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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 (Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2021
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) 
Delaware38-4061754
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)
2200 Faraday Ave., Suite #150
Carlsbad,California92008
(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 shareARLONew 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 82,961,364 as of July 30, 2021.

1

ARLO TECHNOLOGIES, INC.

TABLE OF CONTENTS
 
2

PART I: FINANCIAL INFORMATION

Item 1.Financial Statements

ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of
June 27,
2021
December 31,
2020
(In thousands, except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents$178,698 $186,127 
Short-term investments (amortized cost of $ and $19,996)
 19,997 
Accounts receivable (net of allowance for credit losses of $536 and $519)
51,890 77,643 
Inventories43,155 64,705 
Prepaid expenses and other current assets11,852 8,076 
Total current assets285,595 356,548 
Property and equipment, net11,368 15,821 
Operating lease right-of-use assets, net15,148 23,998 
Goodwill11,038 11,038 
Restricted cash4,113 4,164 
Other non-current assets3,519 2,399 
Total assets$330,781 $413,968 
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable$42,884 $62,171 
Deferred revenue47,668 53,142 
Accrued liabilities97,707 121,766 
Income tax payable96 267 
Total current liabilities188,355 237,346 
Non-current deferred revenue3,235 16,563 
Non-current operating lease liabilities22,780 25,029 
Non-current income taxes payable111 104 
Other non-current liabilities1,515 1,159 
Total liabilities215,996 280,201 
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: 82,916,535 at June 27, 2021 and 79,336,242 at December 31, 2020
83 79 
Additional paid-in capital381,511 366,455 
Accumulated other comprehensive income  3 
Accumulated deficit(266,809)(232,770)
Total stockholders’ equity114,785 133,767 
Total liabilities and stockholders’ equity$330,781 $413,968 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3

ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedSix Months Ended
June 27,
2021
June 28,
2020
June 27,
2021
June 28,
2020
(In thousands, except per share data)
Revenue:
Products$73,311 $49,603 $133,072 $100,326 
Services25,260 17,029 48,055 31,756 
Total revenue98,571 66,632 181,127 132,082 
Cost of revenue:
Products62,019 51,186 109,176 103,374 
Services10,383 9,957 19,975 19,266 
Total cost of revenue72,402 61,143 129,151 122,640 
Gross profit26,169 5,489 51,976 9,442 
Operating expenses:
Research and development16,251 14,192 31,042 29,435 
Sales and marketing12,459 11,713 23,666 22,751 
General and administrative13,559 9,837 24,786 28,621 
Impairment charges9,116  9,116  
Separation expense605 82 659 161 
Gain on sale of business   (292)
Total operating expenses51,990 35,824 89,269 80,676 
Loss from operations(25,821)(30,335)(37,293)(71,234)
Interest income3 151 27 686 
Other income (expense), net2,662 1,111 3,571 2,294 
Loss before income taxes(23,156)(29,073)(33,695)(68,254)
Provision for income taxes164 183 344 328 
Net loss$(23,320)$(29,256)$(34,039)$(68,582)
Net loss per share:
Basic$(0.28)$(0.38)$(0.42)$(0.89)
Diluted$(0.28)$(0.38)$(0.42)$(0.89)
Weighted average shares used to compute net loss per share:
Basic82,134 77,885 81,275 77,229 
Diluted82,134 77,885 81,275 77,229 

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

4

ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 Three Months EndedSix Months Ended
June 27,
2021
June 28,
2020
June 27,
2021
June 28,
2020
(In thousands)
Net loss$(23,320)$(29,256)$(34,039)$(68,582)
Other comprehensive income (loss), before tax:
Unrealized gain (loss) on derivative instruments (28)(2)25 
Unrealized gain (loss) on available-for-sale securities (75)(1)(9)
Total other comprehensive income (loss), before tax (103)(3)16 
Total other comprehensive income (loss), net of tax (103)(3)16 
Comprehensive loss$(23,320)$(29,359)$(34,042)$(68,566)

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

5

ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Common Stock

SharesAmount Additional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
(In thousands)
Balance as of March 28, 202181,250 $81 $379,738 $ $(243,489)$136,330 
Net loss— — — — (23,320)(23,320)
Stock-based compensation expense— — 6,575 — — 6,575 
Settlement of liability classified RSUs— — 104 — — 104 
Issuance of common stock under stock-based compensation plans2,465 3 — — — 3 
Restricted stock unit withholdings(798)(1)(4,906)— — (4,907)
Balance as of June 27, 202182,917 $83 $381,511 $ $(266,809)$114,785 
Common Stock

