer of control from us to the customer
occurs. Upon device shipment, we attribute a portion of the sales
price as prepaid service, deferring this revenue at the outset and
subsequently recognizing it ratably over the estimated useful
economic life of the device or free trial period, as applicable.
Our paid subscription services relate to sales of subscription
plans to our registered accounts. Our services also include certain
development services provided to strategic partners under NRE
arrangements.
Our revenue consists of gross revenue, less end-user customer
rebates and other channel sales incentives, allowances for
estimated sales returns, price protection, and net changes in
deferred revenue. 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.
Cost of Revenue
Cost of revenue consists of both product costs and service costs.
Product costs primarily consist of the cost of finished products
from our third-party manufacturers and overhead costs, including
personnel expense for operation staff, purchasing, product
planning, inventory control, warehousing and distribution
logistics, third-party software licensing fees, inbound freight, IT
and facilities overhead, warranty costs associated with returned
goods, write-downs for excess and obsolete inventory and excess
components, and royalties to third parties. Service costs consist
of costs attributable to the provision and maintenance of our
cloud-based platform, including personnel, storage, security and
computing, IT and facilities overhead as well as NRE service costs
incurred under NRE arrangements.
Our cost of revenue as a percentage of revenue can vary based upon
a number of factors, including those that may affect our revenue
set forth above and factors that may affect our cost of revenue,
including, without limitation product mix, sales channel mix,
registered accounts’ acceptance of paid subscription service
offerings, and changes in our cost of goods sold due to
fluctuations in prices paid for components, net of vendor rebates,
cloud platform costs, warranty and overhead costs, inbound freight
and duty costs, and charges for excess or obsolete inventory. 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 and
allows us to adapt to changing market dynamics and supply chain
constraints.
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. Generally, we recognize
research and development expenses as they are incurred. Research
and development expense directly attributable to delivering the
Verisure NRE is recognized in cost of service.
We have invested in and expanded our research and development
organization to enhance our ability to introduce innovative
products and services. We expect research and development expense
to increase in absolute dollars as we develop new product and
service offerings and compete for engineering talent. 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.
Sales and Marketing
Sales and marketing expense consists primarily of personnel expense
for sales and marketing staff; technical support expense;
advertising; trade shows; media and placement; corporate
communications and other marketing expense; product marketing
expense; IT and facilities overhead; outbound freight costs; and
credit card processing fees.
We expect our sales and marketing expense to increase in the future
as we invest in marketing to drive awareness of our brand and drive
demand for our products and 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.
Restructuring Charges
Restructuring charges consist primarily of severance costs, office
exit expense, and other exit expense associated with the
abandonment of certain lease contracts and cancellation of
contractual services arrangements with certain
suppliers.
Impairment Charges
During the second quarter of 2021, we reviewed certain of our
right-of-use assets and other lease-related assets for impairment
in conjunction with our decision to sublease our office space in
San Jose, California. As a result, we recorded an impairment charge
for the right-of-use asset and other lease-related assets included
in the San Jose office asset group.
Others
Others include separation expense and gain on sale of business.
Separation expense consists primarily of costs of legal and
professional services for IPO-related litigation associated with
our separation from NETGEAR. Gain on sale of business represents
the gain on the sale of our commercial operations in
Europe.
Results of Operations
In this section, we discuss the results of operations for the year
ended December 31, 2022 compared to the year ended
December 31, 2021. For a discussion of the year ended
December 31, 2021 compared to the year ended December 31,
2020, please refer to Part II, Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in our
Annual Report on Form 10-K for the year ended December 31,
2021.
The following table sets forth our consolidated statements of
comprehensive loss data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022 |
|
2021 |
|
|
(In thousands, except percentage data) |
|
Revenue: |
|
|
|
|
|
|
|
|
Products |
$ |
353,935 |
|
|
72.2 |
% |
|
$ |
331,620 |
|
|
76.2 |
% |
|
Services |
136,479 |
|
|
27.8 |
% |
|
103,517 |
|
|
23.8 |
% |
|
Total revenue |
490,414 |
|
|
100.0 |
% |
|
435,137 |
|
|
100.0 |
% |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
Products |
308,692 |
|
|
63.0 |
% |
|
285,334 |
|
|
65.6 |
% |
|
Services |
45,687 |
|
|
9.3 |
% |
|
41,768 |
|
|
9.6 |
% |
|
Total cost of revenue |
354,379 |
|
|
72.3 |
% |
|
327,102 |
|
|
75.2 |
% |
|
Gross profit |
136,035 |
|
|
27.7 |
% |
|
108,035 |
|
|
24.8 |
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
64,709 |
|
|
13.2 |
% |
|
59,063 |
|
|
13.6 |
% |
|
Sales and marketing |
70,081 |
|
|
14.3 |
% |
|
48,909 |
|
|
11.2 |
% |
|
General and administrative |
55,932 |
|
|
11.4 |
% |
|
49,489 |
|
|
11.4 |
% |
|
Restructuring charges |
1,805 |
|
|
0.3 |
% |
|
— |
|
|
— |
% |
|
Impairment charges |
— |
|
|
— |
% |
|
9,116 |
|
|
2.1 |
% |
|
Others |
387 |
|
|
0.1 |
% |
|
1,596 |
|
|
0.4 |
% |
|
Total operating expenses |
192,914 |
|
|
39.3 |
% |
|
168,173 |
|
|
38.6 |
% |
|
Loss from operations |
(56,879) |
|
|
(11.6) |
% |
|
(60,138) |
|
|
(13.8) |
% |
|
Interest income |
926 |
|
|
0.2 |
% |
|
11 |
|
|
— |
% |
|
Other income, net |
302 |
|
|
0.1 |
% |
|
4,775 |
|
|
1.1 |
% |
|
Loss before income taxes |
(55,651) |
|
|
(11.3) |
% |
|
(55,352) |
|
|
(12.7) |
% |
|
Provision for income taxes |
975 |
|
|
0.2 |
% |
|
677 |
|
|
0.2 |
% |
|
Net loss |
$ |
(56,626) |
|
|
(11.5) |
% |
|
$ |
(56,029) |
|
|
(12.9) |
% |
Revenue
We conduct business across three geographic regions—(i) the
Americas; (ii) EMEA; and (iii) APAC—and generally base revenue by
geography on the ship-to location of the customer for device sales
and device location for service sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022 |
|
% Change |
|
2021 |
|
|
(In thousands, except percentage data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
$ |
273,981 |
|
|
1.0 |
% |
|
$ |
271,182 |
|
|
Percentage of revenue |
55.8 |
% |
|
|
|
62.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA |
$ |
196,465 |
|
|
46.4 |
% |
|
$ |
134,232 |
|
|
Percentage of revenue |
40.1 |
% |
|
|
|
30.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
APAC |
$ |
19,968 |
|
|
(32.8) |
% |
|
$ |
29,723 |
|
|
Percentage of revenue |
4.1 |
% |
|
|
|
6.8 |
% |
|
Total revenue |
$ |
490,414 |
|
|
12.7 |
% |
|
$ |
435,137 |
|
Revenue increased for the year ended December 31, 2022
compared to the prior year, primarily due to higher service revenue
across all geographic regions and product sales mainly an increase
in shipment volume.
Product revenue increased by $22.3 million, or 6.7% for the year
ended December 31, 2022 compared to the prior year, primarily
driven by an increase in product shipments in EMEA due to stronger
customer demand and the full year sale of cameras in the Verisure
security channel, partially offset by decreases in product sales in
APAC and the Americas and by higher provisions for sales incentives
and returns in the Americas that are accounted for a contra
revenue.
Service revenue increased by $33.0 million, or 31.8%, for the year
ended December 31, 2022 compared to the prior year, primarily
driven by a 74.5% increase in paid accounts, partially offset by a
decrease in NRE revenue.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022 |
|
% Change |
|
2021 |
|
|
(In thousands, except percentage data) |
|
Cost of revenue: |
|
|
|
|
|
|
Products |
$ |
308,692 |
|
|
8.2 |
% |
|
$ |
285,334 |
|
|
Services |
45,687 |
|
|
9.4 |
% |
|
41,768 |
|
|
Total cost of revenue |
$ |
354,379 |
|
|
8.3 |
% |
|
$ |
327,102 |
|
Cost of product revenue increased for the year ended
December 31, 2022 compared to the prior year, primarily due to
increases in gross shipments, coupled with increases in costs of
materials and components of our products, mainly as a result of
inflation, offset by a decrease in freight-in costs due to
normalization of the supply chain and utilization of ocean
freight.
Cost of service revenue increased for the year ended
December 31, 2022 compared to the prior year, primarily due to
the service revenue growth driven by growth of paid subscriber
base, offset by cost optimizations.
