UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended December 31 , 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission file no. 001-36414
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices, including zip code)
(781 ) 430-3000
(Registrant’s telephone number, including area code)
_______________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check-mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check-mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 þ 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 þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☑ | 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
The aggregate market value of the Common Stock held by nonaffiliates of the registrant was approximately $1.0 billion based on the last reported sale of the Common Stock on The Nasdaq Global Select Market on July 2, 2022, the last business day of the registrant's most recently completed second fiscal quarter.
As of January 27, 2023, there were 27,423,694 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
iROBOT CORPORATION
ANNUAL REPORT ON FORM 10-K
Year Ended December 31, 2022
TABLE OF CONTENTS
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| Part I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Part II | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| Item 9C. | ||||||||
| Part III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| Part IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K (this "Annual Report") contains forward-looking statements. All statements other than statements of historical facts contained in this Annual Report, including statements regarding our future results of operations and financial position, business strategy, plans and objectives of management for future operations, and plans for product development, launches and manufacturing, ability to address consumer needs, expansion of our addressable market and connected consumer base, factors for differentiation of our products, our competition, our market position, market acceptance of our products, seasonal factors, the impact of promotional activity and tariffs, efforts to refine value proposition and related results, efforts to mitigate supply chain challenges, plans for the production of robots, strategic alliances and product integration plans are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss certain of these risks in greater detail in the "Risk Factors" section and elsewhere in this Annual Report. Also, these forward-looking statements speak only as of the date of this Annual Report, and we have no plans to update our forward-looking statements to reflect events or circumstances occurring after the date of this Annual Report. We caution readers not to place undue reliance upon any such forward-looking statements.
iRobot and its stylized logo, Roomba, Roomba Combo, Clean Base, iRobot OS, iRobot Genius Home Intelligence, NorthStar, Create, Clean Map, iAdapt, Home Base, Looj, Braava, Braava jet, AeroForce, AllergenLock, Better Together, PerfectEdge, P.O.O.P. Pet Owner Official Promise, Corners. Edges. And the Details in Between., Imprint, Mirra, Root, Terra, vSLAM and Virtual Wall are trademarks of iRobot Corporation (together with its subsidiaries, "iRobot", the "Company", "we", "us" or "our").
Overview
iRobot is a leading global consumer robot company that designs and builds robots that empower people to do more. With over 30 years of artificial intelligence ("AI") and advanced robotics experience, we are focused on building thoughtful robots and developing intelligent home innovations that help make life better for millions of people around the world. iRobot's portfolio of home robots and smart home devices features proprietary technologies for the connected home and advanced concepts in cleaning, mapping and navigation, human-robot interaction and physical solutions. Leveraging this portfolio, we plan to add new capabilities and expand our offerings to help consumers make their homes easier to maintain, more efficient, more secure and healthier places to live.
Since our founding in 1990, we have developed the expertise necessary to design, build, sell and support durable, high-performance and cost-effective robots through the close integration of software, electronics and hardware. Following the introduction of the Roomba robotic vacuum cleaner ("RVC") in 2002, we have sold nearly 50 million consumer robots worldwide to become a global, market-leading consumer robotics innovator with a strong presence in a number of major geographic regions worldwide. Our core technologies serve as reusable building blocks that we adapt and expand to create next-generation robotic platforms. We believe that this approach accelerates the time to market while also reducing the costs, time and other risks associated with product development. These capabilities are amplified by iRobot OS, an evolution of our Genius Home Intelligence platform. The software intelligence of iRobot OS powers our portfolio of connected robotic floor care products, enabling an ever-expanding range of new features and thoughtful digital experiences that improve overall cleaning performance, personalization and control. By leveraging our considerable expertise and ongoing investment in AI, home understanding and machine vision technologies, iRobot OS provides consumers with greater control over where, when and how our robots work, simple integration with other smart home devices, thoughtful recommendations to further enhance the cleaning experience, and the ability to share and transfer home knowledge across multiple iRobot robots. We believe that the capabilities within iRobot OS will support our long-term vision of building out a larger ecosystem that encompasses a broader range of adjacent robotic and smart home categories. We believe that our significant expertise in robot design, engineering, and smart home technologies and targeted focus on understanding and addressing consumer needs, positions us well to expand our total addressable market and capitalize on the anticipated growth in a wider range of robotic and smart home categories.
Merger Agreement
On August 4, 2022, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Amazon.com, Inc., a Delaware corporation ("Parent" or "Amazon") and Martin Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), pursuant to which Merger Sub will merge with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent. As a result of the Merger, each share of common stock of the Company, par value $0.01 per share ("Common Stock"), outstanding immediately prior to the effective time of the Merger (the "Effective Time") (subject to certain exceptions, including shares of
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Common Stock owned by the Company, Merger Sub, Parent or any of their respective direct or indirect wholly owned subsidiaries and shares of Common Stock owned by stockholders of the Company who have validly demanded and not withdrawn appraisal rights in accordance with Section 262 of the General Corporation Law of the State of Delaware) will, at the Effective Time, automatically be cancelled and converted into the right to receive $61.00 in cash, without interest and subject to applicable withholding taxes. If the Merger is consummated, the Company’s Common Stock will be delisted from the Nasdaq Stock Market LLC and deregistered under the Securities Exchange Act of 1934.
2022 Financial Performance
Our total revenue for fiscal 2022 was $1,183.4 million, declining 24.4% from revenue of $1,565.0 million in fiscal 2021. Geographically, domestic revenue declined by $139.1 million, or 18.4%, and international revenue declined by $242.5 million, or 29.9%. Entering 2022, we were focused on further expanding our business by addressing a range of supply chain challenges that constrained our financial performance in 2021. Although we made considerable progress in addressing those supply chain challenges, market conditions in our two largest regions, North America and EMEA, eroded considerably over the course of 2022. In North America, consumer spending was impacted by high inflation, rising energy costs and slowing growth while consumer spending across EMEA was affected by the combination of a recessionary climate in many European countries and geopolitical instability, highlighted by the Russia-Ukraine war. These macroeconomic trends resulted in lower overall category demand and order reductions, delays and cancellations from retailers and distributors in those two regions. While we took actions in August 2022 to better align our spending with lower revenue levels, the magnitude of the revenue decrease resulted in a significant operating loss in 2022.
Strategy & 2022 Highlights
Our strategy to improve our near-term financial performance and ultimately drive sustainable, profitable growth over the long term remains focused on four concepts: innovate, get, keep and grow – all of which is enabled by our talent, operational excellence and an expansive range of data and insights about our products and the consumers who purchase them.
•Innovate: We are focused on maintaining our RVC category leadership by continuing to fund innovation. We typically deliver new, high-value functionality and features in our newest products. We also focus on cost-optimizing our innovations in ways that extend those capabilities across our portfolio. In addition to continuing to advance beautifully designed, high-performance hardware platforms, our investments in research and development also support ongoing advances in our iRobot OS platform by leveraging our extensive AI, home understanding and machine vision capabilities. We believe that software intelligence will be increasingly critical for differentiating our floor cleaning robots and other home innovations. During 2022, we delivered several important new innovations while also taking steps to protect our innovations:
◦We launched two upgrades to our iRobot OS platform, delivering new features and digital experiences across our entire portfolio of WiFi-connected floor cleaning robots.
