Arlo Technologies, Inc. [ARLO] Filings

10-Q 1 arlo-20220403.htm 10-Q arlo-20220403

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 3, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-38618

ARLO TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


Delaware		38-4061754
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2200 Faraday Ave.,	Suite #150
Carlsbad,	California	92008
(Address of principal executive offices)		(Zip Code)

(408) 890-3900

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

ARLO

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer

☐

Accelerated filer

☒

Non-Accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

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

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

Table of Contents

ARLO TECHNOLOGIES, INC.

TABLE OF CONTENTS


PART I: FINANCIAL INFORMATION
		Page No.
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets	3
	Unaudited Condensed Consolidated Statements of Operations	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)	5
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity	6
	Unaudited Condensed Consolidated Statements of Cash Flows	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	44

PART II: OTHER INFORMATION

Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 6.	Exhibits	46
Signatures		47

Table of Contents

PART I: FINANCIAL INFORMATION

Item 1.Financial Statements

ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	As of
	April 3, 2022		December 31, 2021
	(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	100,975	$	175,749
Short-term investments (amortized cost of $44,612 and $—)	44,566		—
Accounts receivable (net of allowance for credit losses of $339 and $337)	78,054		79,564
Inventories	37,038		38,390

Prepaid expenses and other current assets	9,015		9,919
Total current assets	269,648		303,622
Property and equipment, net	8,522		9,595
Operating lease right-of-use assets, net	13,797		14,814

Goodwill	11,038		11,038
Restricted cash	4,114		4,107
Other non-current assets	4,671		4,314
Total assets	$	311,790	$	347,490
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	68,266	$	84,098
Deferred revenue	16,460		29,442
Accrued liabilities	91,732		97,377
Income tax payable	45		12
Total current liabilities	176,503		210,929
Non-current deferred revenue	915		1,344
Non-current operating lease liabilities	20,308		21,470

Non-current income taxes payable	94		94
Other non-current liabilities	1,966		1,001
Total liabilities	199,786		234,838
Commitments and contingencies (Note 9)
Stockholders’ Equity:
Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding	—		—
Common stock: $0.001 par value; 500,000,000 shares authorized; shares issued and outstanding: 85,834,841 at April 3, 2022 and 84,453,212 at December 31, 2021	86		84
Additional paid-in capital	409,242		401,367
Accumulated other comprehensive income	(46)		—
Accumulated deficit	(297,278)		(288,799)
Total stockholders’ equity	112,004		112,652
Total liabilities and stockholders’ equity	$	311,790	$	347,490

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

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ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended
	April 3, 2022		March 28, 2021
	(In thousands, except per share data)
Revenue:
Products	$	94,825	$	59,761


Services	29,926		22,795

Total revenue	124,751		82,556
Cost of revenue:
Products	80,777		47,157


Services	10,399		9,592

Total cost of revenue	91,176		56,749
Gross profit	33,575		25,807

Operating expenses:
Research and development	16,379		14,791
Sales and marketing	13,168		11,207
General and administrative	12,621		11,227

Separation expense	79		54

Total operating expenses	42,247		37,279

Loss from operations	(8,672)		(11,472)
Interest income (expense), net	(5)		24
Other income (expense), net	411		909
Loss before income taxes	(8,266)		(10,539)
Provision for income taxes	213		180
Net loss	$	(8,479)	$	(10,719)

Net loss per share:
Basic	$	(0.10)	$	(0.13)
Diluted	$	(0.10)	$	(0.13)
Weighted average shares used to compute net loss per share:
Basic	85,222		80,370
Diluted	85,222		80,370

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

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ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Three Months Ended
	April 3, 2022		March 28, 2021
	(In thousands)
Net loss	$	(8,479)	$	(10,719)
Other comprehensive income (loss), before tax:
Unrealized gain (loss) on derivative instruments	—		(2)
Unrealized gain (loss) on available-for-sale securities	(46)		(1)
Total other comprehensive income (loss), before tax	(46)		(3)