Gross Profit
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022 |
|
% Change |
|
2021 |
|
|
(In thousands, except percentage data) |
|
Gross profit: |
|
|
|
|
|
|
Products |
$ |
45,243 |
|
|
(2.3) |
% |
|
$ |
46,286 |
|
|
Services |
90,792 |
|
|
47.0 |
% |
|
61,749 |
|
|
Total gross profit |
$ |
136,035 |
|
|
25.9 |
% |
|
$ |
108,035 |
|
|
Gross margin: |
|
|
|
|
|
|
Products |
12.8 |
% |
|
|
|
14.0 |
% |
|
Services |
66.5 |
% |
|
|
|
59.7 |
% |
|
Total gross margin |
27.7 |
% |
|
|
|
24.8 |
% |
Product gross profit decreased for the year ended December 31,
2022 compared to the prior year, primarily due to higher product
costs and provisions of sales incentives and returns that are
accounted for a contra revenue, partially offset by the increase in
product shipments.
Service gross profit increased for the year ended December 31,
2022 compared to the prior year, primarily due to growth in paid
service revenue as a result of the increase in paid accounts and
cost optimizations.
Operating Expenses
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022 |
|
% Change |
|
2021 |
|
|
(In thousands, except percentage data) |
|
Research and development expense |
$ |
64,709 |
|
|
9.6 |
% |
|
$ |
59,063 |
|
Research and development expense increased $5.6 million for
the year ended December 31, 2022 compared to the prior year,
primarily due to increases of $3.6 million in personnel-related
expenses mainly increases in headcount and stock-based
compensation, and $2.4 million in outside professional services,
partially offset by a decrease of $1.2 million in IT and facility
overhead and other expenses.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022 |
|
% Change |
|
2021 |
|
|
(In thousands, except percentage data) |
|
Sales and marketing expense |
$ |
70,081 |
|
|
43.3 |
% |
|
$ |
48,909 |
|
Sales and marketing expense increased $21.2 million for the
year ended December 31, 2022 compared to the prior year,
primarily due to increases of $17.5 million in marketing expenses,
primarily for the production of creative content and media spend
for our brand awareness advertising campaign, $1.6 million in
personnel-related expenses mainly from the increase in stock-based
compensation, and $1.6 million in credit card processing
fees.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022 |
|
% Change |
|
2021 |
|
|
(In thousands, except percentage data) |
|
General and administrative expense |
$ |
55,932 |
|
|
13.0 |
% |
|
$ |
49,489 |
|
General and administrative expense increased $6.4 million for
the year ended December 31, 2022 compared to the prior year,
primarily due to an increase of $9.7 million in personnel-related
expenses mainly an increase in stock-based compensation, partially
offset by decreases of $1.6 million in legal and professional
services and $1.4 million in IT and facility overhead.
Restructuring Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022 |
|
% Change |
|
2021 |
|
|
(In thousands) |
|
Restructuring charges |
$ |
1,805 |
|
|
** |
|
$ |
— |
|
**Percentage
change not meaningful.
During the fourth quarter of 2022, we initiated a restructuring
plan to reduce our cost structure to better align the operational
needs of the business to current economic conditions while
continuing to support our long-term strategy. This restructuring
included the reduction of headcount as well as abandonment of
certain lease contracts and cancellation of contractual services
arrangements with certain suppliers. Refer to Note 6,
Restructuring
in the Notes to Consolidated Financial Statements in Item 8 of Part
II of this Annual Report on Form 10-K for further information about
the restructuring.
Impairment Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022 |
|
% Change |
|
2021 |
|
|
(In thousands) |
|
Impairment charges |
$ |
— |
|
|
** |
|
$ |
9,116 |
|
**Percentage
change not meaningful.
During the second quarter of 2021, we reviewed certain operating
lease right-of-use assets and other lease-related assets for
impairment in conjunction with our decision to sublease our office
space in San Jose, California. As a result, we recorded an
impairment charge of $9.1 million, which included
$6.8 million associated with operating lease right-of-use
assets and $2.3 million associated with the leasehold
improvements and furniture, fixtures and equipment included in the
San Jose office asset group.
Interest and Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022 |
|
% Change |
|
2021 |
|
|
(In thousands, except percentage data) |
|
Interest income |
$ |
926 |
|
|
** |
|
$ |
11 |
|
|
Other income, net |
$ |
302 |
|
|
(93.7) |
% |
|
$ |
4,775 |
|
**Percentage change not meaningful.
Interest income increased for the year ended December 31,
2022, compared to the prior year, primarily due to the increase in
our short-term investments as well as a result of higher interest
rates.
Other income, net primarily represents miscellaneous income and
expense, which includes reimbursements under the Verisure
Transition Service Agreement (“Verisure TSA”) and the Employee
Retention Credit (“ERC”) under the Coronavirus Aid, Relief, and
Economic Security Act (the “CARES Act”) for qualified wages. Other
income, net decreased for the year ended December 31, 2022
compared to the prior year, primarily due to decreases of $2.1
million in ERC under the CARES Act and $2.5 million in Verisure TSA
related income.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2022 |
|
% Change |
|
2021 |
|
|
(In thousands, except percentage data) |
|
Provision for income taxes |
$ |
975 |
|
|
44.0 |
% |
|
$ |
677 |
|
|
Effective tax rate |
(1.8) |
% |
|
|
|
(1.2) |
% |
Our effective tax rate for the year ended December 31, 2022
was lower than the U.S. federal income tax rate due to a lower
effective tax rate on foreign earnings and valuation allowance on
our net U.S. deferred tax assets and certain foreign tax attributes
as it is more likely than not that some or all of our deferred tax
assets will not be realized.
Our provision for income taxes was primarily attributable to income
taxes on foreign earnings and to a lesser extent U.S. taxable
income. The increase in provision for income taxes for the year
ended December 31, 2022 compared to the prior year was
impacted by the application of Section 174 of the U.S. Tax Code
requiring capitalization of research and experimental expenses.
Consistent with the prior year, we maintained a valuation allowance
against our U.S. 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.
Liquidity and Capital Resources
As of December 31, 2022, our cash and cash equivalent and
short-term investments totaled $113.7 million and unused
borrowing capacity of $22.2 million based on the terms and
conditions of our revolving credit facility. We have a history of
losses and may continue to incur operating and net losses for the
foreseeable future. As of December 31, 2022, our accumulated
deficit was $345.4 million. Historically, we have funded our
principal business activities through cash flows generated from
operations and available cash on hand.
Material Cash Requirements
We believe that our existing sources of liquidity will be
sufficient to meet our anticipated cash requirements for at least
the next 12 months. However, in the future we may require or desire
additional funds to support our operating expenses and capital
requirements. To the extent that current and anticipated future
sources of liquidity are insufficient, we may seek to raise
additional funds through public or private equity.
Our future liquidity and cash requirements may vary from those
currently planned and will depend on numerous factors, including
the introduction of new products, the growth in our service
revenue, the ability to increase our gross margin dollars, as well
as cost optimization initiatives and controls over our operating
expenditures. As we grow our installed base revenue, there will be
a need for additional working capital, hence, we have increased our
subscription rates effective February 3, 2023.
Leases and Contractual Commitments
Our operating lease obligations mostly include offices, equipment,
data centers, and distribution centers. Our contractual commitments
are primarily inventory-related purchase obligations with
suppliers.
Contingencies
We are involved in disputes, litigation, and other legal actions.
We evaluate whether or not a potential loss amount or a potential
range of loss is probable and reasonably estimable under the
provisions of the authoritative guidance that addresses accounting
for contingencies. Significant judgment is required to determine
both the probability and the estimated amount of loss. In such
cases, we accrue for the amount or, if a range, we accrue the low
end of the range, only if there is not a better estimate than any
other amount within the range, as a component of legal expense
within litigation reserves, net.
Refer to Note 8.
Commitments and Contingencies
in the Notes to Consolidated Financial Statements in Item 8 of Part
II of this Annual Report on Form 10-K for further information about
our operating leases, purchase obligations, and legal
contingencies. We have no commitments to obtain such additional
financing and cannot provide assurance that additional financing
will be available at all or, if available, that such financing
would be obtainable on terms favorable to us and would not be
dilutive.
Cash Flow
The following table presents our cash flows for the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2022 |
|
2021 |
|
(In thousands) |
|
Net cash used in operating activities |
$ |
(45,962) |
|
|
$ |
(23,197) |
|
|
Net cash used in investing activities |
(31,773) |
|
|
17,732 |
|
|
Net cash used in financing activities |
(13,942) |
|
|
(4,970) |
|
|
Net cash decrease |
$ |
(91,677) |
|
|
$ |
(10,435) |
|
Operating activities
Net cash used in operating activities increased by $22.8 million
for the year ended December 31, 2022 compared to the prior
year. This increase is mostly due to an increase in working capital
used in operations of $25.7 million. The increase in working
capital used in operations was driven by higher inventory purchases
as a result of our internal objective to maintain more appropriate
inventory levels to support consumer demand and higher payments to
our suppliers and vendors.
Investing activities
Net cash used in investing activities increased by
$49.5 million for the year ended December 31, 2022
compared to the prior year, primarily due to higher net purchases
of short-term investments.