◦In September 2022, we introduced the Roomba Combo™ j7+, an advanced floor cleaning robot that can vacuum and mop in a single cleaning job.
◦iRobot’s patent infringement action against SharkNinja Operating LLC and its related entities ("SharkNinja") received a favorable initial determination at the International Trade Commission ("ITC"). The initial determination recommends that the ITC issue an order barring the importation of various infringing SharkNinja robotic cleaning products.
•Get: This element of our strategy is based on expanding our base of connected customers who have opted into communications with us either through our Home App, email or both. As we move forward, we believe that our extensive network of retailers and distributors around the world will remain critical in enabling us to continue expanding our connected customer base.
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◦We ended 2022 with 17.6 million connected customers, an increase of 26% from 2021.
•Keep: It is important that our customers are happy with the performance of our products and use them consistently. We believe that a highly satisfied iRobot customer is more likely to recommend our products to others and purchase more products and accessories directly from us over the course of their ownership. Accordingly, we plan to invest in features and functionality aimed at elevating the iRobot experience as well as in our customer care organization.
◦Over the past 12 months, we have taken steps to further enhance our customer care capabilities and elevate product quality, the combination of which has helped us reduce our warranty expense and drive improvement in our customer satisfaction ratings and net promoter scores.
•Grow: An important element in our plan to drive profitable growth over the long term is increasing revenue from our existing customers. To motivate more customers to purchase our products and services more frequently directly from us, we continue to invest in enhancing the online buying experience on our website and through our Home App as well as by implementing marketing systems and tools designed to enable us to target the right customers at the right time with the right promotions. Product diversification, while less practical in the near-term given current market conditions, remains strategically important for expanding existing customer revenue. Accordingly, we have adjusted our 2023 plans to limit investment in non-robotic product development while continuing to devote resources that can broaden our robotic product portfolio over the longer term.
◦We continued to deliver enhancements to support e-commerce on our websites and Home app, as well as help nurture customer spending over the long-term;
◦Revenue from existing end customers grew 8.9% in fiscal 2022;
◦Many existing customers purchased their products directly from us online, a dynamic which helped underpin 3.4% growth in our direct-to-consumer revenue in fiscal 2022.
Technology
Since the Roomba’s introduction in 2002, we have continuously pursued innovation and introduced a wide range of powerful features and functionality that have been favorably received by customers, helped extend our consumer robot technology and category leadership, and have further expanded our product portfolio. Over the past several years, we have focused on research and development initiatives that elevate the iRobot experience by combining beautifully designed, high-performance hardware with thoughtful intelligence. We believe that this approach enables us to advance overall cleaning efficacy and performance, increase autonomy of our products, and enable personalized control over how, when and where our robots clean. We believe that our products will continue to be increasingly differentiated by their software intelligence and are investing in our iRobot OS platform accordingly. By leveraging our robust connectivity and cloud infrastructure through Amazon Web Services and the ever-increasing processing power in our robots, we have built a Home Knowledge Cloud that can quickly and cost-effectively support over-the-air delivery of new digital features and enhanced functionality for customers globally. This infrastructure also allows us to collect valuable performance data that helps us identify and remedy product performance issues, improve the effectiveness of our support teams, and inform our short-term and long-term product roadmaps.
Our development roadmaps are shaped by our product management teams, interactions between customers and our support teams, a wide range of consumer studies and surveys, as well as analysis of extensive performance data of our robots in the field as discussed above. We believe that our iRobot OS platform will continue to play a key role in our ability to consistently deliver new features and functionality in our floor cleaning robots and other home innovations. We also plan to continue leveraging recent and ongoing investments in a range of technologies and interfaces, including artificial intelligence, home understanding and machine vision, that further improve cleaning efficacy, make our products easier to use and perform better, increase the trust that the user places in our products to successfully complete their missions, and tightly integrate our products into the lifestyles of our users.
Products & Services
We sell various products designed to empower people to do more in and around their homes. We believe our home floor cleaning robots deliver compelling and unique value to customers by providing a better way to clean that frees people from repetitive, time consuming home cleaning tasks. To ensure the continued adoption of our robots, we plan to continue to invest in the digital, data and physical products necessary to further improve the robots' cleaning efficacy, deliver the requisite intelligence to successfully complete missions without requiring user intervention, and offer personalized control over cleaning so that the robots fit seamlessly into the lifestyle of their owners. We also have taken and will continue to take steps aimed at diversifying our product portfolio, which we believe will help us increase our total addressable market, leverage our iRobot OS platform to support a larger ecosystem of robotic and smart home offerings, and drive profitable growth over the long term. We also continue to offer subscription services for our robotic floor cleaning robots, which provide subscribers with several
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important benefits: a lower initial out-of-pocket expense; an affordable monthly recurring membership fee for continued use of the product; dedicated customer care; accessories on demand; extended warranty coverage; and product upgrades.
Our products and services consist of the following offerings:
Home Maintenance Products: Floor Care Robots
•Roomba – We currently offer multiple Roomba floor vacuuming robots at suggested retail price points ranging from approximately $275 to $1,100 based upon features and performance characteristics. Our WiFi-connected Roomba robots are powered by our iRobot OS platform, which leverages our considerable expertise and ongoing investment in AI, home understanding and machine vision technologies to provide consumers with greater control over our products, simple integration with other smart home devices, provide recommendations to further enhance the cleaning experience and the ability to share and transfer home knowledge across multiple robots. Also included within the Roomba family is the Roomba Combo j7+, an advanced floor cleaning robot introduced in late 2022 that performs both mopping and vacuuming. To help ensure that our Roomba robots perform optimally, we also sell Roomba accessories and consumables, including the Clean Base® Automatic Dirt Disposal, replacement dirt disposal bags for the Clean Base, filters, brushes and batteries.
•Braava – We currently offer the Braava family of automatic floor mopping robots designed exclusively for hard-surface floors at suggested retail price points ranging from $199 to $500. Our WiFi-connected Braava robots are also powered by our iRobot OS platform. To help ensure that our Braava robots perform optimally, we also sell Braava accessories and consumables, including cleaning solution, washable and disposable mopping pads, replacement tanks and batteries.
•Subscription Services and Extended Warranties – We currently market several different subscription services and membership programs to customers for a monthly fee. We also directly offer extended warranties for our floor care robots, including an option to cover accidental damage in the U.S.
Home Maintenance Products: Cleaning Products
•H1 Handheld Vacuum – We currently offer a powerful portable vacuum designed to help people clean areas that Roomba cannot easily reach. This product is currently sold directly to consumers via our digital properties at a suggested retail price of $250. We also market accessories for this product including filters, chargers, batteries and an extension kit that converts the H1 into a stick vacuum.
Home Health Products: Air Purifiers
•Aeris Air Purifiers – We currently market a line of air purifiers under the Aeris brand at suggested retail price points ranging from $500 to $1,000. We also sell filters and fabric covers. We plan to introduce new air purifiers in select international markets under the iRobot brand during 2023.