Total other comprehensive income (loss), net of tax	(46)		(3)
Comprehensive loss	$	(8,525)	$	(10,722)

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

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ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Common Stock
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total
	(In thousands)
Balance as of December 31, 2021	84,453	$	84	$	401,367	$	—	$	(288,799)	$	112,652
Net loss	—	—		—		—		(8,479)		(8,479)
Stock-based compensation expense	—	—		8,183		—		—		8,183
Settlement of liability classified RSUs	—	—		4,966		—		—		4,966
Issuance of common stock under stock-based compensation plans	2,127	3		1,385		—		—		1,388

Restricted stock unit withholdings	(745)	(1)		(6,659)		—		—		(6,660)
Change in unrealized gains and losses on available-for-sale securities, net of tax	—	—		—		(46)		—		(46)

Balance as of April 3, 2022	85,835	$	86	$	409,242	$	(46)	$	(297,278)	$	112,004

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

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

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ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended
	April 3, 2022		March 28, 2021
	(In thousands)
Cash flows from operating activities:
Net loss	$	(8,479)	$	(10,719)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	9,589		8,340

Depreciation and amortization	1,302		1,547
Allowance for credit losses and inventory reserves	(135)		(562)
Deferred income taxes	(9)		(130)

Premium amortization (discount accretion) on investments, net	28		(3)

Changes in assets and liabilities:
Accounts receivable, net	1,508		26,522
Inventories	1,490		9,296

Prepaid expenses and other assets	556		361
Accounts payable	(15,676)		(34,647)
Deferred revenue	(13,411)		(8,101)
Accrued and other liabilities	(1,320)		(22,072)

Net cash used in operating activities	(24,557)		(30,168)
Cash flows from investing activities:
Purchases of property and equipment	(298)		(803)

Purchases of short-term investments	(44,640)		—
Proceeds from maturities of short-term investments	—		15,000
Net cash provided by (used in) investing activities	(44,938)		14,197
Cash flows from financing activities:


Proceeds related to employee benefit plans	1,388		6,133
Restricted stock unit withholdings	(6,660)		(4,177)

Net cash provided by (used in) financing activities	(5,272)		1,956
Net decrease in cash and cash equivalents and restricted cash	(74,767)		(14,015)
Cash and cash equivalents and restricted cash, at beginning of period	179,856		190,291
Cash and cash equivalents and restricted cash, at end of period	$	105,089	$	176,276

Non-cash investing and financing activities:
Purchases of property and equipment included in accounts payable and accrued liabilities	$	310	$	82

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

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and Basis of Presentation

The Company

Arlo Technologies, Inc. ("Arlo" or the "Company") combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle. The Company's deep expertise in product design, wireless connectivity, cloud infrastructure and cutting-edge AI capabilities focuses on delivering a seamless, smart home experience for Arlo users that is easy to setup and interact with every day. The Company's cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection. The Company conducts business across three geographic regions - Americas; Europe, Middle-East and Africa (“EMEA”); and Asia Pacific (“APAC”), and primarily generates revenue by selling devices through retail channels, wholesale distribution, wireless carrier channels, security solution providers, and Arlo's direct to consumer store and paid subscription services.

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

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All periods presented have been accounted for in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”).

These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair statement of the unaudited condensed consolidated financial statements for interim periods.

Fiscal periods

The Company’s fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. The Company reports its results on a fiscal quarter basis rather than on a calendar quarter basis. Under the fiscal quarter basis, each of the first three fiscal quarters ends on the Sunday closest to the calendar quarter end, with the fourth quarter ending on December 31.