Financing activities
Net cash used in financing activities increased by
$9.0 million for the year ended December 31, 2022
compared to the prior year, primarily due to the increase in
withholding tax from restricted stock unit releases and the
decrease in proceeds from exercises of stock options.
Critical Accounting Estimates
We prepare the consolidated financial statements in accordance with
U.S. generally accepted accounting principles (“U.S. GAAP”) and
pursuant to the regulations of the U.S. Securities and Exchange
Commission (“SEC”). The preparation of the consolidated financial
statements requires management to make assumptions, judgments and
estimates that can have a significant impact on the reported
amounts of assets, liabilities, revenue and expenses. We base our
estimates on historical experience and other assumptions that we
believe are applicable and reasonable under the circumstances. We
evaluate these estimates on an ongoing basis, as new events occur,
our operating environment changes, or additional information is
obtained, and we make changes accordingly. We also discuss our
critical accounting estimates with the Audit Committee of our Board
of Directors.
Note 2, Summary
of Significant Accounting Policies
in the Notes to Consolidated Financial Statements included in Item
8 of Part II of this Annual Report on Form 10-K describes the
significant accounting policies and the effect on our consolidated
financial statements.
Revenue recognition
Revenue from all sales types is recognized at transaction price,
the amount we expect to be entitled to in exchange for transferring
goods or providing services. Transaction price is calculated as
selling price net of variable
consideration which may include estimates for sales returns, sales
incentives, and price protection related to current period product
revenue. In determining estimates for sales returns, management
analyzes historical sales and returns data, channel inventory
levels, current economic trends, and changes in customer demand for
our products. Sales incentives and price protection are determined
based on a combination of the actual amounts committed and
estimated future expenditure based upon historical customary
business practice. Typically variable consideration does not need
to be constrained as estimates are based on predictive historical
data or future commitments that we plan and control. However, we
continue to assess variable consideration estimates such that it is
probable that a significant reversal of revenue will not
occur.
Our standard warranty obligation to our direct customers generally
provides for a right of return of any product for a full refund in
the event that such product is not merchantable or is found to be
damaged or defective. At the time we recognize revenue, we record
an estimate of sales warranty returns to reduce revenue in the
amount of the expected credit or refund to be provided to our
direct customers as a contra revenue, and we record a write-down to
reduce the carrying value of such products to net realizable value
as cost of revenue. Because our products are manufactured by
third-party manufacturers, in certain cases we have recourse to the
third-party manufacturer for replacement or credit for the
defective products. We give consideration to amounts recoverable
from our third-party manufacturers in determining our warranty
liability. Our estimated allowances for product warranties can vary
from actual results, and we may have to record additional contra
revenue or cost of revenue, which could materially impact our
financial position and results of operations. As of
December 31, 2022 and 2021, accrued sales warranty returns
amounted to $17.7 million and $18.0 million,
respectively.
Our standard warranty obligation to end-users provides for
replacement of a defective product for one or more years. Factors
that affect the warranty obligation include product failure rates,
material usage and service delivery costs incurred in correcting
product failures. We record the estimated cost associated with
fulfilling the warranty obligation to end-users as cost of revenue.
As of December 31, 2022 and 2021, accrued warranty obligations
were not material.
In addition to sales warranty returns, certain distributors and
retailers generally have the right to return products for stock
rotation purposes. Upon shipment of the product, we record an
estimate of potential stock rotation returns related to the current
period product revenue as a contra revenue. Our estimated
allowances for returns due to stock rotation can vary from actual
results, and we may have to record additional contra revenue, which
could materially impact our financial position and results of
operations. As of December 31, 2022 and 2021, accrued stock
rotation returns were not material.
We accrue for sales incentives offered to customers as a marketing
expense if we receive an identifiable benefit in exchange and can
reasonably estimate the fair value of the identifiable benefit
received; otherwise, it is recorded as a contra revenue. As a
consequence, we record a substantial portion of our channel
marketing costs as a contra revenue. We record an estimate of sales
incentives as a contra revenue when the related revenue is
recognized or ahead of customer or end customer commitment if
customary business practice creates an implied expectation that
such activities will occur in the future. As of December 31,
2022 and 2021, accrued sales incentives amounted to
$35.7 million and $31.4 million,
respectively.
Valuation of Inventory
We value our inventory at the lower of cost or net realizable
value, cost being determined using the first-in, first-out method.
We continually assess the value of our inventory and will
periodically write down its value to account for estimated excess
and obsolete inventory based upon assumptions about future demand
and market conditions. On a quarterly basis, we review inventory
quantities on hand and on order under non-cancelable purchase
commitments and compare those quantities to our estimated forecast
of product demand for the next nine months to determine what
inventory, if any, is not salable. We base our analysis on the
product demand forecast by taking into account market conditions,
product development plans, product life expectancy and other
factors. Based on this analysis, we write down the carrying value
of the affected inventory to account for estimated excess and
obsolete amounts. At the point of loss recognition, a new, lower
cost basis for that inventory is established, and subsequent
changes in facts and circumstances do not result in the restoration
or increase in that newly established cost basis. As demonstrated
during prior years, demand for our products can fluctuate
significantly. If actual demand is lower than our forecasted demand
and we fail to reduce our
manufacturing accordingly, we could be required to write down the
value of additional inventory, which would have a negative effect
on our gross profit. As of December 31, 2022 and 2021, excess
and obsolescence reserves were not material.
Valuation of Long-Lived Assets
Long-lived assets, including property and equipment and operating
lease right-of-use assets, are reviewed for possible impairment
whenever events or circumstances indicate that the carrying amount
of such assets may not be recoverable. Recoverability of these
assets is measured by a comparison of the carrying amounts to the
anticipated undiscounted value of the assets are expected to
generate from the use and eventual disposition. If such review
indicates that the carrying amount of property and equipment and
operating lease assets is not recoverable, the carrying amount of
such assets is reduced to the fair value. During the year ended
December 31, 2022, no impairment of long-lived assets has been
identified. For the year ended December 31, 2021, we recorded an
impairment charge of $9.1 million, which included
$6.8 million associated with operating lease right-of-use
assets and $2.3 million associated with lease related property
and equipment.
Valuation of Goodwill
We perform an
annual assessment of goodwill at the reporting unit level
on
the first day of the fourth quarter of each year and whenever
events or changes in circumstances indicate the carrying value may
not be recoverable.
We operate as one operating and reportable segment.
In the annual assessment, a qualitative assessment was performed in
consideration of macroeconomic conditions, industry and market
conditions, cost factors, overall company financial performance,
and changes
in our stock price. We believed that it was more-likely-than-not
that the fair value of the reporting unit was greater than the
respective carrying value and therefore performing the next step of
impairment test for the reporting unit was unnecessary. If there
are events occurred or circumstances changed (i.e. a decline in our
stock price based on market conditions and deterioration of our
business) that would more likely than not reduce our fair value
below the carrying amount, we may have to record a charge to our
earnings for the associated goodwill impairment of up to
$11.0 million. No goodwill impairment was recognized in the
years ended December 31, 2022 and 2021.
Uncertain Tax Position
We are subject to income taxes in the U.S. and numerous foreign
jurisdictions. We apply significant judgement in determining our
uncertain tax positions. Although we believe that our reserves of
uncertain tax position are reasonably adequate, no assurance can be
given that the final outcome of these matters will not be different
from our reserves. When facts and circumstances change, our
reserves are adjusted, such as the closing of a tax audit, the
expiration of statute of limitation for a relevant taxing authority
to examine a tax position, or when additional information becomes
available. To the extent that the final tax outcome of these
matters is different than the reserves recorded, such differences
will affect the provision for income taxes in the period in which
such determination is made and could have a material impact on our
financial condition and operating results.
Recent Accounting Pronouncements
For a complete description of recent accounting pronouncements,
including the expected dates of adoption and estimated effects on
financial condition and results of operations, refer to Note
2,
Summary of Significant Accounting Policies
in the Notes to Consolidated Financial Statements in Item 8 of Part
II of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
We are exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates.
Interest Rate Risk
We have an investment portfolio of fixed income securities that are
classified as available-for-sale securities. These securities, like
all fixed income instruments, are subject to interest rate risk and
will fall in value if market interest rates increase. We attempt to
limit this exposure by investing primarily in highly rated
short-term securities. Our investment policy requires investments
to be rated triple-A with the objective of minimizing the potential
risk of principal loss. Due to the short duration and conservative
nature of our investment portfolio, a hypothetical movement of 10%
in interest rates would not have a material impact on our operating
results and the total value of the portfolio over the next fiscal
year. We monitor our interest rate and credit risks, including our
credit exposure to specific rating categories and to individual
issuers. The unrealized loss was immaterial as of December 31,
2022 and there was no impairment charge on our investments for the
year ended December 31, 2022.
