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ARLO TECHNOLOGIES, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

Forward-looking Statements

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

Business and Executive Overview

Arlo combines an intelligent cloud infrastructure and mobile app with a variety
of smart connected devices that are transforming the way people experience the
connected lifestyle. Arlo's deep expertise in product design, wireless
connectivity, cloud infrastructure and cutting-edge AI capabilities focuses on
delivering a seamless, smart home experience for Arlo users that is easy to
setup and interact with every day. Our cloud-based platform provides users with
visibility, insight and a powerful means to help protect and connect in
real-time with the people and things that matter most, from any location with a
Wi-Fi or a cellular connection. Since the launch of our first product in
December 2014, we have shipped over 25.1 million smart connected devices, and as
of July 3, 2022, the Arlo platform had approximately 6.6 million cumulative
registered accounts across more than 100 countries around the world.

We conduct business across three geographic regions-(i) the Americas; (ii)
Europe, Middle-East and Africa ("EMEA"); and (iii) Asia Pacific ("APAC") and we
primarily generate revenue by selling devices through retail, wholesale
distribution, wireless carrier channels, security solution providers, Arlo's
direct to consumer store and paid subscription services. International revenue
was 49.6% and 32.5% of our revenue for the three months ended July 3, 2022 and
June 27, 2021, respectively, and 48.6% and 35.9% of our revenue for the six
months ended July 3, 2022 and June 27, 2021, respectively.

For the three months ended July 3, 2022 and June 27, 2021, we generated revenue
of $119.0 million and $98.6 million, respectively, representing a year-over-year
increase of 20.7%. For the six months ended July 3, 2022 and June 27, 2021, we
generated revenue of $243.7 million and $181.1 million, respectively,
representing a year-over-year increase of 34.6%. Loss from operations were $11.3
million and $25.8 million for the three months ended July 3, 2022 and June 27,
2021, respectively. Loss from operations were $20.0 million and $37.3 million
for the six months ended July 3, 2022 and June 27, 2021, respectively.

On November 4, 2019, we concurrently entered into an Asset Purchase Agreement
(the "Purchase Agreement") and Supply Agreement (the "Supply Agreement" and
together with the Purchase Agreement, the "Verisure Agreements") with Verisure.
Under the Supply Agreement, Verisure became the exclusive distributor of our
products in Europe for all channels, and non-exclusively distribute our products
through its direct channels globally for an initial term of five years.

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
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many factors, including our ability to innovate and launch successful new
products on a timely basis and grow our installed base, to increase
subscription-based recurring revenue, to invest in brand awareness and channel
partnerships and to continue our global expansion. We expect to increase our
investment in research and development going forward as we continue to introduce
new and innovative products and services to enhance the Arlo platform and
compete for engineering talent. We also expect to significantly increase our
Sales and Marketing expense as we invest in new campaigns to increase awareness
of and preference for the Arlo brand.

Key Business Metrics

In addition to the measures presented in our unaudited condensed consolidated
financial statements, we use the following key metrics to evaluate our business,
measure our performance, develop financial forecasts and make strategic
decisions. We believe these key business metrics provide useful information by
offering the ability to make more meaningful period-to-period comparisons of our
on-going operating results and a better understanding of how management plans
and measures our underlying business. Our key business metrics may be calculated
in a manner different from the same key business metrics used by other
companies. We regularly review our processes for calculating these metrics, and
from time to time we may discover inaccuracies in our metrics or make
adjustments to better reflect our business or to improve their accuracy,
including adjustments that may result in the recalculation of our historical
metrics. We believe that any such inaccuracies or adjustments are immaterial
unless otherwise stated.
                                                         As of
                                     July 3, 2022         % Change      June 27, 2021
                                         (In thousands, except percentage data)
Cumulative registered accounts             6,640            20.1  %             5,527
Cumulative paid accounts                   1,478           112.7  %               695
Annual recurring revenue         $       116,601            67.2  %    $       69,753