Home Education Products: Coding Robots
•Root – We offer Root robots designed to help children learn how to code that range in price from $130 to $180. These products help broaden the impact of our STEM efforts and reinforce our commitment to making robotic technology more accessible to educators, students and parents.
•Create 3 – iRobot Create 3, priced at $375, is an affordable, preassembled mobile robot platform built from the blueprint of a Roomba robot vacuum that provides an out-of-the-box opportunity for educators, developers and high-school and college-age students to program behaviors, sounds, movements and add additional electronics.
Strategic Alliances
In addition to our internal technology development, we leverage relevant robotic technologies through licensing, acquisitions, venture investments and/or other partnerships. These strategic alliances are an important part of our product development, advanced research and distribution strategies. We rely on strategic alliances to provide technology and complementary product offerings to drive market adoption of our robotic products.
We seek to form relationships with organizations that can provide best-in-class technology or market advantages for establishing iRobot technology. Consistent with our position on customer data privacy, data from consumers who have purchased our products is not accessible to third parties unless the customer affirmatively opts into the program and acknowledges that this home understanding data will be used in support of these related integrations. We are also advancing technology alliances with other smart home device companies to help expand the capabilities of our products or enable our respective products to be integrated more tightly and thereby work together more seamlessly.
Sales and Distribution Channels
We sell our robotic floor care products through distributor and retail sales channels, as well as the online store on our website and through our Home App. We plan to integrate the Aeris air purifier products into our channels as applicable while
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continuing to support existing business-to-business sales to schools, medical and dental offices and other commercial enterprises. For fiscal 2022, 2021 and 2020, sales to non-U.S. customers accounted for 48.0%, 51.8%, and 47.9% of total revenue, respectively. For fiscal 2022, 2021 and 2020, we generated 22.6%, 21.8% and 22.7% of total revenue, respectively, from one of our retailers.
In the United States, Canada, Japan and across much of Europe, we sell our consumer products primarily through a network of retailers. To support these retailers, we maintain in-house sales, marketing and product management teams. Certain smaller retail operations in these regions are supported by distributors to whom we sell our products directly. Throughout the rest of the world, our products are sold primarily through a network of in-country distributors who resell to retail stores in their respective countries. These distributors are supported by our international sales and product marketing team.
Our retail and distributor networks are our primary distribution channels for our products. Complementing our retail and distributor networks is a growing direct-to-consumer sales channel. For fiscal 2022, 2021 and 2020, direct sales to consumers accounted for 16.4%, 12.0% and 10.5% of total revenue, respectively.
Customer Service and Support
We also provide ongoing customer service and support, which is critical to the "Keep" element of our strategy. Consumer customer service representatives, the majority of whom are employees of outsourced service organizations or our distribution partners, are extensively trained on the technical intricacies of our consumer products. Our support activities are focused on helping customers enjoy our products and optimize their performance by resolving technical issues or repairing our products. With Wi-Fi connectivity implemented across the vast majority of our floor cleaning robots, we can provide customer support directly via the iRobot HOME App, and our customer service representatives can use video chat tools and access robot performance information remotely to identify relevant issues and behaviors to more efficiently and effectively troubleshoot and address customer questions and concerns. In addition, this connectivity enables us to provide direct marketing material, and deliver new features and enhanced functionality to robots in the field.
Due to the modular nature of our products, our support teams are often able to help customers remediate issues themselves, augmented by iRobot-certified technicians who perform repairs if a timely resolution cannot be achieved. In our effort to provide highly responsive support, customers use a variety of channels to contact our customer care teams, spanning our websites, email, social media and telephone, which now includes a convenient call back feature to help reduce wait times. We believe that providing subscribers of our robots-as-a-service offerings with dedicated support staff is another important differentiator to help us drive adoption of these services, enabling us to elevate the utility of our floor care robots, increase overall customer satisfaction and maximize ongoing retention.
Marketing and Brand
We market our consumer robots to end-user customers through our extensive network of retail partners with the support of our sales and marketing teams as well as in collaborations with in-country distributors. In addition, we sell directly to consumers through our e-commerce channels around the world and continually improve the buying experience on our website and Home App. For consumers seeking information about our products, the iRobot website showcases our brand, allows consumers to learn more about our products, including the latest product innovations, and enables direct-to-consumer sales. The website also plays an important after-sales role for owners seeking spare parts and accessories, as well as for trouble-shooting possible issues and contacting customer support.
Our marketing strategy is to drive consumer awareness of and interest in iRobot's product portfolio and convert this interest into sales via our retail and direct-to-consumer channels. Our sales and marketing expenses represented 24.8%, 18.5% and 18.6% of our total revenue in fiscal 2022, 2021 and 2020, respectively. We expect to continue to invest in national advertising across a range of media, direct marketing and public relations to drive consumer demand and further build brand awareness.
Marketing highlights in 2022 included the launches of iRobot OS along with a new advertising campaign to help consumers better appreciate the value of iRobot OS across its robotic floor cleaning portfolio. We also supported the successful introduction of the Roomba Combo j7+ Robot Vacuum and Mop, and moved into production with new marketing technology systems and tools to help support existing customer revenue growth and further enhance the online buying experience on our websites and the iRobot HOME App. Related to these specific initiatives, we have continued to fund critical marketing, advertising and public relations efforts to build demand generation in ways that amplify the iRobot and applicable product brands, generate consumer interest in our products and perpetuate customer word-of-mouth, to encourage repeat purchases by existing customers and inspire new customers to buy our products. Since we anticipate that market conditions will remain challenging into 2023, we plan to carefully align working media and other demand-generation activities with anticipated revenue while limiting marketing investment in non-robotic product categories during fiscal 2023.
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Manufacturing
Our core competencies are the design, development and marketing of robots. Our manufacturing strategy is to outsource non-core competencies, such as the production of our robots, to third-party entities skilled in manufacturing. By relying on the outsourced manufacture of our robots, we can focus our engineering expertise on the design of robots and associated technologies.
Manufacturing a new product requires a close relationship between our product designers, our operations teams and the contract manufacturer, as well as a range of component and raw materials suppliers as appropriate. Using multiple engineering techniques, our products are introduced to the selected production facility at an early-development stage and the feedback provided by manufacturing is incorporated into the design before tooling is finalized and mass production begins. As a result, we believe that we can significantly reduce the time required to move a product from its design phase to mass production deliveries, with improved quality and yields. Once a new product has been introduced, we focus on executing a multi-year plan to improve its profitability through a combination of higher production volume and cost-optimization initiatives. To help us efficiently and effectively fulfill orders from retailers and consumers around the globe, we work closely with third-party logistics partners as well as a range of oceanic and air freight transportation providers.
Under our agreements with our contract manufacturers, the manufacturers supply us with specified quantities of products that align with demand forecasts that we establish based upon historical trends and analysis from our sales and product management functions. We believe that we have taken steps to diversify our manufacturing so that overall volumes are relatively well balanced across our multiple contract manufacturers in multiple geographies and a substantial majority of volume is dual sourced. Given the significant changes in market conditions and consumer demand in recent years, we move forward with the operational flexibility to manufacture between 1,000 robots a day and 37,000 robots a day in 2023. As a result, we believe we are well positioned to reduce year-end 2022 inventory levels, optimize production levels across multiple contract manufacturers and geographies, meet demand for peak seasons and respond quickly to ever-changing market conditions. We outsource the manufacturing of our consumer products to multiple contract manufacturers with plants in Southern China and Malaysia.