Foreign Currency Exchange Rate Risk
We are exposed to risks associated with foreign exchange rate
fluctuations due to our international sales and operating
activities. We invoice some of our international customers in
foreign currencies, including the Australian dollar and Canadian
dollar. As the customers that are currently invoiced in local
currency become a larger percentage of our business, or to the
extent we begin to bill additional customers in foreign currencies,
the impact of fluctuations in foreign currency exchange rates could
have a more significant impact on our results of operations. For
those customers in our international markets that we continue to
sell to in U.S. dollars, an increase in the value of the U.S.
dollar relative to foreign currencies could make our products more
expensive and therefore reduce the demand for our products. Such a
decline in the demand for our products could reduce sales and
materially and adversely affect our business, results of
operations, and financial condition. Certain operating expenses of
our foreign operations require payment in local
currencies.
As of December 31, 2022, we had net assets in various local
currencies. A hypothetical 10% movement in foreign exchange rates
would not have a material impact on our operating results. Actual
future gains and losses associated with our foreign currency
exposures and positions may differ materially from the sensitivity
analysis performed as of December 31, 2022 due to the inherent
limitations associated with predicting foreign currency exchange
rates and our actual exposures and positions. For the years ended
December 31, 2022, 2021, and 2020, 3%, 6%, and 10% of our
total revenue was denominated in currencies other than the U.S.
dollar, respectively.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting
Firm
To
the
Board of Directors and Stockholders of Arlo Technologies,
Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Arlo Technologies, Inc. and its subsidiaries (the
“Company”) as of December 31, 2022 and 2021, and the related
consolidated
statements of comprehensive loss, of stockholders’ equity and of
cash flows for each of the three years in the period ended
December 31, 2022, including the related notes (collectively
referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial
position of the Company
as of December 31, 2022 and 2021, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2022 in conformity with accounting
principles generally accepted in the United States of
America.
Basis for Opinion
These consolidated
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s consolidated financial statements based on our audits. We
are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits of these consolidated
financial statements in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated
financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
consolidated
financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 7, 2023
We have served as the Company’s auditor since 2018.
ARLO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2022 |
|
2021 |
|
|
(In thousands, except share and per share data)
|
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
$ |
84,024 |
|
|
$ |
175,749 |
|
|
Short-term investments |
29,700 |
|
|
— |
|
|
Accounts receivable, net |
65,960 |
|
|
79,564 |
|
|
Inventories |
46,554 |
|
|
38,390 |
|
|
Prepaid expenses and other current assets |
6,544 |
|
|
9,919 |
|
|
Total current assets |
232,782 |
|
|
303,622 |
|
|
Property and equipment, net |
7,336 |
|
|
9,595 |
|
|
Operating lease right-of-use assets, net |
12,809 |
|
|
14,814 |
|
|
Goodwill |
11,038 |
|
|
11,038 |
|
|
Restricted cash |
4,155 |
|
|
4,107 |
|
|
Other non-current assets |
4,081 |
|
|
4,314 |
|
|
Total assets |
$ |
272,201 |
|
|
$ |
347,490 |
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable |
$ |
52,132 |
|
|
$ |
84,098 |
|
|
Deferred revenue |
11,291 |
|
|
29,442 |
|
|
Accrued liabilities |
98,855 |
|
|
97,389 |
|
|
Total current liabilities |
162,278 |
|
|
210,929 |
|
|
Non-current operating lease liabilities |
19,279 |
|
|
21,470 |
|
|
Other non-current liabilities |
2,949 |
|
|
2,439 |
|
|
Total liabilities |
184,506 |
|
|
234,838 |
|
|
Commitments and contingencies (Note 8) |
|
|
|
|
Stockholders’ Equity: |
|
|
|
|
Preferred stock: $0.001 par value; 50,000,000 shares authorized;
none issued or outstanding
|
— |
|
|
— |
|
|
Common stock: $0.001 par value; 500,000,000 shares authorized;
shares issued and outstanding: 88,887,139 at December 31, 2022
and 84,453,212 at December 31, 2021
|
89 |
|
|
84 |
|
|
Additional paid-in capital |
433,138 |
|
|
401,367 |
|
|
Accumulated other comprehensive loss |
(107) |
|
|
— |
|
|
Accumulated deficit |
(345,425) |
|
|
(288,799) |
|
|
Total stockholders’ equity |
87,695 |
|
|
112,652 |
|
|
Total liabilities and stockholders’ equity |
$ |
272,201 |
|
|
$ |
347,490 |
|
The accompanying notes are an integral part of these consolidated
financial statements.
ARLO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2022 |
|
2021 |
|
2020 |
|
(In thousands, except per share data)
|
|
Revenue: |
|
|
|
|
|
|
Products |
$ |
353,935 |
|
|
$ |
331,620 |
|
|
$ |
284,868 |
|
|
Services |
136,479 |
|
|
103,517 |
|
|
72,286 |
|
|
Total revenue |
490,414 |
|
|
435,137 |
|
|
357,154 |
|
|
Cost of revenue: |
|
|
|
|
|
|
Products |
308,692 |
|
|
285,334 |
|
|
263,905 |
|
|
Services |
45,687 |
|
|
41,768 |
|
|
37,860 |
|
|
Total cost of revenue |
354,379 |
|
|
327,102 |
|
|
301,765 |
|
|
Gross profit |
136,035 |
|
|
108,035 |
|
|
55,389 |
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
Research and development |
64,709 |
|
|
59,063 |
|
|
60,137 |
|
|
Sales and marketing |
70,081 |
|
|
48,909 |
|
|
49,064 |
|
|
General and administrative |
55,932 |
|
|
49,489 |
|
|
51,096 |
|
|
Restructuring charges |
1,805 |
|
|
— |
|
|
— |
|
|
Impairment charges |
— |
|
|
9,116 |
|
|
— |
|
|
Others |
387 |
|
|
1,596 |
|
|
(44) |
|
|
Total operating expenses |
192,914 |
|
|
168,173 |
|
|
160,253 |
|
|
|
|
|
|
|
|
|
Loss from operations |
(56,879) |
|
|
(60,138) |
|
|
(104,864) |
|
|
Interest income |
926 |
|
|
11 |
|
|
802 |
|
|
Other income, net |
302 |
|
|
4,775 |
|
|
3,436 |
|
|
Loss before income taxes |
(55,651) |
|
|
(55,352) |
|
|
(100,626) |
|
|
Provision for income taxes |
975 |
|
|
677 |
|
|
625 |
|
|
Net loss |
$ |
(56,626) |
|
|
$ |
(56,029) |
|
|
$ |
(101,251) |
|
|
Net loss per share: |
|
|
|
|
|
|
Basic |
$ |
(0.65) |
|
|
$ |
(0.68) |
|
|
$ |
(1.30) |
|
|
Diluted |
$ |
(0.65) |
|
|
$ |
(0.68) |
|
|
$ |
(1.30) |
|
|
Weighted average shares used to compute net loss per
share: |
|
|
|
|
|
|
Basic |
87,173 |
|
|
82,688 |
|
|
78,084 |
|
|
Diluted |
87,173 |
|
|
82,688 |
|
|
78,084 |
|
|
Comprehensive loss: |
|
|
|
|
|
|
Net loss |
$ |
(56,626) |
|
|
$ |
(56,029) |
|
|
$ |
(101,251) |
|
|
Other comprehensive income (loss), net of tax |
(107) |
|
|
(3) |
|
|
5 |
|
|
Total comprehensive loss |
$ |
(56,733) |
|
|
$ |
(56,032) |
|
|
$ |
(101,246) |
|
The accompanying notes are an integral part of these consolidated
financial statements.