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

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

Annual Recurring Revenue ("ARR"). Effective as of the quarter ended October 3,
2021, we have adopted ARR as one of the key indicators of our business
performance. We believe ARR enables measurement of our business initiatives, and
serves as an indicator of our future growth. ARR represents the amount of paid
service revenue that we expect to recur annually and is calculated by taking our
recurring paid service revenue for the last calendar month in the fiscal
quarter, multiplied by 12 months. Recurring paid service revenue represents the
revenue we recognize from our paid accounts and excludes prepaid service revenue
and Non-Recurring Engineering ("NRE") service revenue from strategic partners.
The ARR for the comparative period presented was derived following the same
methodology. ARR is a performance metric and should be viewed independently of
revenue and deferred revenue, and is not intended to be a substitute for, or
combined with, any of these items.
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Impact of COVID-19, Global Geopolitical, Economic and Business Conditions

We continue to closely monitor developments and are taking steps to mitigate the
potential risks related to the COVID-19 pandemic to us, our employees and our
customers. The extent of the impact of the COVID-19 pandemic on our business
operations will depend on future developments, including the duration of the
pandemic, the broader implications of the macro-economic recovery and the impact
on overall customer demand, all of which are uncertain and cannot be predicted.
Our priorities and actions during the COVID-19 pandemic continue to be focused
on protecting the health and safety of all those we serve, our employees, our
customers, our suppliers and our communities, including implementing continuous
updates to our health and safety policies and processes and progress made
through vaccinations. We continue to instruct all but a limited number of our
global workforce to work remotely as a precautionary measure intended to
minimize the risk of the virus to them and the communities in which we operate,
while we continue to focus on providing our team with the resources that they
need to meet the needs of our customers and deliver new innovations to the
markets we serve, despite challenges presented by the COVID-19 pandemic. We also
continue to work with our suppliers to address any supply chain disruptions,
which might include larger component backlogs, component cost increases, travel
restrictions and logistics changes that can impact our operations. For example,
increased demand for electronics as a result of the COVID-19 pandemic increased
demand for chips in the automotive industry and certain other factors have led
to a global shortage of semiconductors. As a result, we have experienced
component shortages, including longer lead times for components and supply
constraints that have affected both our ability to meet scheduled product
deliveries and worldwide demand for our products. Also, as a result of the
COVID-19 pandemic, our supply chain partners are limited by production capacity,
constrained by material availability, labor shortages, factory uptime and
freight capacity, each of which constrains our ability to capitalize fully on
end-market demand. As of July 3, 2022, international freight capacity remains
depressed compared to pre-pandemic levels, and this has caused, and continues to
cause, air and ocean freight rates to materially increase compared to
pre-pandemic levels. Furthermore, transit times have also increased, causing us
to rely more on air freight in order to meet our customers' demands. For the
three and six months ended July 3, 2022, we saw a 27% and 176% increase in
freight-in expense compared to the prior year periods, respectively, as a result
of the higher sea and air freight rates and component shortages which
necessitated use of air freight to meet customer requested delivery dates. We
expect supply chain constraints to persist through 2022. While we believe we
have been broadly successful in navigating COVID-19 related challenges to date,
any further disruptions to our supply chain and operations could have a
significant negative impact on our net revenue, gross and operating margin
performance. In addition, as a result of the COVID-19 pandemic, ongoing conflict
in Ukraine, supply chain disruptions, inflation, lower consumer confidence and
rising interest rates, we could experience material charges from potential
adjustments of the carrying value of our inventories and trade receivables,
impairment charges on our long-lived assets, intangible assets and goodwill, and
changes in the effectiveness of our hedging instruments, among others.

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

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Results of Operations

We operate as one operating and reportable segment. The following table sets
forth, for the periods presented, the unaudited condensed consolidated
statements of operations data, which we derived from the accompanying unaudited
condensed consolidated financial statements:
                                                         Three Months Ended                                                       Six Months Ended
                                             July 3,                            June 27,                             July 3,                            June 27,
                                              2022                                2021                                2022                                2021
                                                                                   (In thousands, except percentage data)
Revenue:
Products                          $  86,191             72.4  %       $  73,311             74.4  %       $ 181,016             74.3  %       $ 133,072             73.5  %

Services                             32,788             27.6  %          25,260             25.6  %          62,714             25.7  %          48,055             26.5  %