Use of estimates

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

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 2. Significant Accounting Policies and Recent Accounting Pronouncements

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

Recent accounting pronouncements

Emerging Growth Company Status

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

Accounting Pronouncements Recently Adopted

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

Accounting Pronouncements Not Yet Effective

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

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

Note 3. Deferred Revenue

Deferred Revenue

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

Transaction Price Allocated to the Remaining Performance Obligations

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

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of April 3, 2022:


	1 year		2 years		Greater than 2 years		Total
	(In thousands)
Performance obligations	$	21,122	$	809	$	107	$	22,038

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

For the three months ended April 3, 2022 and March 28, 2021, $25.8 million and $17.7 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $27.5 million and $21.9 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. $9.0 million and $10.5 million of this recognized revenue was included in the contract liability balance at the beginning of the periods. There were no significant changes in estimates during the period that would affect the contract balances.

Disaggregation of Revenue

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

Note 4. Balance Sheet Components

Cash and Cash Equivalents and Restricted cash

The Company maintains certain cash balances restricted as to withdrawal or use. The restricted cash is comprised primarily of cash used as collateral for a letter of credit associated with the Company’s lease agreement in San Jose, California. The Company deposits restricted cash with high credit quality financial institutions. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same amounts shown on the statements of cash flows:


	As of
	April 3, 2022		December 31, 2021
	(In thousands)
Cash and cash equivalents	$	100,975	$	175,749
Restricted cash	4,114		4,107
Total as presented on the unaudited condensed consolidated statements of cash flows	$	105,089	$	179,856



	As of
	March 28, 2021		December 31, 2020
	(In thousands)
Cash and cash equivalents	$	172,113	$	186,127
Restricted cash	4,163		4,164
Total as presented on the unaudited condensed consolidated statements of cash flows	$	176,276	$	190,291

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Available-for-sale short-term investments


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

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

Accounts receivable, net


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

The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected.


	Three Months Ended
	April 3, 2022		March 28, 2021
	(In thousands)
Balance at the beginning of the period	$	337	$	519

Provision for expected credit losses	2		—
Amounts recovered due to collection	—		—
Balance at the end of the period	$	339	$	519

Inventories

Inventories consist of finished goods which are valued at the lower of cost or net realizable value, with cost being determined using the first-in, first-out method as of April 3, 2022.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Property and equipment, net

The components of property and equipment are as follows:


	As of
	April 3, 2022		December 31, 2021
	(In thousands)
Machinery and equipment	$	13,531	$	13,302
Software	13,670		13,928
Computer equipment	4,074		4,062
Furniture and fixtures	2,534		2,404
Leasehold improvements	4,935		4,922

Total property and equipment, gross	38,744		38,618
Accumulated depreciation and amortization	(30,222)		(29,023)
Total property and equipment, net (1)	$	8,522	$	9,595

_________________________

(1) $2.2 million and $2.4 million property and equipment, net, respectively, was included in the sublease arrangement for the San Jose office building as of April 3, 2022 and December 31, 2021.

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

Goodwill

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

Goodwill Impairment

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

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

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Other non-current assets


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

Accrued liabilities


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

Other	19,393		19,608
Total accrued liabilities	$	91,732	$	97,377

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 5. Fair Value Measurements

Fair Value Measurements - Recurring Basis

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


	As of April 3, 2022						As of December 31, 2021
	Total		Quoted market prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Total		Quoted market prices in active markets (Level 1)		Significant other observable inputs (Level 2)
	(In thousands)
Assets:
Cash equivalents: money-market funds (<90 days)	$	7,179	$	7,179	$	—	$	21,935	$	21,935	$	—
Available-for-sale securities: U.S. treasuries (1)	44,566		44,566		—		—		—		—
Foreign currency forward contracts (2)	—		—		—		65		—		65
Total assets measured at fair value	$	51,745	$	51,745	$	—	$	22,000	$	21,935	$	65
Liabilities:
Foreign currency forward contracts (3)	$	37	$	—	$	37	$	47	$	—	$	47
Total liabilities measured at fair value	$	37	$	—	$	37	$	47	$	—	$	47

_________________________

(1)Included in Short-term investments on the Company’s unaudited condensed consolidated balance sheets.