During 2022, we made important progress to address the supply chain challenges that impacted our business in the prior year. More specifically, to further improve our supply chain continuity and resiliency, we qualified components from new and existing suppliers, and increased safety stock levels. In addition, we carefully managed transportation costs, consolidated our warehouse and distribution networks to improve our fulfillment capabilities, and worked closely with our account teams and retailers to manage inventory levels. We also continued our efforts to scale manufacturing capacity in Malaysia and optimize production among our contract manufacturers in China and Malaysia. Based on inventory levels at the end of 2022 and near-term order expectations, we plan to substantially reduce robot production in both China and Malaysia during the first quarter of 2023 with plans to increase volume in April 2023. We believe that our efforts to scale production in Malaysia and in other regions closer to our largest geographical market will help us reduce our prospective exposure to current U.S. tariffs which are expected to be reinstated beginning in the fourth quarter of 2023 and mitigate the geopolitical risks associated with concentrating production solely in China.
Research and Development
Our research and development team develops new software and hardware products, as well as improves and enhances our existing software to address customer demands and emerging trends. We believe that our future success depends upon our ability to continue to develop new products and product accessories, and enhance and develop new applications for our existing products. For fiscal 2022, 2021 and 2020, our research and development expenses were $166.5 million, $161.3 million and $156.7 million, or 14.1%, 10.3% and 11.0% of revenue, respectively. We intend to continue our investment in research and development to respond to and anticipate customer needs, and to enable us to introduce new products that will continue to address our existing and adjacent market sectors.
Our research and development is conducted by teams dedicated to particular projects, which are primarily located at our headquarters in Bedford, Massachusetts and our office in Pasadena, California.
Competition
The market for robots, including floor cleaning robots, is highly competitive, rapidly evolving and subject to changing technologies, shifting customer needs and expectations, with an increasing number of competitor companies and products. As the performance, functionality and features of our floor cleaning robots have advanced, we believe that consumers are increasingly willing to consider our products as replacements for their traditional vacuum cleaners and wet floor cleaning products. Over the past two years, floor cleaning robots that consolidate vacuuming and mopping functionality in a single product ("2-in-1 robots") have become increasingly popular with European consumers. A number of established companies have developed robots that compete directly with our product offerings, and many of our competitors have significantly more financial and other resources than we possess. Our robot cleaning competitors include consumer electronics and consumer appliance companies such as Samsung, LG, Panasonic, Xiaomi, Cecotec, Hitachi, Electrolux, Midea and Shark, traditional floor
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cleaning brands with robotic offerings such as Dyson, Bissell and Hoover, and firms primarily focused on robotic cleaning such as Ecovacs, Roborock, Neato and iLife. In addition, a number of these competitors now market 2-in-1 floor cleaning robots. We believe that the principal competitive factors in the market for robots include product features, performance for the intended mission, total cost of system operation and overall perceived value, including maintenance and support, ease of use, integration with existing equipment, quality, reliability, brand and reputation.
The market for air purifiers is also highly competitive with an increasing number of competitors and products along with the potential for emerging technologies to disrupt the marketplace. A number of companies offer air purifiers that compete directly with ours, and many of these competitors possess greater financial strength and better access to other resources than we do. Our air purifier competitors include consumer and industrial appliance and electronics companies such as Honeywell, Dyson, Holmes and Levoit, as well as specialized home health companies that focus extensively on air purification with premium products such as Blue Air, Molekule, Alen Air, Austin Air and IQAir. We believe that the principal competitive factors in the market for air purifiers include the ability to improve air quality by removing a wide range of pollutants, measure air quality and other features that provide greater insight into and control over the product’s performance, total cost and overall perceived value, including maintenance and support, ease of use, integration with other connected devices in the home, product quality, reliability, brand and reputation.
Our ability to remain competitive will depend to a great extent upon our ongoing performance in the areas of product development, customer support, and ability to leverage our iRobot OS platform across our products. We remain committed to funding the ongoing enhancement of our products and the development of new robotic floor cleaning robots to deliver cleaning performance, innovative features and functionality, quality and overall value that will appeal to consumers. We plan to complement these investments with various sales, marketing and support activities that we believe are necessary to stimulate customer demand and maintain and improve customer satisfaction.
Intellectual Property
We believe that our continued success depends in large part on our proprietary technology, the technical competence and ability of our employees to continue to innovate. The ownership of intellectual property rights is an important factor in our business. This includes patents, copyrights, trademarks, service marks, trade dress and other forms of intellectual property rights in the United States and a number of foreign countries. We currently hold a significant number of patents and have filed numerous additional patent applications. As of December 31, 2022, we held 585 U.S. patents, more than 1,000 foreign patents, additional design registrations, and have more than 500 patent applications pending worldwide. While our U.S. patents began to expire in 2021, no single intellectual property right is solely responsible for protecting our products. We will continue to file and prosecute patent (or design registration, as applicable) applications when and where appropriate to attempt to protect our rights in our proprietary technologies. We also encourage our employees to continue to invent and develop new technologies so as to maintain our competitiveness in the marketplace. It is possible that our current patents, or patents which we may later acquire, may be successfully challenged or invalidated in whole or in part. It is also possible that we may not obtain issued patents for our pending patent applications or other inventions we seek to protect. In that regard, we sometimes permit certain intellectual property to lapse or go abandoned under appropriate circumstances. It is also possible that we may not develop proprietary products or technologies in the future that are patentable, or that any patent issued to us may not provide us with any competitive advantages, or that the patents of others will harm or altogether preclude our ability to do business.
Our registered U.S. trademarks include iRobot and its stylized logo, Roomba, Clean Base, Roomba Combo, NorthStar, Create, Clean Map, iAdapt, Home Base, Looj, Braava, Braava jet, AeroForce, AllergenLock, Better Together, PerfectEdge, Corners. Edges. And the Details in Between., Imprint, Mirra, Root, Terra, vSLAM and Virtual Wall. Our marks iRobot, Roomba, Braava, Braava jet, Better Together, Root, Clean Map, Imprint, PerfectEdge, Terra, Virtual Wall, and certain other trademarks, have also been registered in selected foreign countries.
Our means of protecting our proprietary rights may not be adequate, and our competitors may independently develop technology that is similar to ours. Legal protections afford only limited protection for our technology. The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Despite our efforts to protect our proprietary rights, unauthorized parties have in the past attempted, and may in the future attempt, to copy aspects of our products or to obtain and use information that we regard as proprietary. Some of our competitors seek to compete primarily through aggressive pricing and low-cost structures while infringing on our intellectual property.