Total revenue                       118,979            100.0  %          98,571            100.0  %         243,730            100.0  %         181,127            100.0  %
Cost of revenue:
Products                             73,829             62.1  %          62,019             62.9  %         154,606             63.4  %         109,176             60.3  %

Services                             11,410              9.6  %          10,383             10.5  %          21,809              8.9  %          19,975             11.0  %

Total cost of revenue                85,239             71.6  %          72,402             73.5  %         176,415             72.4  %         129,151             71.3  %
Gross profit                         33,740             28.4  %          26,169             26.6  %          67,315             27.6  %          51,976             28.7  %
Operating expenses:
Research and development             17,402             14.6  %          16,251             16.5  %          33,781             13.9  %          31,042             17.1  %
Sales and marketing                  14,506             12.2  %          12,459             12.6  %          27,674             11.4  %          23,666             13.1  %
General and administrative           13,149             11.1  %          13,559             13.8  %          25,770             10.6  %          24,786             13.7  %
Impairment charges                        -                -  %           9,116              9.2  %               -                -  %           9,116              5.0  %
Separation expense                       25              0.0  %             605              0.6  %             104              0.0  %             659              0.4  %

Total operating expenses             45,082             37.9  %          51,990             52.7  %          87,329             35.8  %          89,269             49.3  %
Loss from operations                (11,342)            (9.5) %         (25,821)           (26.2) %         (20,014)            (8.2) %         (37,293)           (20.6) %
Interest income (expense), net          129              0.1  %               3                -  %             124              0.1  %              27                -  %
Other income (expense), net            (116)            (0.1) %           2,662              2.7  %             295              0.1  %           3,571              2.1  %
Loss before income taxes            (11,329)            (9.5) %         (23,156)           (23.5) %         (19,595)            (8.0) %         (33,695)           (18.6) %
Provision for income taxes              228              0.2  %             164              0.2  %             441              0.2  %             344              0.2  %
Net loss                          $ (11,557)            (9.7) %       $ (23,320)           (23.7) %       $ (20,036)            (8.2) %       $ (34,039)           (18.8) %



Revenue

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

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

Under the Supply Agreement, Verisure became the exclusive distributor of our
products in Europe for all channels, and will non-exclusively distribute our
products through its direct channels globally for an initial term of five years.
During the five-year period commencing January 1, 2020, Verisure has an
aggregate product purchase commitment of $500.0 million. As of July 3, 2022,
$255.6 million of the purchase commitment has been fulfilled. The Supply
Agreement also provides for certain NRE services to Verisure, including
developing certain custom products specified by Verisure in exchange for an
aggregate of $13.5 million, payable in installments upon meeting certain
development milestones. As of July 3, 2022, Verisure has paid the full cash
consideration of $13.5 million for these NRE services. For the three months
ended July 3, 2022 and June 27, 2021, we recognized service revenue of $0.2
million and $2.0 million, respectively, for these NRE services.

We conduct business across three geographic regions: Americas, EMEA, and APAC.
We generally base revenue by geography on the ship-to location of the customer
for device sales and device location for service sales.

                                   Three Months Ended                             Six Months Ended
                          July 3,                      June 27,        July 3,                       June 27,
                            2022         % Change        2021            2022         % Change         2021
                                                (In thousands, except

percentage data)

Americas                $  60,345          (9.5) %    $ 66,681       $ 128,811          10.7  %    $ 116,317
Percentage of revenue        50.7  %                      67.6  %         52.8  %                       64.2  %

EMEA                       54,483         117.1  %      25,101         104,458         110.2  %       49,692
Percentage of revenue        45.8  %                      25.5  %         42.9  %                       27.4  %

APAC                        4,151         (38.9) %       6,789          10,461         (30.8) %       15,118
Percentage of revenue         3.5  %                       6.9  %          4.3  %                        8.4  %