ARLO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2022 |
|
2021 |
|
2020 |
|
(In thousands)
|
|
Total stockholders' equity, beginning balances |
$ |
112,652 |
|
|
$ |
133,767 |
|
|
$ |
203,376 |
|
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
Beginning balances |
$ |
84 |
|
|
$ |
79 |
|
|
$ |
76 |
|
|
Issuance of common stock under stock-based compensation
plans |
6 |
|
|
8 |
|
|
3 |
|
|
Issuance of common stock under employee stock purchase
plan |
2 |
|
|
— |
|
|
1 |
|
|
Restricted stock unit withholdings |
(3) |
|
|
(3) |
|
|
(1) |
|
|
Ending balances |
$ |
89 |
|
|
$ |
84 |
|
|
$ |
79 |
|
|
Additional paid-in capital: |
|
|
|
|
|
|
Beginning balances |
$ |
401,367 |
|
|
$ |
366,455 |
|
|
$ |
334,821 |
|
|
Stock-based compensation expense |
36,985 |
|
|
24,792 |
|
|
27,418 |
|
|
Settlement of liability classified restricted stock
units |
8,733 |
|
|
15,095 |
|
|
4,242 |
|
|
Issuance of common stock under stock-based compensation
plans |
1,419 |
|
|
5,261 |
|
|
1,727 |
|
|
Issuance of common stock under employee stock purchase
plan |
2,833 |
|
|
2,962 |
|
|
3,024 |
|
|
Restricted stock unit withholdings |
(18,199) |
|
|
(13,198) |
|
|
(4,777) |
|
|
Ending balances |
$ |
433,138 |
|
|
$ |
401,367 |
|
|
$ |
366,455 |
|
|
Accumulated deficit: |
|
|
|
|
|
|
Beginning balances |
$ |
(288,799) |
|
|
$ |
(232,770) |
|
|
$ |
(131,519) |
|
|
Net loss |
(56,626) |
|
|
(56,029) |
|
|
(101,251) |
|
|
Ending balances |
$ |
(345,425) |
|
|
$ |
(288,799) |
|
|
$ |
(232,770) |
|
|
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
Beginning balances |
$ |
— |
|
|
$ |
3 |
|
|
$ |
(2) |
|
|
Other comprehensive income (loss), net of tax |
(107) |
|
|
(3) |
|
|
5 |
|
|
Ending balances |
$ |
(107) |
|
|
$ |
— |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
Total stockholders' equity, ending balances |
$ |
87,695 |
|
|
$ |
112,652 |
|
|
$ |
133,767 |
|
|
|
|
|
|
|
|
|
Common stock shares: |
|
|
|
|
|
|
Beginning balances |
84,453 |
|
|
79,336 |
|
|
75,786 |
|
|
Issuance of common stock under stock-based compensation
plans |
6,155 |
|
|
6,538 |
|
|
3,720 |
|
|
Issuance of common stock under employee stock purchase
plan |
609 |
|
|
602 |
|
|
1,110 |
|
|
Restricted stock unit withholdings |
(2,330) |
|
|
(2,023) |
|
|
(1,280) |
|
|
Ending balances |
88,887 |
|
|
84,453 |
|
|
79,336 |
|
The accompanying notes are an integral part of these consolidated
financial statements.
ARLO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
2022 |
|
2021 |
|
2020 |
|
(In thousands) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
Net loss |
$ |
(56,626) |
|
|
$ |
(56,029) |
|
|
$ |
(101,251) |
|
|
Adjustments to reconcile net loss to net cash used in operating
activities: |
|
|
|
|
|
|
Stock-based compensation expense |
48,476 |
|
|
38,030 |
|
|
35,247 |
|
|
Impairment charges |
— |
|
|
9,116 |
|
|
— |
|
|
Depreciation and amortization |
4,768 |
|
|
5,975 |
|
|
10,206 |
|
|
Allowance for credit losses and inventory reserves |
(190) |
|
|
(3,125) |
|
|
964 |
|
|
Deferred income taxes |
181 |
|
|
(296) |
|
|
50 |
|
|
Others |
24 |
|
|
(3) |
|
|
(238) |
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
Accounts receivable, net |
13,517 |
|
|
(1,739) |
|
|
49,765 |
|
|
Inventories |
(7,887) |
|
|
29,258 |
|
|
2,862 |
|
|
Prepaid expenses and other assets |
3,427 |
|
|
(3,463) |
|
|
10,441 |
|
|
Accounts payable |
(32,520) |
|
|
22,156 |
|
|
(49,282) |
|
|
Deferred revenue |
(19,281) |
|
|
(38,919) |
|
|
3,607 |
|
|
Accrued and other liabilities |
149 |
|
|
(24,158) |
|
|
(8,901) |
|
|
Net cash used in operating activities |
(45,962) |
|
|
(23,197) |
|
|
(46,530) |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
Purchases of property and equipment |
(2,010) |
|
|
(2,268) |
|
|
(3,892) |
|
|
Purchases of short-term investments |
(69,305) |
|
|
— |
|
|
(50,083) |
|
|
Proceeds from maturities of short-term investments |
39,542 |
|
|
20,000 |
|
|
50,000 |
|
|
Net cash provided by (used in) investing activities |
(31,773) |
|
|
17,732 |
|
|
(3,975) |
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
Proceeds related to employee benefit plans |
4,260 |
|
|
8,231 |
|
|
4,755 |
|
|
Restricted stock unit withholdings |
(18,202) |
|
|
(13,201) |
|
|
(4,778) |
|
|
Net cash used in financing activities |
(13,942) |
|
|
(4,970) |
|
|
(23) |
|
|
Net decrease in cash, cash equivalents, and restricted
cash |
(91,677) |
|
|
(10,435) |
|
|
(50,528) |
|
|
Cash, cash equivalents, and restricted cash, at beginning of
period |
179,856 |
|
|
190,291 |
|
|
240,819 |
|
|
Cash, cash equivalents, and restricted cash, at end of
period |
$ |
88,179 |
|
|
$ |
179,856 |
|
|
$ |
190,291 |
|
|
Reconciliation of cash, cash equivalents, and restricted cash to
Consolidated Balance Sheets |
|
|
|
|
|
|
Cash and cash equivalents |
$ |
84,024 |
|
|
$ |
175,749 |
|
|
$ |
186,127 |
|
|
Restricted cash |
4,155 |
|
|
4,107 |
|
|
4,164 |
|
|
Total cash, cash equivalents, and restricted cash |
$ |
88,179 |
|
|
$ |
179,856 |
|
|
$ |
190,291 |
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
Cash paid for income taxes, net |
$ |
415 |
|
|
$ |
964 |
|
|
$ |
5,614 |
|
|
Non-cash investing activities: |
|
|
|
|
|
|
Purchases of property and equipment included in accounts payable
and accrued liabilities |
$ |
946 |
|
|
$ |
379 |
|
|
$ |
564 |
|
The accompanying notes are an integral part of these consolidated
financial statements.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Basis of
Presentation
Description of Business
Arlo Technologies, Inc. (“Arlo”) combines an intelligent cloud
infrastructure and mobile app with a variety of smart connected
devices that transform the way people experience the connected
lifestyle. Our deep expertise in product design, wireless
connectivity, cloud infrastructure and cutting-edge AI capabilities
focuses on delivering a seamless, smart home experience for Arlo
users that is easy to setup and interact with every day. Our
cloud-based platform provides users with visibility, insight and a
powerful means to help protect and connect in real-time with the
people and things that matter most, from any location with a Wi-Fi
or a cellular connection.
We conduct business across three geographic regions—(i) the
Americas; (ii) Europe, Middle-East and Africa (“EMEA”); and (iii)
Asia Pacific (“APAC”)—and primarily generate revenue by selling
devices through retail channels, wholesale distribution, wireless
carrier channels, security solution providers, and Arlo’s direct to
consumer store and paid subscription services.
Our corporate headquarters is located in Carlsbad, California with
other satellite offices across North America and various other
global locations.
Basis of Presentation
We prepare our consolidated financial statements in conformity with
U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and
pursuant to the regulations of the U.S. Securities and Exchange
Commission (“SEC”). The consolidated financial statements include
the accounts of Arlo and its wholly-owned subsidiaries. All
intercompany balances and transactions have been
eliminated.
Fiscal periods
Our fiscal year begins on January 1 of the year stated and
ends on December 31 of the same year. We report the results on
a fiscal quarter basis rather than on a calendar quarter basis.
Under the fiscal quarter basis, each of the first three fiscal
quarters ends on the Sunday closest to the calendar quarter end,
with the fourth quarter ending on December 31.
Reclassification
Certain prior periods amounts have been reclassified to conform to
the current period’s presentation. None of these reclassifications
had a material impact to the consolidated financial
statements.
Use of estimates
The preparation of consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported periods. Management bases
its estimates on various assumptions believed to be reasonable, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities. Actual results could
differ materially from those estimates and operating results for
the year ended December 31, 2022 are not necessarily
indicative of the results that may be expected for any future
period.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 2. Summary of Significant Accounting Policies
Cash and cash equivalents
We invest excess cash primarily in government securities and money
market funds and consider all highly liquid investments with an
original maturity or a remaining maturity at the time of purchase
of three months or less to be cash equivalents. We deposit cash and
cash equivalents with high credit quality financial
institutions.
Restricted cash
We maintain certain cash balances restricted as to withdrawal or
use. Restricted cash is comprised primarily of cash used as a
collateral for a letter of credit associated with our lease
agreement for office space in San Jose, California. We deposit
restricted cash with high credit quality financial
institutions.
Short-term investments
Short-term investments are comprised of marketable securities that
consist of government securities with an original maturity or a
remaining maturity at the time of purchase of greater than three
months and no more than 12 months. The marketable securities are
held with a high quality financial institution, which acts as our
custodian and investment manager. These marketable securities are
classified as available-for-sale securities in accordance with the
provisions of the authoritative guidance for investments and are
carried at fair value with unrealized gains and losses are included
in accumulated other comprehensive income (loss), net of tax, which
is reported on consolidated statements of stockholders’
equity.