On October 15, 2019, we initiated a patent infringement lawsuit in federal district court in Massachusetts against SharkNinja Operating LLC and its related entities ("SharkNinja") for infringement of five patents for technology related to robotic vacuum cleaners. In addition, we sought a preliminary injunction against SharkNinja for infringement of three U.S. patents. SharkNinja has in parallel sought declarations of non-infringement of thirteen U.S. patents owned by iRobot. On November 26, 2019, the federal district court in Massachusetts denied iRobot's motion for a preliminary injunction, and the case is currently stayed pending the outcome of one or more appeals from decisions of the U.S. Patent Trial and Appeal Board. On January 28, 2021, we initiated litigation against SharkNinja at the U.S. International Trade Commission ("ITC") as well as in federal district court in Massachusetts based on claims of patent infringement of five additional U.S. patents related to robotic
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vacuum cleaners. The trial began in January 2022. In October 2022, we received a favorable initial determination in our patent infringement action against SharkNinja at the ITC. The ruling, which found that SharkNinja had infringed valid claims of multiple iRobot asserted patents, recommends that the ITC issue an order barring the importation of various infringing SharkNinja robotic cleaning products.
There is no guarantee that we will prevail on other patent infringement claims against third parties. Third parties may also design around our proprietary rights, which may render our protected products less valuable, if the design around is favorably received in the marketplace. In addition, if any of our products or the technology underlying our products is covered by third-party patents or other intellectual property rights, we could be subject to various legal actions. We cannot assure you that our products do not infringe patents held by others or that they will not in the future. We have received in the past communications from third parties relating to technologies used in our various robot products that have alleged infringement of patents or violation of other intellectual property rights. Some of these allegations have resulted in actions filed against iRobot in foreign jurisdictions. In response to these communications, we have contacted these third parties to convey our good faith belief that we do not infringe the patents in question or otherwise violate those parties' rights. Where an action has been filed, we will defend iRobot against the allegations. We cannot assure you that we will not receive further correspondence from these parties, not be subject to additional allegations of infringement from others, and cannot assure you that iRobot will prevail in any ongoing or subsequently filed actions. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity, misappropriation, or other claims. Any such litigation could result in substantial costs and diversion of our resources. Moreover, any settlement of or adverse judgment resulting from such litigation could require us to obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. Any required licenses may not be available to us on acceptable terms, if at all. If we attempt to design around the technology at issue or to find another provider of suitable alternative technology to permit us to continue offering applicable software or product solutions, our continued supply of software or product solutions could be disrupted or our introduction of new or enhanced software or products could be significantly delayed.
Seasonality
Historically, we have experienced higher revenue in the second half of the year compared to the first half of the year due in large part to seasonal holiday demand. In fiscal 2022, 2021 and 2020, our second-half consumer product revenue represented 53.7%, 57.3% and 67.0% of our annual consumer product revenue, respectively. We have also experienced higher selling and marketing expenses in the second half of the year compared to the first half of the year due to increased marketing campaigns to support seasonal holiday demand. In fiscal 2022, 2021 and 2020, our selling and marketing expense in the second half of the year represented 53.3%, 56.0% and 67.7% of our selling and marketing expense for full fiscal year, respectively. We expect that the majority of our revenue and selling and marketing expenses will continue to be generated in the second half of any given fiscal year unless or until we successfully introduce new products that have potential to generate stronger sales during the first half of the year.
Regulations
Our business requires compliance with a variety of laws and regulations in the United States and abroad regarding privacy, data protection, and data security. In particular, we are subject to numerous U.S. federal, state, and local laws and regulations and foreign laws and regulations regarding privacy and the collection, sharing, use, processing, disclosure, and protection of personal information and other user data, including the General Data Protection Regulation ("GDPR") and California Consumer Privacy Act. In addition, the global nature of our business operations also creates various domestic and foreign regulatory challenges and subjects us to laws and regulations such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar anti-bribery and anti-corruption laws in other jurisdictions. Our products may be subject to U.S. export controls, including the United States Department of Commerce’s Export Administration Regulations, various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls and trade policies and tariffs established by the governments of the United States, China and other jurisdictions where we do business.
The laws in each of these areas - in particular those related to data privacy - are continually changing and evolving in unpredictable ways. New laws and regulations in any of these areas, as well as compliance with these laws (and their derivatives) may have an adverse effect on our business. If we fail to comply with these laws, we may be subject to significant liabilities and other penalties.
We are also subject to international and U.S. federal, state, and local laws and regulations designed to protect the environment, regulate energy efficiency and to regulate the discharge of materials into the environment. We believe that our policies, practices, and procedures are properly designed to prevent unreasonable risk of environmental damage and associated financial liability. To date, environmental control regulations have not had a significant adverse effect on our overall operations.
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Human Capital
As of December 31, 2022, we had 1,254 full-time employees. Approximately 30% of our employees are based outside of the United States. None of our employees in the United States are represented by a labor union. In certain foreign subsidiaries, labor unions or workers’ councils represent some of our employees. To date, we have experienced no work stoppages and believe that we have a good relationship with our employees.
Culture and Work Environment
Over the past three decades, iRobot has created and amplified a unique culture built on fostering invention, discovery and technological exploration in the pursuit of practical and value-add robot products for the next-generation home. iRobot is committed to attracting and retaining the best and brightest talent, leveraging new perspectives, ideas, skills, languages and cultural backgrounds, and providing the resources for individuals to reach their full potential. We’ve assembled a global team of talented, motivated and unique individuals by providing our people with opportunities to make a tangible impact in helping our company thrive while also advancing their careers. In addition, iRobot’s culture is further shaped by an ongoing commitment to the future of Science, Technology, Engineering and Math ("STEM") education. This effort spans our educational robots, a range of complementary educational resources and our STEM outreach program, which is focused on engaging and inspiring students of all ages to learn more about robotics. We communicate regularly with our employees around the world and hold periodic virtual town hall meetings and in-person forums when appropriate to help keep employees informed.
Underpinning our culture is an ongoing commitment to ensuring that our employees, customers and suppliers are treated with dignity and respect. We strive to maintain a workplace that is free from violence, harassment, intimidation and other unsafe or disruptive conditions. Our policy is to provide a safe and healthy workplace and comply with applicable safety and health laws and regulations, as well as internal requirements. Additionally, the safety and health of our employees is of paramount importance to us. Since the height of the COVID-19 pandemic, we have implemented or modified a wide range of policies and practices to help support the physical and mental health while maintaining the productivity of our global workforce.
Compensation, Rewards and Benefits
In addition to competitive base salaries, we provide incentive-based compensation programs to reward performance relative to key metrics. We also provide compensation in the form of restricted stock unit grants as well as a competitive time-off policy. We offer comprehensive benefit options, including retirement savings plans, medical insurance, prescription drug benefits, dental insurance, vision insurance, life and disability insurance, health savings accounts, flexible spending accounts, and an employee stock purchase plan, among others.