Total revenue           $ 118,979          20.7  %    $ 98,571       $ 

243,730 34.6 % $ 181,127



Revenue for the three and six months ended July 3, 2022 increased 20.7% and
34.6%, compared to the prior year periods, respectively, primarily due to higher
product sales and service revenue. Product revenue increased by $12.9 million,
or 17.6% and $47.9 million, or 36.0% for the three and six months ended July 3,
2022 compared to the prior year periods, respectively, primarily driven by an
increase in product shipments in EMEA due to stronger customer demand and the
launch of a customized camera in the Verisure Security channel, partially offset
by decrease in product sales in Americas and APAC, and higher provisions for
sales returns in Americas due to higher return rates in the current period that
are deemed to be a reduction of revenue. Service revenue increased by $7.5
million, or 29.8% and $14.7 million, or 30.5% for the three and six months ended
July 3, 2022 compared to the prior year periods, respectively, primarily due to
an increase in paid accounts, partially offset by a decrease in Verisure NRE
revenue recognition.

Cost of Revenue

Cost of revenue consists of both product costs and costs of service. Product
costs primarily consist of: the cost of finished products from our third-party
manufacturers 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. Cost of service consists 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 the Verisure NRE arrangements.

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Our cost of revenue as a percentage of revenue can vary based upon a number of
factors, including those that may affect our revenue set forth above and factors
that may affect our cost of revenue, including, without limitation: product mix,
sales channel mix, registered accounts' acceptance of paid subscription service
offerings, fluctuation in foreign exchange rates and changes in our cost of
goods sold due to fluctuations in prices paid for components, net of vendor
rebates, cloud platform costs, warranty and overhead costs, inbound freight and
duty product conversion costs, charges for excess or obsolete inventory, and
amortization of acquired intangibles. We outsource our manufacturing,
warehousing, and distribution logistics. We also outsource certain components of
the required infrastructure to support our cloud-based back-end IT
infrastructure. We believe this outsourcing strategy allows us to better manage
our product and service costs and gross margin.

The following table presents cost of revenue and gross margin for the periods
indicated:
                                  Three Months Ended                           Six Months Ended
                          July 3,                     June 27,       July 3,                     June 27,
                           2022         % Change        2021          2022         % Change        2021
                                              (In thousands, except percentage data)
Cost of revenue:
Products                $  73,829         19.0  %    $ 62,019      $ 154,606         41.6  %    $ 109,176

Services                   11,410          9.9  %      10,383         21,809          9.2  %       19,975
Total cost of revenue   $  85,239         17.7  %    $ 72,402      $ 176,415         36.6  %    $ 129,151



Cost of product revenue increased 19.0% and 41.6% for the three and six months
ended July 3, 2022 compared to the prior year periods, respectively, primarily
due to increases in gross shipments plus the increases in costs of materials and
components of our products and freight cost. Cost of service revenue increased
9.9% and 9.2% for the three and six months ended July 3, 2022 compared to the
prior year periods, respectively, as a result of service revenue growth, offset
by cost optimizations.

Gross Profit

The following table presents gross profit for the periods indicated:

                                                 Three Months Ended                                             Six Months Ended
                                  July 3,                                    June 27,           July 3,                                 June 27,
                                   2022                  % Change              2021              2022               % Change              2021
                                       (In thousands, except percentage data)
Gross profit:
Products                     $      12,362                     9.5  %       $ 11,292          $ 26,410                   10.5  %       $ 23,896

Services                            21,378                    43.7  %         14,877            40,905                   45.7  %         28,080
Total gross profit           $      33,740                    28.9  %       $ 26,169          $ 67,315                   29.5  %       $ 51,976
Gross margin percentage:
Products                              14.3   %                                  15.4  %           14.6  %                                  18.0  %

Services                              65.2   %                                  58.9  %           65.2  %                                  58.4  %
Total gross margin
percentage                            28.4   %                                  26.6  %           27.6  %                                  28.7  %



Gross profit increased 28.9% and 29.5% for the three and six months ended
July 3, 2022, compared to the prior year periods, respectively, due to a
combination of both product and service revenue increases. The product gross
profit increase is primarily due to an increase in product revenue and lower
provisions for marketing expenditures that are deemed to be reductions of
revenue, partially offset by higher product costs and provision for sale
returns. The service gross profit increase is primarily due to growth in paid
service revenue due to an increase in paid accounts and cost optimizations
implemented.