Fair value measurements
The carrying values of cash and cash equivalents, accounts
receivable, and accounts payable approximate their fair values due
to their short maturities. Short-term investments are recognized or
disclosed at fair value in the financial statements on a recurring
basis. The fair value of assets and liabilities is measured based
on a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The classification of a financial
asset or liability within the hierarchy is based upon the lowest
level input that is significant to the fair value measurement. The
fair value hierarchy prioritizes the inputs into three levels that
may be used to measure fair value:
Level 1: Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted
assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs
which are observable, either directly or indirectly, for
substantially the full term of the asset or liability;
and
Level 3: Prices or valuation techniques that require inputs that
are both significant to the fair value measurement and unobservable
(i.e., supported by little or no market activity).
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Trade accounts receivable
We are exposed to credit losses primarily through sales of products
and services. Allowance for current estimated credit losses for
trade accounts receivable is developed using historical collection
experience, current and future economic and market conditions and a
review of the current status of customers’ trade accounts
receivables. Due to the short-term nature of such receivables, the
estimated amount of accounts receivable that may not be collected
is based on aging of the accounts receivable balances and the
financial condition of customers. Additionally, specific allowance
amounts are established to record the appropriate provision for
customers that have a higher probability of default.
Monitoring activities include dispute resolution, payment
confirmation, review of customers’ financial condition and
macroeconomic conditions. Balances are written off when determined
to be uncollectible. Although we have historically not experienced
significant credit losses, it is possible that there could be a
material adverse impact from potential adjustments of the carrying
amount of trade accounts receivable.
Concentrations of risk and other uncertainties
Financial instruments that are potentially subject us to a
concentration of credit risk mainly consist of cash equivalents,
short term investments and accounts receivable. We believe that
there is minimal credit risk associated with the investments of
cash equivalents and short-term investments due to the restrictions
placed on the type of investment that can be entered into under our
investment policy. Our cash equivalents and short-term investments
primarily consist of government securities and money market funds
which are held and managed by high credit quality financial
institutions.
Our customers are primarily retailers, wholesale distributors and
security solution providers who sell or distribute our products to
a large group of end-users. We regularly perform credit
evaluations of our customers’ financial condition and performance
and consider factors such as historical experience, credit quality,
age of the accounts receivable balances, geographic or
country-specific risks and current economic conditions that may
affect our customers’ ability to pay. We do not require collateral
from our customers. Historically, a substantial portion of revenue
has been derived from a limited number of retailers and wholesale
distribution partners. As of December 31, 2022 and 2021, four
customers accounted for 28.4%, 26.8%, 16.6% and 13.3%, and three
customers accounted for 35.3%, 20.1% and 10.1% of the total
accounts receivable, net, respectively. No other customers
accounted for 10% or greater of the total accounts receivable, net.
During the year ended December 31, 2022, 2021 and 2020, one
customer accounted for 40.1%, two customers accounted for 30.8%,
and 13.0%, and four customers accounted for 20.6%, 17.3%, 14.6% and
12.2% of the total revenue, respectively. No other customers
accounted for 10% or greater of the total revenue.
Additionally, we receive certain of our components from a limited
number of suppliers and rely on a limited number of third parties
to manufacture all of our products. If any of the third-party
manufacturers cannot or will not manufacture our products in
required volumes, on a cost-effective basis, in a timely manner or
at all, we will have to secure additional manufacturing capacity.
Any interruption or delay in manufacturing could materially and
adversely affect our business, results of operations and financial
condition. At the date of issuance of our financial statements, we
are not aware of any event which could cause the severe impact in a
near term.
Our products are concentrated in the connected lifestyle solution
industries, which are characterized by rapid technological
advances, changes in customer requirements and evolving regulatory
requirements and industry standards. Our success depends on
management’s ability to anticipate and/or to respond quickly and
adequately to such changes. Any significant delays in the
development or introduction of products and services could
materially and adversely affect our business, results of operations
and financial condition.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Inventories
Inventories consist of finished goods which are valued at the lower
of cost or net realizable value, with cost being determined using
the first-in, first-out method. We write down
inventories based on estimated excess and obsolete amounts,
determined primarily based on demand forecasts, but takes into
account market conditions, product development plans, product life
expectancy and other factors. At the point of loss recognition, a
new, lower cost basis for that inventory is established, and
subsequent changes in facts and circumstances do not result in the
restoration or increase of the newly established cost basis. While
management believes the estimates and assumptions underlying its
current forecasts are reasonable, there is risk that additional
charges may be necessary if current forecasts are greater than
actual demand.
Property and equipment, net
Property and equipment are stated at historical cost, less
accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets
as follows:
|
|
|
|
|
|
|
|
|
|
Asset Category: |
|
Range of Useful Lives |
|
Computer equipment |
|
2 years |
|
Furniture and fixtures |
|
5 years |
|
Software |
|
2-5 years
|
|
Machinery and equipment |
|
2-3 years
|
|
Leasehold improvements |
|
Shorter of remaining lease term or 7 years
|
Recoverability of assets to be held and used is measured by
comparing the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of the asset exceeds its estimated
undiscounted future cash flows, an impairment charge is recognized
in the amount by which the carrying amount of the asset exceeds the
fair value of the asset. The carrying value of the asset is
reviewed on a regular basis for the existence of facts, both
internal and external, that may suggest impairment.
Operating leases
Our operating leases comprised of offices, data centers, and other
equipment. We determine if an arrangement is a lease at inception.
Operating leases are included in operating lease right-of-use
assets, net, accrued liabilities, and non-current operating lease
liabilities on the consolidated balance sheets. Leases with an
initial term of 12 months or less are expensed as incurred and
recorded on the consolidated statements of comprehensive loss. The
lease expense for fixed lease payments is recorded on the
consolidated statements of comprehensive loss on a straight-line
basis over the lease term and variable lease payments are included
in the lease expense when the obligation for those payments is
incurred.
Operating lease assets represent our right to use an underlying
asset over the lease term and lease liabilities represent our
obligation to make lease payments arising from the lease. Operating
lease assets and liabilities are recognized at commencement date
based on the present value of lease payments over the lease term.
As most of the leases do not provide an implicit rate, the
incremental borrowing rate based on the information available is
used at commencement date in determining the present value of lease
payments. We use the implicit rate when readily determinable. The
operating lease asset also includes any lease payments made before
the lease commencement date less any lease incentives received. The
lease terms may include options to extend or terminate the lease
when it is reasonably certain that we will exercise the options.
The lease agreements with lease and non-lease components are
generally accounted as a single component.
In addition, certain lease agreements contain tenant improvement
allowances (“TIA”) from the landlords. We record lessee-owned
improvements as leasehold improvements within property and
equipment, net on our consolidated balance sheets and the TIA as a
reduction to the lease asset with the impact of the decrease
recognized prospectively over the
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
remaining lease term. We record lessor-owned improvements as
prepaid rent within prepaid expenses and other current assets on
our consolidated balance sheets and the TIA as a reduction to
prepaid rent.
Sublease income from our sublet office space in San Jose,
California is recognized on a straight-line basis over the term of
the sublease and is recorded as a reduction of lease
expense.
Goodwill
We perform an annual impairment assessment of goodwill at the
reporting unit level on the first day of the fourth fiscal quarter.
We operate as one operating and reportable segment and identify
that one reporting unit for the purpose of goodwill impairment
testing, which is at the same level as our operating and reportable
segment. The analysis may include both qualitative and quantitative
factors to assess the likelihood of an impairment. Should certain
events or indicators of impairment occur between annual impairment
tests, we will perform the impairment test as those events or
indicators occur. Examples of such events or circumstances include
a significant decline in the expected future cash flows, a
sustained, significant decline in our stock price and market
capitalization, a significant adverse change in the business
climate and slower growth rates.
Goodwill is tested for impairment at the reporting unit level by
first performing a qualitative assessment to determine whether it
is more likely than not (that is, a likelihood of more than 50%)
that the fair value of the reporting unit is less than its carrying
amount. The qualitative assessment considers macroeconomic
conditions, industry and market considerations, cost factors,
overall company financial performance, and events affecting our
stock price. If the reporting unit does not pass the qualitative
assessment, we estimate the fair value using a discounted cash flow
method and compare the fair value with the carrying amount of our
reporting unit, including goodwill. If the fair value is greater
than the carrying amount of our reporting unit, no impairment is
recorded. If the fair value is less than the carrying amount, an
impairment loss shall be recognized in an amount equal to that
excess, limited to the total amount of goodwill allocated to our
reporting unit. The impairment charge, if any, would be recorded to
earnings in the consolidated statements of comprehensive
loss.
Revenue recognition
Revenue from contracts with customers is recognized when control of
the promised goods or services is transferred to the customers in
an amount that reflects the consideration we expect to be entitled
to in exchange for those goods or services. Our product revenue is
recognized at a point in time when control of the goods is
transferred to the customer, generally occurring upon shipment or
delivery, dependent upon the terms of the underlying contract. Our
paid subscription services are billed in advance of the start of
the monthly subscription and revenues are recognized ratably over
subscription period, generally 30 days or 12 months in
length.