We are committed to the continued development of our people. We offer opportunities for personal and technical development with programs such as our leadership training, management training, mentoring program and educational assistance. We continue to evolve our approach to attracting and retaining our talent – from having a well-defined process for hiring to continuing to enhance our compensation and benefits packages.
iRobot iDEA (Inclusion, Diversity, Equity & Acceptance)
iRobot is an inclusive organization, seeking out the best and brightest minds to help us meet the global requirements of our business. We are excited to welcome new perspectives, ideas, skills, languages and cultural backgrounds to our global iRobot family. As part of our commitment to build our business, we formed the Diversity Council, which comprises our senior leadership along with representatives from our Employee Resource Group, to advance diversity across the organization. We have branded these efforts as iDEA (inclusion, diversity, equity & acceptance) with dedicated staff and resources to expand on our progress domestically and abroad.
The iRobot community is built upon the diverse perspectives, beliefs and backgrounds of incredibly talented people from around the world who have all had a hand in shaping who we are as an organization. Strengthening diversity within our global workforce enables iRobot to bring our collective ideas together to invent a future that seamlessly fits the unique, personal and diverse needs of our global consumer base. We have and will continue to take action and hold ourselves accountable to continue to foster equality and diversity on a global scale. Each day we learn from each other, grow and evolve, seeking out new opportunities to strengthen our support for all employees and the communities in which we work. Our efforts to advance diversity and inclusion include programming, partnerships and initiatives that have helped enhance our workplace, strengthen our workforce and positively impact our community.
More Information
Additional information about our efforts to make our company a great place to work, build a career and build an appealing corporate culture that prides itself on diversity and inclusion is available within our 2022 Corporate Social Responsibility report, which is available on our website as well as within the Careers section of our website.
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Available Information
We were incorporated in California in August 1990 under the name IS Robotics, Inc. and reincorporated as IS Robotics Corporation in Massachusetts in June 1994. We reincorporated in Delaware as iRobot Corporation in December 2000. We conduct operations and maintain a number of subsidiaries in the United States and abroad, including operations in Austria, Belgium, China, France, Germany, Hong Kong, Japan, Netherlands, Portugal, Spain, Switzerland and the United Kingdom. Our website address is www.irobot.com. We have included our website address as an inactive textual reference only. The information on, or that can be accessed through, our website is not part of, or incorporated by reference into, this Annual Report. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are available free of charge through the investor relations page of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the "SEC"). Alternatively, these reports may be accessed at the SEC’s website at www.sec.gov.
ITEM 1A. RISK FACTORS
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. This discussion highlights some of the risks which may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial, or which are similar to those faced by other companies in our industry or business in general may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.
Risks Related to our Business and Industry
We have incurred substantial operating losses in the past year, expect to continue to incur operating losses for the foreseeable future, and may not achieve a return to profitability in the future.
During the most recent fiscal year, we incurred a substantial operating loss of $240.4 million due to the combination of declining orders for our products and significant decreases in our gross margin. While we have taken and will continue to take actions to moderate operating expenses, we cannot guarantee that we will be able to return to profitability through a combination of revenue growth and gross margin improvement. In addition, our revenue may decline for a number of reasons, including reduced demand for our products, increased competition or macroeconomic conditions, and if our revenue does not grow at a greater rate than our operating expenses, we will not be able to achieve and maintain profitability.
We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders.
We anticipate that our current cash, cash equivalents, cash provided by operating activities and funds available through our credit facility, will be sufficient to meet our current and anticipated needs for at least the next twelve months. In the event our future revenue does not meet our expectations or our costs are higher than expected, we may eliminate or curtail expenses to further mitigate the impact on working capital. Our future capital requirements will depend on many factors, including our rate of revenue growth or decline, the expansion or contraction of our marketing and sales activities, the timing and extent of spending to support product development efforts, the timing of introductions of new products and enhancements to existing products, the acquisition of new capabilities or technologies, the continuing market acceptance of our products and services, the overall macroeconomic conditions due to heightened inflation and reduced consumer confidence stemming from the Russia-Ukraine war, and the ongoing indirect impacts of the COVID-19 pandemic on our business. Moreover, to the extent existing cash and cash equivalents, cash from operations, and cash from short-term borrowing are insufficient to fund our future activities, we may need to extend the timing of repayment of or refinance our existing credit facility or raise additional funds through public or private equity or debt financing. In such cases, we may need additional financing to execute on our current or future business strategies. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products, or otherwise respond to competitive pressures would be significantly limited. In addition, our access to credit through our credit facility may be limited by the restrictive covenants contained in the agreement.
Significant reductions in consumer demand has caused, and will likely continue to cause, a decrease in revenue from sales of our products and additional costs reducing both gross margin and operating income.
Reductions in consumer demand for our products have caused a decrease in revenue from sales of our products and also resulted in higher inventory levels and additional warehousing and demurrage charges. If we are not successful in increasing consumer demand, or if macroeconomic conditions impacting consumer demand do not improve, we will continue to incur these additional charges and adverse impacts to our revenue and profitability.
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To ensure an adequate inventory supply, we must forecast inventory needs and place orders sufficiently in advance with our suppliers and contract manufacturers, based on our estimates of future demand for specific product SKUs by region. Failure to accurately forecast our needs has resulted, and may continue to result, in manufacturing delays, increased costs, or excess inventory. Our ability to accurately forecast demand could be affected by many factors, including changes in consumer demand for our products, changes in demand for the products of our competitors, unanticipated changes in general market conditions, and the weakening of economic conditions or consumer confidence in future economic conditions. Our failure to accurately forecast consumer demand has resulted, and may continue to result, in excess inventory levels or a shortage of certain product models available for sale. We have recently experienced a decrease in consumer demand and an increase in our inventory levels. Inventory levels in excess of consumer demand has resulted, and may continue to result, in increased promotional intensity to support the sale of excess inventory, which would cause our gross margins to suffer.
In addition, we do not have long-term, fixed price contracts with our contract manufacturers. As we reduce production orders with our contract manufacturers to meet demand, we face increased cost of goods sold as both our own manufacturing overhead as well as that of our suppliers is amortized over smaller production levels. In addition, as production decreases, we may not be able to maintain manufacturing relationships with some of our suppliers, which has caused us to exit production at certain contract manufacturers. The process of exiting production at certain contract manufacturers has caused us, and may continue to cause us, to incur additional costs related to unused tooling, components, relocation of materials and fixtures, and unrecouped non-recurring engineering.
We face intense competition from other providers of robots, including diversified technology providers, as well as competition from providers offering alternative products, which could negatively impact our results of operations and cause our market share to decline.
A number of companies have developed or are developing robots that will compete directly with our product offerings. Our competition includes established, well-known sellers of floor cleaning robots such as Ecovacs, SharkNinja, Samsung, Roborock, as well as new market entrants. Many current and potential competitors are larger in size and more broadly diversified with substantially greater financial, marketing, research and manufacturing resources than we possess, and there can be no assurance that our current and future competitors will not be more successful than us. We also face competition from manufacturers of lower-cost devices, which has, and may continue to, further drive down the average selling price in the marketplace for floor cleaning products. Moreover, while we believe many customers purchase our floor vacuuming robots as a supplement to, rather than a replacement for, their traditional vacuum cleaners, we also compete with providers of traditional vacuum cleaners.
The global market for robots is highly competitive, rapidly evolving and subject to changing technologies, shifting customer needs and expectations and the likely increased introduction of new products. Our ability to remain competitive will depend to a great extent upon our ongoing performance in the areas of product development, operating efficiency and customer support.