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Operating Expenses

Research and Development

Research and development expense consists primarily of personnel-related
expense, safety, security, regulatory services and testing, other research and
development consulting fees, and corporate IT and facilities overhead. We
recognize research and development expenses as they are incurred. 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. Research and development expense directly attributable to
delivering the Verisure NRE is recognized in cost of service.

The following table presents research and development expense for the periods
indicated:
                                                    Three Months Ended                                           Six Months Ended
                                     July 3,                                  June 27,           July 3,                                 June 27,
                                       2022               % Change              2021              2022               % Change              2021
                                                                        (In thousands, except percentage data)
Research and development expense   $  17,402                    7.1  %       $ 16,251          $ 33,781                    8.8  %       $ 31,042



Research and development expense increased $1.2 million for the three months
ended July 3, 2022, compared to the prior year period, primarily due to an
increase of $0.8 million in outside professional services and an increase in
certain research and development expenses amounting to $0.8 million, as result
of a reduction in the amount of work performed on Verisure NRE projects
classified as a cost of service revenue, partially offset by a decrease of $0.4
million in IT and facility overhead and other expenses. Research and development
expense increased $2.7 million for the six months ended July 3, 2022, compared
to the prior year period, primarily due to an increase of $1.7 million in
outside professional services and an increase in certain research and
development expenses amounting to $1.4 million, as a result of a reduction in
the amount of work performed on Verisure NRE projects which are classified as
cost of service revenue, partially offset by a decrease of $0.4 million in other
expenses.

Sales and Marketing

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

The following table presents sales and marketing expense for the periods
indicated:
                                        Three Months Ended                          Six Months Ended
                                July 3,                     June 27,      July 3,                     June 27,
                                 2022         % Change        2021          2022        % Change        2021
                                                   (In thousands, except

percentage data)
Sales and marketing expense $ 14,506 16.4 % $ 12,459 $ 27,674 16.9 % $ 23,666



Sales and marketing expense increased $2.0 million for the three months ended
July 3, 2022, compared to the prior year period, primarily due to increases of
$1.4 million in marketing expenditures, primarily for the production of creative
content and other preparatory work for our upcoming awareness advertising
campaign, $0.6 million in personnel-related expenses and $0.4 million in credit
card processing fees, partially offset by a decrease of $0.3 million in outside
professional services. Sales and marketing expense increased $4.0 million for
the six months ended July 3, 2022, compared
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to the prior year period, primarily due to increases of $2.3 million in
marketing expenditures, primarily for the production of creative content and
other preparatory work for our upcoming awareness advertising campaign,
$1.4 million in personnel-related expenses, $0.8 million in credit card
processing fees, $0.2 million in IT and facility overhead and $0.2 million in
sales freight-out expenses, partially offset by decreases of $0.9 million in
outside professional services.

General and Administrative

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

The following table presents general and administrative expense for the periods
indicated:
                                                       Three Months Ended                                           Six Months Ended
                                        July 3,                                  June 27,           July 3,                                 June 27,
                                          2022               % Change              2021              2022               % Change              2021
                                                                           (In thousands, except percentage data)
General and administrative expense    $  13,149                   (3.0) %       $ 13,559          $ 25,770                    4.0  %       $ 24,786



General and administrative expense decreased $0.4 million for the three months
ended July 3, 2022, compared to the prior year period, primarily due to an
increase of $0.7 million in personnel-related expenses, offset by decreases of
$0.7 million in legal and professional services, $0.3 million in IT and facility
overhead, and $0.1 million in other expenses. General and administrative expense
increased $1.0 million for the six months ended July 3, 2022, compared to the
prior year period, primarily due to an increase of $2.5 million in
personnel-related expenses, partially offset by decreases of $0.7 million in
legal and professional services, $0.6 million in IT and facility overhead, and
$0.2 million in other expenses.

Impairment Charges

The following table presents impairment charges for the periods indicated:

                                  Three Months Ended                        

Six Months Ended

                         July 3,                         June 27,        July 3,                        June 27,
                           2022           % Change         2021            2022          % Change         2021
                                                (In thousands, except percentage data)
Impairment charges   $    -                       **    $  9,116      $    -                     **    $  9,116



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 of $9.1 million, which includes $6.8 million
associated with the right-of-use asset and $2.3 million associated with the
leasehold improvements and furniture, fixtures and equipment included in the San
Jose office asset group. Refer to Note 4, Balance Sheet Components, for further
information about the impairment of the right-of-use asset and long-lived
assets.