SharesAmount Additional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
(In thousands)
Balance as of March 29, 202077,361 $77 $349,212 $117 $(170,845)$178,561 
Net loss— — — — (29,256)(29,256)
Stock-based compensation expense— — 3,772 — — 3,772 
Settlement of liability classified RSUs— — 57 — — 57 
Issuance of common stock under stock-based compensation plans1,150 1 — — — 1 
Restricted stock unit withholdings(422)— (1,128)— — (1,128)
Change in unrealized gains and losses on available-for-sale securities, net of tax— — — (75)— (75)
Change in unrealized gains and losses on derivatives, net of tax— — — (28)— (28)
Balance as of June 28, 202078,089 $78 $351,913 $14 $(200,101)$151,904 
Common Stock


SharesAmount Additional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
(In thousands)
Balance as of December 31, 202079,336 $79 $366,455 $3 $(232,770)$133,767 
Net loss— — — — (34,039)(34,039)
Stock-based compensation expense— — 11,446 — — 11,446 
Settlement of liability classified RSUs— — 6,562 — — 6,562 
Issuance of common stock under stock-based compensation plans4,598 6 4,433 — — 4,439 
Issuance of common stock under Employee Stock Purchase Plan353 — 1,697 — — 1,697 
Restricted stock unit withholdings(1,370)(2)(9,082)— — (9,084)
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 June 27, 202182,917 $83 $381,511 $ $(266,809)$114,785 
6

ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
Common Stock


SharesAmount Additional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
(In thousands)
Balance as of December 31, 201975,786 $76 $334,821 $(2)$(131,519)$203,376 
Net loss— — — — (68,582)(68,582)
Stock-based compensation expense— — 15,757 — — 15,757 
Settlement of liability classified RSUs— — 2,630 — — 2,630 
Issuance of common stock under stock-based compensation plans2,525 2 — — — 2 
Issuance of common stock under Employee Stock Purchase Plan732 1 1,853 — — 1,854 
Restricted stock unit withholdings(954)(1)(3,148)— — (3,149)
Change in unrealized gains and losses on available-for-sale securities, net of tax— — — (9)— (9)
Change in unrealized gains and losses on derivatives, net of tax— — — 25 — 25 
Balance as of June 28, 202078,089 $78 $351,913 $14 $(200,101)$151,904 

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

7

ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended
June 27,
2021
June 28,
2020
(In thousands)
Cash flows from operating activities:
Net loss$(34,039)$(68,582)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense19,949 17,337 
Impairment charges9,116  
Depreciation and amortization3,169 5,476 
Allowance for credit losses and inventory reserves(1,085)1,182 
Deferred income taxes(115)27 
Premium amortization (discount accretion) on investments, net (3)44 
Gain on sale of business (292)
Changes in assets and liabilities:
Accounts receivable, net 25,736 80,650 
Inventories22,652 1,827 
Prepaid expenses and other assets (4,782)8,745 
Accounts payable (19,189)(58,669)
Deferred revenue(18,802)(11,553)
Accrued and other liabilities(26,073)(24,875)
Net cash used in operating activities(23,466)(48,683)
Cash flows from investing activities:
Purchases of property and equipment (1,066)(1,184)
Purchases of short-term investments (25,094)
Proceeds from maturities of short-term investments20,000 25,000 
Net cash provided by (used in) investing activities18,934 (1,278)
Cash flows from financing activities:
Proceeds related to employee benefit plans6,136 1,856 
Restricted stock unit withholdings(9,084)(3,149)
Net cash used in financing activities(2,948)(1,293)
Net decrease in cash and cash equivalents and restricted cash
(7,480)(51,254)
Cash and cash equivalents and restricted cash, at beginning of period
190,291 240,819 
Cash and cash equivalents and restricted cash, at end of period
$182,811 $189,565 
Non-cash investing and financing activities:
Purchases of property and equipment included in accounts payable and accrued liabilities$549 $1,523 

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

8


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 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, 2020. 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 six months ended June 27, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any future period.

9



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, 2020. There have been no significant changes during the six months ended June 27, 2021.

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 six months ended June 27, 2021.