(2)Included in Prepaid expenses and other current assets on the Company’s unaudited condensed consolidated balance sheets.

(3)Included in Accrued liabilities on the Company’s unaudited condensed consolidated balance sheets.

The Company’s investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company enters into foreign currency forward contracts with only those counterparties that have long-term credit ratings of A-/A3 or higher. The Company’s foreign currency forward contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that take into account the contract terms as well as currency rates and counterparty credit rates. The Company verifies the reasonableness of these pricing models using observable market data for related inputs into such models. Additionally, the Company includes an adjustment for non-performance risk in the recognized measure of fair value of derivative instruments. As of April 3, 2022 and December 31, 2021, the adjustment for non-performance risk did not have a material impact on the fair value of the Company’s foreign currency forward contracts. The carrying value of non-financial assets and liabilities measured at fair value in the financial statements on a recurring basis, including accounts receivable and accounts payable, approximate fair value due to their short maturities. As of April 3, 2022 and December 31, 2021, the Company had no Level 3 fair value assets or liabilities measured on a recurring basis.

Fair Value Measurements - Nonrecurring Basis

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

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 6. Derivative Financial Instruments

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

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

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

Fair value of derivative instruments

The fair values of the Company’s derivative instruments and the line items on the unaudited condensed consolidated balance sheets to which they were recorded as of April 3, 2022 and December 31, 2021 are summarized as follows:


Derivative Assets	Balance Sheet Location	April 3, 2022		December 31, 2021		Balance Sheet Location	April 3, 2022		December 31, 2021
		(In thousands)					(In thousands)
Derivative assets not designated as hedging instruments	Prepaid expenses and other current assets	$	—	$	65	Accrued liabilities	$	37	$	47

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

Gross amounts offsetting of derivative instruments

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

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

There were no derivative assets recorded as of April 3, 2022. The following table sets forth the offsetting of derivative assets as of December 31, 2021:


December 31, 2021							Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets		Net Amounts Of Assets Presented in the Unaudited Condensed Consolidated Balance Sheets		Financial Instruments		Cash Collateral Pledged		Net Amount
	(In thousands)


Wells Fargo Bank	$	65	$	—	$	65	$	(47)	$	—	$	18

The following tables set forth the offsetting of derivative liabilities as of April 3, 2022 and December 31, 2021:


As of April 3, 2022							Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets		Net Amounts Of Liabilities Presented in the Unaudited Condensed Consolidated Balance Sheets		Financial Instruments		Cash Collateral Pledged		Net Amount
	(In thousands)


Wells Fargo Bank	$	37	$	—	$	37	$	—	$	—	$	37


December 31, 2021							Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets		Net Amounts Of Liabilities Presented in the Unaudited Condensed Consolidated Balance Sheets		Financial Instruments		Cash Collateral Pledged		Net Amount
	(In thousands)


Wells Fargo Bank	$	47	$	—	$	47	$	(47)	$	—	$	—

Cash flow hedges

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

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The effects of the Company’s cash flow hedges on the unaudited condensed consolidated statements of operations for the three months ended March 28, 2021 are summarized as follows:


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

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

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

Non-designated hedges

The Company adjusts its non-designated hedges monthly and enters into about six non-designated derivatives per quarter with an average size of $2.3 million. The hedges range typically from one to three months in duration. The effects of the Company’s non-designated hedges, which are included in Other income (expense), net in the unaudited condensed consolidated statements of operations for the three months ended April 3, 2022 and March 28, 2021, were as follows:

Derivatives Not Designated as Hedging Instruments

Location of Gains (Losses)
Recognized in Income on Derivative

Three Months Ended

April 3, 2022

March 28, 2021

(In thousands)

Foreign currency forward contracts

Other income (expense), net

128

(5)

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 7. Accumulated Other Comprehensive Income (Loss)

The following table sets forth the changes in accumulated other comprehensive income (loss) (“AOCI”) by component for the three months ended April 3, 2022 and March 28, 2021.