Separation Expense

Separation expense consists primarily of costs of legal and professional
services for IPO-related litigation associated with our separation from NETGEAR.

                                       43
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`

The following table presents separation expense for the periods indicated:

                                                   Three Months Ended                                             Six Months Ended
                                    July 3,                                  June 27,             July 3,                                    June 27,
                                     2022               % Change               2021                2022                 % Change               2021
                                                                         (In thousands, except percentage data)
Separation expense                $     25                  (95.9) %       $     605          $    104                      (84.2) %       $     659


Interest Income and Other Income (Expense), Net

The following table presents other income (expense), net for the periods
indicated:
                                                    Three Months Ended                                               Six Months Ended
                                      July 3,                                  June 27,            July 3,                                     June 27,
                                        2022                % Change             2021               2022                  % Change               2021
                                                                           (In thousands, except percentage data)
Interest income (expense), net    $     129                          **       $      3                124                          **              27
Other income (expense), net       $    (116)                         **       $  2,662                295                          **           3,571


**Percentage change not meaningful.

Our interest income was primarily earned from our short-term investments and
cash and cash equivalents. We expect our interest income in absolute dollars to
marginally increase as interest rates are expected to increase, while we deploy
our short-term investments and cash and cash equivalents to fund our operations.

Other income (expense), net primarily represents gains and losses on
transactions denominated in foreign currencies, foreign currency contract gain
(loss), net, and other miscellaneous income and expense. We have also included
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 in Other income.

Other income (expense), net decreased $2.8 million for the three months ended
July 3, 2022, compared to the prior year period, primarily due to a decrease of
$1.8 million in ERC under the CARES Act, which was recognized as Other income in
the second quarter of 2021, and a decrease of $0.8 million in Verisure TSA
related income. Other income (expense), net decreased $3.3 million for the six
months ended July 3, 2022, compared to the prior year period, primarily due to a
decrease of $1.8 million in ERC under the CARES Act, which was recognized as
Other income in the second quarter of 2021, and a $1.5 million decrease in
Verisure TSA related income.

Provision for Income Taxes
                                                    Three Months Ended                                             Six Months Ended
                                   July 3,                                      June 27,           July 3,                                  June 27,
                                     2022                   % Change              2021               2022               % Change              2021
                                                                        (In thousands, except percentage data)
Provision for income taxes       $    228                        39.0  %       $    164          $    441                    28.2  %       $    344
Effective tax rate                   (2.0)  %                                      (0.7) %           (2.3)  %                                  (1.0) %



The Company's provision for income taxes was primarily attributable to income
taxes on foreign earnings. The increase in provision for income taxes for the
three and six months ended July 3, 2022, compared to the prior year periods, was
primarily due to higher foreign earnings in the second quarter of 2022 and first
half of 2022, respectively. Consistent with the prior year, the Company
maintained a valuation allowance against its U.S. federal and state deferred tax
assets and did not record a tax benefit on these deferred tax assets since it is
more likely than not that these deferred tax assets will not be realized.

                                       44
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`

Liquidity and Capital Resources

We have a history of losses and may continue to incur operating and net losses
for the foreseeable future. As of July 3, 2022, our accumulated deficit was
$308.8 million.

Our principal sources of liquidity are cash, cash equivalents and short-term
investments. Short-term investments are marketable 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
in our name with a high quality financial institution, which acts as our
custodian and investment manager. As of July 3, 2022, we had cash, cash
equivalents and short-term investments totaling $135.3 million. 34.6% of our
cash and cash equivalents were held outside of the U.S. Starting in 2018, the
Tax Cuts and Jobs Act of 2017 (the "Tax Act") impact on the repatriation of
foreign earnings is generally immaterial. The cash and cash equivalents balance
outside of the U.S. is subject to fluctuation based on the settlement of
intercompany balances. On October 27, 2021, we entered into a Loan and Security
Agreement with Bank of America, N.A. for a $40.0 million three-year revolving
credit facility. Refer to Note 8. Debt for further information about the terms
and structure of the credit facility.