We expect that competition will continue to intensify as additional competitors enter the market and current competitors expand their product lines. Companies competing with us have, and may continue to, introduce products that are competitively priced, have increased performance or functionality, or incorporate technological advances that we have not yet developed or implemented. Increased competitive pressure has resulted and will continue to result in a loss of sales or market share or cause us to lower prices for our products, any of which would harm our business and operating results.
Many of our competitors have demonstrated an ability to rapidly replicate new features and innovations that we have introduced into the market, and therefore are able to offer products with similar capabilities to ours at lower prices. Other competitors have demonstrated the ability to innovate more rapidly than we have, and those innovations – particularly in the development of 2-in-1 robot vacuum cleaners – have allowed competitors to offer products at premium price points as well as capture significant market share in certain geographic markets. In addition, some of our competitors aggressively discount their products and services in order to gain market share, which has resulted in pricing pressures, reduced profit margins and lost market share. In addition, new products often have lower volumes, lower selling prices or higher costs than products that have been sold for at least a year; any or all of those factors could negatively impact our gross margins and operating results.
We cannot assure you that our products will compete favorably or that we will be successful in the face of increasing competition from new products and enhancements introduced by existing competitors or new companies entering the markets in which we provide products. Our failure to compete successfully has caused, and may continue to cause, our revenue and market share to decline, which would negatively impact our results of operations and financial condition.
We operate in an emerging market, which makes it difficult to evaluate our business and future prospects.
Robots represent a new and emerging market. Accordingly, our business and future prospects are difficult to evaluate. We cannot accurately predict the extent to which demand for floor cleaning robots will increase, if at all. You should consider the challenges, risks and uncertainties frequently encountered by companies using new and unproven business models in rapidly evolving markets. These challenges include our ability to:
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•generate sufficient revenue and gross margin to maintain profitability;
•maintain market share in our consumer market;
•attract and retain customers of our robots;
•attract and retain engineers and other highly-qualified personnel; and
•expand our product offerings beyond our existing robots.
If we fail to successfully address these and other challenges, risks and uncertainties, our business, results of operations and financial condition would be materially harmed.
Designing new robotic products is complex and requires significant resources, and our ability to remain competitive requires significant continued investment in tools, processes and talent.
To remain competitive, we must continue to invest in developing tools and processes to improve the speed at which we are able to develop competitive products. This includes a significant investment in designing multiple hardware-based platforms and developing a reusable software architecture for use across those platforms. The development of multiple hardware platforms and a reusable software architecture requires the expenditure of significant resources that may not result in the designed efficiencies. Our inability to reduce the cost to develop new products or product variants has substantially impacted, and may continue to substantially impact, our ability to offer products that compete favorably.
We depend on the experience and expertise of our senior management team and key technical employees, and the loss of any key employee may impair our ability to operate effectively.
Our success depends upon the continued services of our senior management team and key technical employees. Each of our executive officers, key technical personnel and other employees could terminate his or her relationship with us at any time. The loss of any member of our senior management team might significantly delay or prevent the achievement of our business objectives and could materially harm our business and customer relationships. In addition, because of the highly technical nature of our robots, the loss of any significant number of our existing engineering and project management personnel could have a material adverse effect on our business and operating results. Also, increased turnover, particularly on the senior management team, with insufficient development of leadership talent and succession plans, could diminish employee confidence and increase risks for retaining key employees. Uncertainties related to our proposed Merger with Amazon have added additional risks to our ability to retain talent.
If we are unable to attract and retain additional skilled personnel, we may be unable to grow our business.
To execute our growth plan, we must attract and retain additional, highly-qualified personnel. Competition for hiring these employees is intense, especially with regard to engineers with high levels of experience in designing, developing and integrating robots and engineers with expertise in artificial intelligence, machine learning, data science and cloud applications. Many of the companies with which we compete for hiring experienced employees have greater resources than we have. If we fail to attract new technical personnel or fail to retain and motivate our current employees, our business and future growth prospects could be severely harmed.
In addition, we have experienced increased employee turnover as a result of general market conditions, the impact of a reduction in force executed in August 2022, and the impact of uncertainties related to our proposed Merger with Amazon. Given the difficult market conditions, the steps we are taking to manage our costs and the ongoing uncertainty of the timing and outcomes of the regulatory reviews required to complete our Merger with Amazon, we expect to continue to experience increased employee turnover in the future. New hires require significant training and, in most cases, take significant time before they achieve full productivity. New employees may not become as productive as we expect, and we may be unable to hire or retain significant numbers of qualified individuals. Moreover, we may be forced to adjust salaries or other compensation in order to retain key talent. If our retention efforts are not successful or our team member turnover rate continues to increase in the future, our business, results of operations and financial condition could be materially and adversely affected.
Our business has been, and will continue to be, adversely affected by the continuing effects of the coronavirus pandemic.
The coronavirus pandemic and virus containment measures taken by government authorities have directly and indirectly impacted our business and operating results but the full extent of its impact will depend on future developments that are uncertain and cannot be accurately predicted, including new information that may emerge, future spikes of infections (including the spread of variants or mutant strains), and the actions to contain the coronavirus or treat its impact, among others. The ultimate impact of the current pandemic, or any other health epidemic, is highly uncertain and subject to change not only with the spread of the disease, but also with the scope and timing of governmental, regulatory, fiscal, monetary and public health responses.
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Our business operations could be further disrupted or delayed by effects of the pandemic. The pandemic has resulted in, and may continue to result in, work stoppages, slowdowns and delays, travel restrictions, event cancellation, and other factors that cause an increase in costs or order cancellations, reductions or delays. For example, our manufacturing supply chain has been and may continue to be adversely affected by production delays or limited manufacturing volumes associated with factory shutdowns or reduced numbers of workers or working hours in the factories, limits on component supplies and diminished capability to implement engineering and design changes in a timely manner. Although the business and markets in mainland China have reopened as mainland China relaxed its policies and controls relating to COVID-19 in early December 2022, the number of cases of COVID-19 is expected to increase greatly which may cause restrictions on our manufacturers in China. Travel restrictions have prevented, and may continue to prevent, significant progress in supply chain diversification efforts in Malaysia, which may have a material impact on our ability to mitigate the impact of Section 301 List 3 tariffs on Roomba products imported from China. In addition, quarantines, stay at home orders and other travel limitations (whether voluntary or required) impede our employees’ ability to efficiently conduct research and development activities or oversee manufacturing activities, which has, and may continue to, slow innovation, lead to higher costs or both. For example, we have experienced an increase in freight costs and a delay in our supply chain diversification efforts. Adverse impacts to our operations caused directly or indirectly by the pandemic may lead to delay, default, violation and/or non-compliance under existing agreements.
While the potential economic impact and the duration of the pandemic may be difficult to assess or predict, it has caused, and is likely to result in further, significant disruption of global financial markets. In addition, a recession, depression or other sustained adverse market event relating directly or indirectly to the pandemic could materially and adversely affect our business, our access to needed capital and liquidity, and the value of our common stock. We do not yet know the full extent of potential delays or impacts on our business, our industry or the global economy as a whole.