	Unrealized gains (losses) on available-for-sale securities		Unrealized gains (losses) on derivatives		Estimated tax benefit (provision)		Total
	(In thousands)
Balance as of December 31, 2021	$	—	$	—	$	—	$	—
Other comprehensive income (loss) before reclassifications	(46)		—		—		(46)
Less: Amount reclassified from accumulated other comprehensive income (loss)	—		—		—		—
Net current period other comprehensive income (loss)	(46)		—		—		(46)
Balance as of April 3, 2022	$	(46)	$	—	$	—	$	(46)


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

The following tables provide details about significant amounts reclassified out of each component of AOCI for the three months ended April 3, 2022 and March 28, 2021:


	Three Months Ended
	April 3, 2022				March 28, 2021
	Gains (Losses) Recognized in OCI - Effective Portion		Gains (Losses) Reclassified from OCI to Income - Effective Portion		Gains (Losses) Recognized in OCI - Effective Portion		Gains (Losses) Reclassified from OCI to Income - Effective Portion		Affected Line Item in the Statements of Operations
	(In thousands)
Gains (losses) on cash flow hedge:
Foreign currency contracts	$	—	$	—	$	—	$	—	Revenue
Foreign currency contracts	—		—		—		—		Cost of revenue
Foreign currency contracts	—		—		—		—		Research and development
Foreign currency contracts	—		—		—		2		Sales and marketing
Foreign currency contracts	—		—		—		—		General and administrative
	$	—	$	—	$	—	$	2	Total *

_________________________

* Tax impact to hedging gains and losses from derivative contracts was immaterial.

Note 8. Debt

Revolving Credit Facility

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On October 27, 2021, the Company entered into a Loan and Security Agreement (the “Credit Agreement”) with Bank of America, N.A., a national banking association, as lender (the “Lender”).

The Credit Agreement provides for a three-year revolving credit facility (the “Credit Facility”) that matures on October 27, 2024. Borrowings under the Credit Facility are limited to the lesser of (x) $40.0 million, and (y) an amount equal to the borrowing base. The borrowing base will be the sum of (i) 90% of investment grade eligible receivables and (ii) 85% of non-investment grade eligible accounts, less applicable reserves established by the Lender. The Credit Agreement also includes a $5.0 million sublimit for the issuance by the Lender of letters of credit. In addition, the Credit Agreement includes an uncommitted accordion feature that allows the Company to request, from time to time, that the Lender increase the aggregate revolving loan commitments by up to an additional $25.0 million in the aggregate, subject to the satisfaction of certain conditions, including obtaining the Lender’s agreement to participate in each increase. The proceeds of the borrowings under the Credit Facility may be used for working capital and general corporate purposes.

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

At the Company’s option, borrowings under the Credit Agreement will bear interest at a floating rate equal to: (i) the Bloomberg Short-Term Bank Yield Index rate plus the applicable rate of 2.0% to 2.5% determined based on the Company’s average daily availability for the prior fiscal quarter, or (ii) the base rate plus the applicable rate of 1.0% to 1.5% based on the Company’s average daily availability for the prior fiscal quarter. Among other fees, the Company is required to pay a monthly unused fee of 0.2% per annum on the amount by which the Lender’s aggregate commitment under the Credit Facility exceeds the average daily revolver usage during such month.

The Credit Agreement contains events of default, representations and warranties, and affirmative and negative covenants customary for credit facilities of this type. The Credit Agreement also contains financial covenants that require the Company to (a) until the Company achieves a fixed charge coverage ratio of at least 1.00 to 1.00 for two consecutive quarters, maintain minimum liquidity of not less than $20.0 million at all times and (b) thereafter, maintain a fixed charge coverage ratio, tested quarterly on a trailing twelve month basis, of at least 1.00 to 1.00 at any time a Financial Covenant Trigger Period (as defined in the Credit Agreement) is in effect. As of April 3, 2022, the Company is in compliance with all the covenants of the Credit Agreement.