Based on our current plans, the Loan and Security 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. However, in the future, including sooner than may be
anticipated, we may require or desire additional funds to support our operating
expenses and capital requirements or for other purposes, such as acquisitions,
and may seek to raise such additional funds through public or private equity or
debt financings or collaborative agreements or from other sources. However, the
COVID-19 pandemic continues to rapidly evolve and has already resulted in a
significant disruption of global financial markets, which have also been
impacted by ongoing supply chain disruptions, rising interest rates, lower
consumer confidence and inflation. If the disruption persists and deepens, we
could experience an inability to access additional capital, which could in the
future negatively affect our capacity to support our operating expenses and
capital requirements or for other purposes, such as acquisitions.

We have no commitments to obtain such additional financing and cannot assure you
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. Our future liquidity and cash requirements will depend on numerous
factors, including the introduction of new products, the growth in our service
revenue, as well as the ability to increase our gross margin dollars and
continue to maintain controls over our operating expenditures.

Cash Flow

The following table presents our cash flows for the periods presented:

                                                                Six Months Ended
                                                             July 3,       June 27,
                                                              2022           2021
                                                                 (In thousands)
     Net cash used in operating activities                 $ (29,381)     $

(23,466)

Net cash provided by (used in) investing activities (50,429)

18,934

     Net cash used in financing activities                   (10,384)      
 (2,948)
     Net cash decrease                                     $ (90,194)     $  (7,480)



                                       45
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`

Operating activities

Net cash used in operating activities increased by $5.9 million for the six
months ended July 3, 2022 compared to the prior year period. This increase
comprised an increase in working capital used in operations of $13.3 million,
offset by a $7.4 million reduction in adjusted net loss reconciled to net cash
used in operating activities. The increase in working capital used in operations
was mainly driven by lower collections from customers primarily as a result of a
change in customer mix and associated payment terms and higher inventory
purchases, partially offset by lower payments to suppliers.

Our days' sales outstanding ("DSO") increased to 57 days as of July 3, 2022
compared to 50 days as of December 31, 2021, primarily as a result of changes in
customer mix and associated payment terms. Inventory increased marginally to
$39.2 million as of July 3, 2022 from $38.4 million as of December 31, 2021, due
to higher inventory purchases in line with product shipments. Our ending
inventory turns were 7.5x in the three months ended July 3, 2022 down from 10.5x
turns in the three months ended December 31, 2021, primarily as a result of the
normal seasonality in our business. Our accounts payable decreased to $77.4
million as of July 3, 2022 from $84.1 million as of December 31, 2021, primarily
due to timing of supplier payments.

Investing activities

Net cash used in investing activities increased by $69.4 million for the six
months ended July 3, 2022 compared to the prior year period, primarily due to
purchases of short-term investments.

Financing activities

Net cash used in financing activities was $10.4 million for the six months ended
July 3, 2022, representing tax withholdings from restricted stock unit releases
of $13.6 million, offset by proceeds from ESPP contributions and exercises of
stock options of $3.2 million. Net cash used in financing activities was $2.9
million for the six months ended June 27, 2021, representing tax withholdings
from restricted stock unit releases of $9.1 million, offset by proceeds from
ESPP contributions and exercises of stock options of $6.1 million.

Contractual Obligations

Our principal commitments consist of obligations under operating leases for
office space, equipment, data center facilities and distribution center
facilities, as well as non-cancellable purchase commitments. Refer to Note 9.
Commitments and Contingencies, in Notes to Unaudited Condensed Consolidated
Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q
for a complete discussion of our contractual obligations.

Critical Accounting Policies and Estimates

For a complete description of what we believe to be the critical accounting
policies and estimates used in the preparation of our Unaudited Condensed
Consolidated Financial Statements, refer to our Annual Report on Form 10-K for
the year ended December 31, 2021. There have been no material changes to our
critical accounting policies and estimates during the six months ended July 3,
2022, other than as discussed in Note 2. Significant Accounting Policies and
Recent Accounting Pronouncements, in the Notes to Unaudited Condensed
Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report
on Form 10-Q.

                                       46

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