Revenue from all sales types is recognized at the transaction
price, which is the amount we expect to be entitled to in exchange
for transferring goods or providing services. Transaction price is
calculated as selling price net of variable consideration which may
include estimates for future returns, sales incentives, and price
protection related to current period product revenue. Our standard
obligation to our direct customers generally provides for a full
refund in the event that such product is not merchantable or is
found to be damaged or defective. In determining estimates for
future returns, management analyzes historical sales and returns
data, channel inventory levels, current economic trends, and
changes in customer demand for our products. Sales incentives and
price protection are determined based on a combination of the
actual amounts committed and estimated future expenditure based
upon historical customary business practice. Typically variable
consideration does not need to be constrained as estimates are
based on predictive historical data or future commitments that we
plan and control. However, we continue to assess variable
consideration estimates such that it is probable that a significant
reversal of revenue will not occur.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Contracts with multiple performance obligations
Some of our contracts with customers contain multiple promised
goods or services. Such contracts include hardware products with
bundled services, various subscription services, and support. For
these contracts, we account for the promises separately as
individual performance obligations if they are distinct.
Performance obligations are determined to be distinct if they are
both capable of being distinct or separately identifiable within
the context of the contract. In determining whether performance
obligations meet the criteria for being distinct, we consider a
number of factors, such as the degree of interrelation and
interdependence between obligations, and whether or not the good or
service significantly modifies or transforms another good or
service in the contract. The embedded software in most of the
hardware products is not considered distinct and therefore the
combined hardware and incidental software are treated as one
performance obligation and recognized at the point in time when
control of product transfers to the customer. Services that are
included with certain hardware products are considered distinct and
therefore the hardware and service are treated as separate
performance obligations.
After identifying the separate performance obligations, the
transaction price is allocated to the separate performance
obligations on a relative stand-alone selling price basis.
Stand-alone selling prices are generally determined based on the
prices charged to customers or using an adjusted market assessment.
Stand-alone selling price of the hardware is directly observable
from add-on camera and base station sales. Stand-alone selling
price of the premium services are directly observable from direct
sales to end users while the service is estimated using an adjusted
market approach.
Revenue is then recognized for each distinct performance obligation
as control is transferred to the customer. Revenue attributable to
hardware is recognized at the time control of the product transfers
to the customer. The transaction price allocated to the service is
recognized over the specified service period or over the estimated
useful life of the hardware, beginning when the customer is
expected to activate their account. Useful life of the hardware is
determined by industry norms, technical and financial relevance,
frequency of new model releases, and user history.
Long-term Supply Arrangement - Verisure
We have entered into a Supply Agreement which includes product
purchases, paid subscription services, and an option for
Verisure
S.à.r.l. (“Verisure”)
to acquire development services by submitting a statement of work
(“SOW”). Products sold come with a standard twelve months warranty.
Verisure assumes responsibilities for all warranty claims, returns
of products and certain technical support provided to the end
users. We provide technical support for paid subscription services
where Verisure cannot resolve the issue. Verisure is responsible
for any marketing and promotion of our products and services sold
in Europe. We concluded that we are acting as the principal in the
Supply Agreement and determined that revenue should be presented
gross.
Products are priced at a cost plus markup as specified in the
Supply Agreement. The paid subscription services is billed based on
the number of active cameras monthly and is priced at a cost plus
markup specified in the Supply Agreement.
The
transaction price for products and paid subscription services is
entirely variable because the consideration is dependent on the
actual costs. For products, since quantity and product types are
not specified in the agreement, contracts are not deemed to exist
until we receive and accept the customer purchase order (“PO”).
Each product with a valid PO is considered a single performance
obligation.
NRE Arrangement - Verisure
The Supply Agreement also provides for certain development services
under an SOW to Verisure (“NRE arrangement”), which Verisure pays
non-refundable installments upon the commencement of agreed-upon
milestones. There is a single performance obligation as the
distinct goods and services promised under the SOW are highly
interdependent or interrelated inputs that produce a single
combined output given the nature of such arrangements. The output
(or work-in-progress of such output) typically has no alternative
use to us given the customized nature of the arrangement and we
have
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
enforceable rights given that the non-refundable milestone payments
are prepayments in nature; control for NRE development services
therefore transfers over time.
We determined that the most appropriate measure of progress for
revenue recognition is the input method based on cost because we
can reasonably estimate the total costs for the NRE, and the costs
incurred reasonably reflect our efforts to satisfy the performance
obligation. The NRE costs include labor, material, overhead as well
as the use of outside services. The total estimated NRE costs are
based on a combination of historical costs together with quotes
from vendors for supplying parts or services towards the
completion. Adjustments to cost and profit estimates are made
periodically due to changes in scope of work, hours to complete and
estimated profitability, including those arising from final
contract settlements. These changes may result in revisions to
costs and income and are recognized in the period in which the
revisions are determined. Any losses expected to be incurred on
contracts in progress are charged to operations in the period such
losses are determined. If total NRE costs calculated upon
completion in the current period are more than the estimated total
costs at completion used to calculate revenue in a prior period,
then the profits in the current period will be lower than if the
estimated costs used in the prior period calculation were equal to
the actual total costs upon completion.
Warranties
Sales of hardware products regularly include warranties to end
customers that cover bug fixes, minor updates such that the product
continues to function according to published specifications in a
dynamic environment, and phone support. These standard warranties
are assurance type warranties and do not offer any services in
addition to the assurance that the product will continue working as
specified for one or more years. Therefore, warranties are not
considered separate performance obligations in the arrangement.
Instead, the expected cost of warranties is accrued as an expense
in accordance with authoritative guidance.
Sales incentives
We accrue for sales incentives offered to our customers as a
marketing expense if we receive an identifiable benefit in exchange
and can reasonably estimate the fair value of the identifiable
benefit received; otherwise, it is recorded as a contra revenue. As
a consequence, we record a substantial portion of the channel
marketing costs as a reduction of revenue.
We record estimated reductions to revenue for sales incentives when
the related revenue is recognized or ahead of customer or end
customer commitment if customary business practice creates an
implied expectation that such activities will occur in the
future.
Shipping and handling costs
We include shipping and handling fees billed to customers in
Revenue. Shipping and handling costs associated with inbound
freight are included in Cost of revenue. In cases where we give a
freight allowance to the customer for their own inbound freight
costs, such costs are appropriately recorded as a reduction in
Revenue. Shipping and handling costs associated with outbound
freight are included in sales and marketing expenses. We have
elected to account for shipping and handling activities related to
contracts with customers as costs to fulfill the promise to
transfer the associated products. Shipping and handling costs
associated with outbound freight totaled $3.4 million, $2.9 million
and $2.7 million for the years ended December 31, 2022, 2021
and 2020, respectively.
Contract costs
We recognize the incremental costs of obtaining contracts as an
expense when incurred if the amortization period of the assets that
otherwise would have been recognized is one year or less. These
costs are included in operating expenses of sales and marketing and
general and administrative on the consolidated statements of
comprehensive loss. If the incremental costs of obtaining a
contract, which consist of sales commissions, relate to a service
recognized over a period longer than one year, costs are deferred
and amortized in line with the related services over the period of
benefit. Deferred commissions are
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
classified as non-current based on the original amortization period
of over one year. There were no deferred commissions as of
December 31, 2022 and 2021.
Contract balances
Contract assets are recorded as accounts receivable, net on the
consolidated balance sheets when we have an unconditional right to
consideration. Contract liabilities are recorded as deferred
revenue on the consolidated balance sheets when cash payments are
received or due in advance of performance. Contract liabilities
consist of advance payments and customer billings in advance of
revenue recognition from subscription contracts where we have
unsatisfied performance obligations. Advance payments include
prepayments for NRE services under the Supply Agreement with
Verisure.
Payment terms vary by customer. The time between invoicing and when
payment is due is not significant. For certain products or services
and customer types, payment is required before the products or
services are delivered to the customer. Performance obligations
represent the transaction price allocated that are unsatisfied or
partially unsatisfied as of the end of the reporting period.
Unsatisfied and partially unsatisfied performance obligations
consist of contract liabilities.
Research and development
Costs incurred in the research and development of new products are
expensed as incurred.
Software development costs
We expense software development costs, including costs to develop
software products or the software component of products to be sold,
leased, or marketed to external users, before technological
feasibility is reached. Technological feasibility is typically
reached shortly before the release of such products. As a result,
development costs that meet the criteria for capitalization were
$1.8 million for the year ended December 31, 2022. There
was no capitalized development costs for the years ended 2021 and
2020.
We capitalize software development costs related to those software
applications to be used solely to meet internal needs during the
application development stage. Capitalized software development
costs are amortized using the straight-line amortization method
over the estimated useful life of the applicable software. Costs
capitalized for developing such software applications were not
material as of December 31, 2022 and 2021.
Advertising costs
Advertising costs are expensed when incurred and included in sales
and marketing on the consolidated statements of comprehensive loss.