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.
10



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 June 27, 2021:
1 year2 yearsGreater than 2 yearsTotal
(In thousands)
Performance obligations$56,419 $2,875 $502 $59,796 

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

For the six months ended June 27, 2021 and June 28, 2020, $39.6 million and $21.4 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $45.3 million and $29.0 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. $16.1 million and $15.4 million of this recognized revenue was included in the contract liability balance at the beginning of the period. 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 for its office space 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
June 27,
2021
December 31,
2020
(In thousands)
Cash and cash equivalents$178,698 $186,127 
Restricted cash4,113 4,164 
Total as presented on the unaudited condensed consolidated statements of cash flows$182,811 $190,291 
As of
June 28,
2020
December 31,
2019
(In thousands)
Cash and cash equivalents$185,424 $236,680 
Restricted cash4,141 4,139 
Total as presented on the unaudited condensed consolidated statements of cash flows$189,565 $240,819 
11



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

Available-for-sale short-term investments

As of June 27, 2021As of December 31, 2020
 CostUnrealized GainsUnrealized LossesEstimated Fair ValueCostUnrealized GainsUnrealized LossesEstimated Fair Value
(In thousands)
U.S. treasuries$ $ $ $ $19,996 $1 $ $19,997 

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 investment for the three and six months ended June 27, 2021.

Accounts receivable, net
As of
June 27,
2021
December 31,
2020
(In thousands)
Gross accounts receivable$52,426 $78,162 
Allowance for credit losses(536)(519)
Total accounts receivable, net$51,890 $77,643 

    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 EndedSix Months Ended
June 27,
2021
June 28,
2020
June 27,
2021
June 28,
2020
(In thousands)
Balance at the beginning of the period$519 $863 $519 $609 
Adoption of ASU 2016-13, cumulative-effect adjustment to retained earnings    
Provision for (release of) expected credit losses17 (53)17 201 
Amounts recovered due to collection    
Balance at the end of the period$536 $810 $536 $810 

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 June 27, 2021.

12



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
June 27,
2021
December 31,
2020
(In thousands)
Machinery and equipment$13,869 $14,397 
Software13,444 13,192 
Computer equipment4,095 4,083 
Furniture and fixtures2,376 4,048 
Leasehold improvements
4,877 8,023 
Total property and equipment, gross38,661 43,743 
Accumulated depreciation and amortization(27,293)(27,922)
Total property and equipment, net$11,368 $15,821 

Depreciation and amortization expense pertaining to property and equipment was $1.6 million and $3.1 million for the three and six months ended June 27, 2021, respectively, and $2.3 million and $4.8 million for the three and six months ended June 28, 2020, respectively.

Long-lived Assets and Right-of-use Assets Impairment

During the second quarter of 2021, the Company evaluated its real estate lease portfolio in light of the COVID-19 pandemic and the changing nature of office space use by its workforce. This evaluation included the decision to sublease its office space in San Jose, California. This change in the circumstances for the San Jose office space use led management to test the recoverability of the carrying amount of the asset group related to the sublease. At May 25, 2021, the carrying amount of the asset group exceeds the Company's anticipated undiscounted value of the sublease income over the sublease term. Accordingly, the Company reviewed certain of its right-of-use assets and other lease related assets including leasehold improvements, furniture, fixtures and equipment under the sublease asset group for impairment in accordance with Accounting Standards Codification ("ASC") 360 "Property, Plant, and Equipment".

As a result of the evaluation, the Company recorded an impairment charge of $9.1 million, which includes $6.8 million associated with the right-of-use assets and $2.3 million associated with other lease related property and equipment assets, for the three and six months ended June 27, 2021.The assets indicated as impaired were written down to fair value as calculated using a discounted cash flow method (income approach). The fair value of the asset group was determined by utilizing projected cash flows from the sublease, discounted by a risk-adjusted discount rate that reflects the level of risk associated with receiving future cash flows. The inputs utilized in the analyses were classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement". Refer to Note 5, Fair Value Measurements for additional information about the fair value measured on a non-recurring basis and Note 9, Commitments and Contingencies, for further information about the sublease.

Goodwill

There was no change in the carrying amount of goodwill during the six months ended June 27, 2021. The goodwill as of December 31, 2020 and June 27, 2021 was $11.0 million.

Goodwill Impairment

13



ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 June 27, 2021 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.

Other non-current assets

As of
June 27,
2021
December 31,
2020
(In thousands)
Non-current deferred income taxes$1,384 $1,269 
Sublease initial direct cost1,049  
Deposits122 122 
Other964 1,008 
Total other non-current assets$3,519 $2,399 

Accrued liabilities

As of
June 27,
2021
December 31,
2020
(In thousands)
Sales and marketing$32,232 $38,577 
Sales returns
18,310 37,689 
Accrued employee compensation18,219 15,089 
Current operating lease liabilities 4,395 4,400 
Freight3,247 3,558 
Warranty obligation 1,805 2,451 
Other19,499 20,002 
Total accrued liabilities$97,707 $121,766 

14



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 June 27, 2021 and December 31, 2020:

As of June 27, 2021As of December 31, 2020
TotalQuoted market
prices in active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
TotalQuoted market
prices in active
markets
(Level 1)
Significant
other
observable
inputs
(Level 2)
(In thousands)
Assets:
Cash equivalents: money-market funds (<90 days)
$21,932 $21,932 $ $1,934 $1,934 $ 
Available-for-sale securities: U.S. treasuries (1)
   19,997 19,997  
Foreign currency forward contracts (2)
   24  24 
Total assets measured at fair value$21,932 $21,932 $ $21,955 $21,931 $24 
Liabilities:
Foreign currency forward contracts (3)
$20 $ $20 $199 $ $199 
Total liabilities measured at fair value$20 $ $20 $199 $ $199 
_________________________
(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 June 27, 2021 and December 31, 2020, 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 June 27, 2021 and December 31, 2020, the Company has 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. In the second quarter of 2021, in connection with the long-lived assets impairment analysis, certain lease related property and equipment assets and right-of-use asset were measured and written down to fair value on a nonrecurring basis as a result of impairment. The fair value measurements were determined using a discounted cash flow method with unobservable inputs and were classified
15



ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
within Level 3 of the fair value hierarchy. The fair value of the asset group was calculated by utilizing projected cash flows from the sublease, discounted by a market derived discount rate at 8.0%. As of May 25, 2021, the date of measurement, the fair value of the right-of-use asset and other lease related property and equipment assets were $8.1 million and $2.8 million, respectively. The Company recorded an impairment charge of $9.1 million on the assets measured at fair value on a non-recurring basis, which includes $6.8 million associated with the right-of-use assets and $2.3 million associated with other lease related property and equipment assets, for the three and six months ended June 27, 2021. Refer to Note 4, Balance Sheet Components, for further information about the impairment of the right-of-use asset and long-lived assets.

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.
16



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

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 June 27, 2021 and December 31, 2020 are summarized as follows:
Derivative AssetsBalance Sheet
Location
June 27, 2021December 31, 2020Balance Sheet
Location
June 27, 2021December 31, 2020
(In thousands)(In thousands)
Derivative assets not designated as hedging instrumentsPrepaid expenses and other current assets$ $22 Accrued liabilities$20 $199 
Derivative assets designated as hedging instrumentsPrepaid expenses and other current assets 2 Accrued liabilities  
Total$ $24 $20 $199 

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.

The following tables set forth the offsetting of derivative assets as of June 27, 2021 and December 31, 2020:
As of June 27, 2021Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
Gross Amounts of Recognized AssetsGross Amounts Offset in the Unaudited Condensed Consolidated Balance SheetsNet Amounts Of Assets Presented in the Unaudited Condensed Consolidated Balance SheetsFinancial InstrumentsCash Collateral PledgedNet Amount
(In thousands)
Wells Fargo Bank$ $ $ $ $ $ 
December 31, 2020Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
Gross Amounts of Recognized AssetsGross Amounts Offset in the Unaudited Condensed Consolidated Balance SheetsNet Amounts Of Assets Presented in the Unaudited Condensed Consolidated Balance SheetsFinancial InstrumentsCash Collateral PledgedNet Amount
(In thousands)
Wells Fargo Bank$24 $ $24 $(24)$ $ 


The following table sets forth the offsetting of derivative liabilities as of June 27, 2021 and December 31, 2020:
17



ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 27, 2021Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
Gross Amounts of Recognized LiabilitiesGross Amounts Offset in the Unaudited Condensed Consolidated Balance SheetsNet Amounts Of Liabilities Presented in the Unaudited Condensed Consolidated Balance SheetsFinancial InstrumentsCash Collateral PledgedNet Amount
(In thousands)
Wells Fargo Bank$20 $ $20 $ $ $20 
December 31, 2020Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
Gross Amounts of Recognized LiabilitiesGross Amounts Offset in the Unaudited Condensed Consolidated Balance SheetsNet Amounts Of Liabilities Presented in the Unaudited Condensed Consolidated Balance SheetsFinancial InstrumentsCash Collateral PledgedNet Amount
(In thousands)
Wells Fargo Bank$199 $ $199 $(24)$ $175 

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 and six months ended June 27, 2021. The effects of the Company's cash flow hedges on the unaudited condensed consolidated statements of operations for the three and six months ended June 27, 2021 are summarized as follows:
Three Months Ended June 27, 2021
Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges
RevenueCost of revenueResearch and developmentSales and marketingGeneral and administrative
(In thousands)
Statements of operations$98,571 $72,402 $16,251 $12,459 $13,559 
Gains (losses) on cash flow hedge$ $