If an event of default under the Credit Agreement occurs, then the Lender may cease making advances under the Credit Agreement and declare any outstanding obligations under the Credit Agreement to be immediately due and payable. In addition, if the Company files a bankruptcy petition, a bankruptcy petition is filed against the Company and is not dismissed or stayed within thirty days, or the Company makes a general assignment for the benefit of creditors, then any outstanding obligations under the Credit Agreement will automatically and without notice or demand become immediately due and payable.

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

Note 9. Commitments and Contingencies

Operating Leases

The Company primarily leases office space, with various expiration dates through June 2029. Some of the leases include options to extend such leases for up to five years, and some include options to terminate such leases within one year. The terms of certain of the Company's leases provide for rental payments on a graduated scale. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, accrued liabilities, and non-current operating lease liabilities in the unaudited condensed consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

fixed lease payments are recognized in the unaudited condensed consolidated statements of operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. Gross lease expense was $1.8 million and $1.6 million for the three months ended April 3, 2022 and March 28, 2021, respectively. The lease expense was recorded within Cost of revenue, Research and development, Sales and marketing, and General and administrative expense in the Company's unaudited condensed consolidated statements of operations. Short-term leases and variable lease costs were included in the lease expense and they were immaterial. The Company recorded sublease income as reduction of lease expense, in the amount of $0.5 million for the three months ended April 3, 2022.

Supplemental cash flow information related to operating leases for the three months ended April 3, 2022 and March 28, 2021 was as follows:


	April 3, 2022		March 28, 2021
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	2,036	$	1,534
Right-of-use assets obtained in exchange for lease liabilities
Operating leases	$	18	$	—

Weighted average remaining lease term and weighted average discount rate related to operating leases were as follows:

As of

April 3, 2022

December 31, 2021

Weighted average remaining lease term

5.9 years

6.1 years

Weighted average discount rate

5.76

5.77

The Company's future minimum undiscounted lease payments under operating leases and future non-cancelable rent payments from its subtenants for each of the next five years and thereafter as of April 3, 2022 were as follows:


	Operating Lease Payments		Sublease Payments		Net
	(In thousands)
2022 (Remaining nine months)	$	4,362	$	(1,506)	$	2,856
2023	5,563		(1,891)		3,672
2024	4,885		(1,947)		2,938
2025	3,174		(2,006)		1,168
2026	3,267		(2,066)		1,201
Thereafter	8,217		(5,942)		2,275
Total future lease payments	29,468		$	(15,358)	$	14,110
Less: interest (1)	(4,631)
Present value of future minimum lease payments	$	24,837

Accrued liabilities	$	4,529
Non-current operating lease liabilities	20,308
Total lease liabilities	$	24,837

________________________

(1) Leases that commenced before November 5, 2019 were calculated using the Company’s incremental borrowing rate on a collateralized basis plus LIBOR rate that closely matches contractual term of most leases. Leases that commenced between November 5, 2019 and October 27, 2021 were calculated using the Company's borrowing rate defined in the credit agreement with Western Alliance Bank. Leases that commenced after October 27, 2021 were calculated using the Company's borrowing rate defined in the Credit Agreement with Bank of America, N.A.

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ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Letters of Credit

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

Purchase Obligations

The Company has entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements,

Arlo Technologies, Inc. [ARLO] Filings
10-Q	[2022-05-11]
10-K	[2022-03-02]
10-Q	[2021-11-10]
10-Q	[2021-08-05]
10-Q	[2021-05-06]
10-K	[2021-02-26]
10-Q	[2020-11-05]
10-Q	[2020-08-06]
10-Q	[2020-05-11]
10-K	[2020-02-28]
10-Q	[2019-11-08]
10-Q	[2019-08-06]
10-Q	[2019-05-06]
10-K	[2019-02-22]
10-Q	[2018-11-02]
10-Q	[2018-08-27]
S-1	[2018-07-06]