Total advertising costs were $27.1 million, $9.6 million and $12.7
million for the years ended December 31, 2022, 2021 and 2020,
respectively.
Stock-based compensation
We measure stock-based compensation at the grant date based on the
fair value of the award. The fair value of stock options is
estimated on the grant date using the Black-Scholes option pricing
model. The fair value of restricted stock units (“RSUs”) and
performance-based restricted stock units is measured on the grant
date based on the closing fair market value of our common stock. We
utilize a Monte Carlo pricing model customized to the specific
provisions to value the market-based restricted stock units on the
grant date. The fair value determined using the Monte Carlo
simulation model varies based on the assumptions used for the
expected stock price volatility, the correlation coefficient
between Arlo and Russell 2000 Index, risk-free interest rates, and
dividend yield. Forfeitures are accounted for as they
occur.
Our Employee Stock Purchase Plan (“ESPP”) is intended to provide
employees with the opportunity to purchase our common stock through
accumulated payroll deductions at the end of specified purchase
period. Eligible employees may contribute up to 15% of
compensation, subject to certain income limits, to purchase our
common stock. The terms of the plan
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
include a look-back feature that enables employees to purchase
stock semi-annually at a price equal to 85% of the lesser of the
fair market value at the beginning of the offering period or the
purchase date. The duration of each purchasing period is generally
six months. We determine the fair value using the Black-Scholes
Model using various inputs, including its estimate of expected
volatility, term, dividend yield and risk-free interest rate. The
risk-free interest rate of the purchase rights granted under the
ESPP is based on the implied yield currently available on U.S.
Treasury securities, with a remaining term commensurate with the
estimated expected term. Expected volatility of the purchase rights
granted under the ESPP is based on historical volatility over the
most recent period commensurate with the estimated expected
term.
We recognize compensation costs for RSUs. stock options, and ESPP
on a straight-line basis over the requisite service period of the
award, usually the vesting period, which is generally four years
for stock options and
three to four years for RSUs. For performance-based RSUs,
compensation costs associated with individual performance
milestones is recognized over the period when the performance
conditions achievement become probable. In addition, we evaluate
the probability of achieving the performance conditions at the end
of each reporting period and record the related stock-based
compensation expense based on performance to date over the service
period. For market-based RSUs, stock-based compensation expense is
recognized ratably over the performance period subject to
achievement of market conditions.
Foreign currency
Our functional currency is the U.S. dollar. Foreign currency
transactions of international subsidiaries
are re-measured into U.S. dollars at
the end-of-period exchange rates for monetary assets and
liabilities, and at historical exchange rates
for non-monetary assets and liabilities. Revenue
is re-measured at average exchange rates in effect during
each period. Expenses are re-measured at average exchange
rates in effect during each period, except for expenses related
to non-monetary assets and liabilities, which
are re-measured at historical exchange rates. Gains and
losses arising from foreign currency transactions are included in
other income, net on the consolidated statements comprehensive
loss.
Net loss per share
Basic net loss per share is computed by dividing the net loss for
the period by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is
computed by dividing the net loss for the period by the weighted
average number of shares of common stock and potentially dilutive
common stock outstanding during the period. Potentially dilutive
common shares include common shares issuable upon exercise of stock
options, vesting of restricted stock awards and performance shares,
and issuances of shares under the ESPP, which are reflected in
diluted net loss per share by application of the treasury stock
method. Potentially dilutive common shares are excluded from the
computation of diluted net loss per share when their effect is
anti-dilutive.
Segment Information
We operate as one operating and reportable segment. Our Chief
Executive Officer (“CEO”) is identified as the Chief Operating
Decision Maker (“CODM”), who reviews financial information
presented on a consolidated basis for purposes of allocating
resources and evaluating financial performance.
Income taxes
We record the provision for income taxes in the consolidated
financial statements using the asset and liability method. Under
this method, we recognize income tax liabilities or receivables for
the current year. We also recognize deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the financial reporting and tax basis of assets
and liabilities, as well as for operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using the tax rates that are expected to apply to taxable income
for the years in which those tax assets and liabilities are
expected to be realized or settled. We record a valuation allowance
to reduce deferred tax assets to the net amount that we believe is
more likely than not to be realized. Our assessment considers the
recognition of deferred tax assets on a jurisdictional basis.
Accordingly, in assessing the future taxable income on a
jurisdictional basis, we consider the
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
effect of the transfer pricing policies on that income. We have
recorded a valuation allowance against U.S. federal and state
deferred tax assets and certain foreign tax attribute carryforwards
since we do not anticipate to realize the benefits of these
deferred tax assets.
We recognize tax benefits from uncertain tax positions only if we
believe that it is more likely than not that the tax position will
be sustained on examination by the taxing authorities based on the
technical merits of the position. As we expand internationally, we
will face increased complexity in determining the appropriate tax
jurisdictions for revenue and expense items. Our policy is to
adjust these unrecognized tax benefits in the period when facts and
circumstances change, such as the closing of a tax audit, the
expiration of statute of limitation for a relevant taxing authority
to examine a tax position, or when additional information becomes
available. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences
will affect the provision for income taxes in the period in which
such determination is made and could have a material impact on the
financial condition and operating results. The provision for income
taxes includes the effects of any accruals that we believe are
appropriate, as well as the related interest and
penalties.
Legislation enacted in 2017, informally titled the Tax Cuts and
Jobs Act introduced the global intangible low-taxed income
(“GILTI”) provisions effective in 2018, which generally impose a
tax on the net income earned by foreign subsidiaries of a U.S
company in excess of a deemed return on their tangible assets. We
recognize the tax on GILTI as a period cost when the tax is
incurred.
Recent accounting pronouncements
Emerging Growth Company Status
As an emerging growth company (“EGC”), we may, under the Jumpstart
Our Business Startups Act, delay adoption of new or revised
accounting pronouncements applicable to public companies until such
pronouncements are made applicable to private companies, unless we
otherwise irrevocably elect not to avail ourselves of this
exemption. We did not make such an irrevocable election and have
not delayed the adoption of any applicable accounting
standards.
Accounting Pronouncements Recently Adopted
In 2022, we adopted Accounting Standards Update (“ASU”)
2020-04,
Facilitation of the Effects of Reference Rate Reform on Financial
Reporting.
The ASU 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”). The adoption of this guidance did not have a
material impact on our financial statements and related
disclosures.
Accounting Pronouncements Not Yet Effective
We have considered all recent accounting pronouncements issued, but
not yet effective, and do not expect any to have a material effect
on our financial statements and related disclosures.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 3. Revenue
Contract Balances
The following table reflects the changes in contract balances for
the years ended December 31, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location |
|
December 31, 2022 |
|
December 31, 2021 |
|
$
change |
|
%
change |
|
|
|
(In thousands) |
|
|
|
Accounts receivable, net |
Accounts receivable, net |
|
$ |
65,960 |
|
|
$ |
79,564 |
|
|
$ |
(13,604) |
|
|
(17.1) |
% |
|
Contract liabilities - current |
Deferred revenue |
|
$ |
11,291 |
|
|
$ |
29,442 |
|
|
$ |
(18,151) |
|
|
(61.7) |
% |
|
Contract liabilities - non-current |
Other non-current liabilities |
|
$ |
212 |
|
|
$ |
1,344 |
|
|
$ |
(1,132) |
|
|
(84.2) |
% |
For the year ended December 31, 2022, compared to the previous
year, accounts receivable, net decreased, primarily driven by the
decrease in revenue in the fourth quarter of 2022, current portion
of deferred revenue decreased, primarily due to utilization of
Verisure prepayments for product purchases, Verisure NRE
installment payments and recognition of prepaid service revenue,
and non-current deferred revenue decreased due to the recognition
of prepaid service revenue.
For the years ended December 31, 2022 and 2021,
$29.4 million and $53.1 million, respectively, of the
recognized revenue was included in the contract liability balance
at the beginning of the periods. There were no significant changes
in estimates during the periods that would affect the contract
balances.
Refer to Note 4,
Balance Sheet Components
for further details of accounts receivable, net.
Performance Obligations
The following table includes estimated revenue expected to be
recognized in the future related to performance obligations that
are unsatisfied and partially unsatisfied as of December 31,
2022
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|
|
|
|
|
|
|
|
|
|
|
|
|
1 year |
|
2 years |
|
Greater than 2 years |
|
Total |
|
|
(In thousands) |
|
Performance obligations |
|
$ |
11,291 |
|
|
$ |
202 |
|
|
$ |
10 |
|
|
$ |
11,503 |
|
During the five-year period commencing January 1, 2020, Verisure
has an aggregate purchase commitment of $500.0 million. As of
December 31, 2022, $336.7 million of the purchase commitment
has been fulfilled with a backlog of
$97.9 million.
ARLO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Disaggregation of Revenue
We disaggregate our revenue into three geographic regions: the
Americas, EMEA, and APAC, where we conduct our business. The
following table presents revenue by geography.