If we are not successful in expanding our direct-to-consumer sales channel by driving consumer traffic and consumer purchases through our website, our business and results of operations could be harmed.
We are currently investing in our direct-to-consumer sales channel, primarily through our website and mobile app and the technology infrastructure used to support them. Our future growth relies in part on our ability to attract consumers to this channel, which requires significant expenditures in marketing, software development and infrastructure. If we are unable to drive traffic to, and increase sales through, our website and mobile app, our business and results of operations could be harmed. The success of direct-to-consumer sales is subject to risks associated with e-commerce, many of which are outside of our control. In addition, our efforts to carefully manage our cost structure may result in lower levels of investment in our direct-to-consumer infrastructure and systems. Our inability to adequately respond to these risks and uncertainties, successfully fund new infrastructure initiatives or maintain and expand our direct-to-consumer business via our website may have an adverse impact on our results of operations.
Our success depends nearly entirely on our consumer robots, and our sales growth and operating results would be negatively impacted if we are unable to enhance our current consumer robots or develop new consumer robots at competitive prices or in a timely manner, or if the consumer robot market does not achieve broad market acceptance.
We primarily derive our revenue from consumer robot sales. For the foreseeable future, we expect that our revenue will be derived nearly entirely from sales of home floor care products. Accordingly, our future success depends upon our ability to further penetrate the consumer home care market, to enhance our current consumer products and to develop and introduce new consumer products offering enhanced performance and functionality at competitive prices. The development and application of new technologies involves time, substantial costs and risks. Our inability to achieve significant sales of our newly introduced robots, or to enhance, develop and introduce other products in a timely manner, or at all, would materially harm our sales growth and operating results.
Even if consumer robots gain wide market acceptance, our robots may not adequately address market requirements and may not continue to gain market acceptance. If robots generally, or our robots specifically, do not gain wide market acceptance, we may not be able to achieve our anticipated level of growth, and our revenue and results of operations would suffer.
Any efforts to expand our product offerings beyond our current markets or to develop new products may not succeed, which could negatively impact our operating results.
Efforts to expand our product offerings beyond our current markets are limited and those efforts may not succeed and may divert management resources from existing operations and require us to commit significant financial resources to an unproven business, either of which could significantly impair our operating results. Any new product that we develop may not be introduced in a timely or cost-effective manner, may contain defects, or may not achieve the market acceptance necessary to generate sufficient revenue. Moreover, efforts to expand beyond our existing markets may never result in new products that achieve market acceptance, create additional revenue or become profitable.
On November 15, 2021, we acquired Aeris Cleantec AG, a provider of premium air purifiers. This acquisition represents our first major expansion of product offerings beyond consumer robotics. Air purifiers represent a new market segment for us and is subject to intense competition.
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Our success in the air purifier market will depend on a number of factors including our ability to develop innovative solutions, integrate those solutions into our home ecosystem, and market and sell those solutions to our existing and new customers. Establishing a new market segment will require significant investment in R&D and sales & marketing in the near term. These investments may not be successful, and our revenue and profitability may suffer. Because of our current fiscal constraints, our ability to support investments of this magnitude are limited, and a more limited level of investment in the near-term is unlikely to yield a meaningful return.
If the air purifier business – or any other business we acquire – does not perform as expected or we are unable to effectively integrate the acquired business into our operations or achieve the expected synergies of the acquisition, our operating results could be harmed. Expansion into new market segments involve risks and uncertainties, including, among other things, potential distraction of management from our core robotic floorcare business, greater than expected liabilities and expenses, inadequate return on capital, and unidentified issues not discovered in our investigations and evaluations of those acquisitions.
We spend significant amounts on advertising and other marketing campaigns, which may not be successful or cost effective.
We spend significant amounts on advertising and other marketing campaigns, such as television, print advertising, and social media, as well as increased promotional activities, to acquire new customers, and we expect our marketing expenses to increase in the future as we continue to spend significant amounts to increase awareness of our consumer robot products. For fiscal 2022, 2021 and 2020, sales and marketing expenses were $293.3 million, $289.8 million, and $265.5 million, respectively, representing approximately 24.8%, 18.5% and 18.6%, of our revenue, respectively. While we seek to structure our advertising campaigns in the manner that we believe is most likely to encourage people to purchase our products, we may fail to identify advertising opportunities that satisfy our anticipated return on advertising spend as we scale our investments in marketing or to fully understand or estimate the conditions and behaviors that drive customer behavior. If any of our advertising campaigns prove less successful than anticipated in attracting customers, we may not be able to recover our advertising spend, and our revenue may fail to meet market expectations, either of which could have an adverse effect on our business. There can be no assurance that our advertising and other marketing efforts will result in increased sales of our products.
If we fail to enhance our brand, our ability to expand our customer base will be impaired and our operating results may suffer.
We believe that developing and maintaining awareness of the iRobot brand is critical to achieving widespread acceptance of our existing and future products and is an important element in attracting new customers. Furthermore, we expect the importance of global brand recognition to increase as competition increases. If customers do not perceive our products to be of high quality, our brand and reputation could be harmed, which could adversely impact our financial results. In addition, brand promotion efforts may not yield significant revenue or increased revenue sufficient to offset the additional expenses incurred in building our brand. Maintaining, protecting, and enhancing our brand may require us to make substantial investments, and these investments may not be successful. If we fail to successfully maintain, promote, and position our brand and protect our reputation, or if we incur significant expenses in this effort, our business, financial condition and operating results may be adversely affected.
Our income tax provision and other tax liabilities may be insufficient if taxing authorities are successful in asserting tax positions that are contrary to our position. Additionally, there is no guarantee that we will realize our deferred tax assets.
From time to time, we are audited by various federal, state, local and foreign authorities regarding income tax matters. Significant judgment is required to determine our provision for income taxes and our liabilities for federal, state, local and foreign taxes. Although we believe our approach to determine the appropriate tax treatment is supportable and in accordance with relevant authoritative guidance, it is possible that a tax authority will take a final tax position that is materially different than that which is reflected in our income tax provision. Such differences could have a material adverse effect on our income tax provision or benefit, in the reporting period in which such determination is made and, consequently, on our results of operations, financial position and/or cash flows for such period.
The realization of our deferred tax assets ultimately depends on the existence of sufficient income in either the carryback or carryforward periods under the tax law. During the three months ended October 1, 2022, we concluded that, based on our evaluation of available positive and negative evidence, it is no longer more likely than not that our net U.S. federal and state deferred tax assets are recoverable. Due to significant estimates utilized in establishing a valuation allowance and the potential for changes in facts and circumstances, it is possible that we will be required to record a valuation allowance in future periods. Our results of operations would be impacted negatively if we determine that an additional valuation allowance is required in a future reporting period.
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Risks Related to our Dependence on Third Parties and Distribution Channels
We depend on a limited number of manufacturers, and our reputation and results of operations would be harmed if these manufacturers fail to meet our requirements.
We depend on a limited number of manufacturers, employing a dual-source strategy to mitigate potential manufacturing disruptions, and we have safety stock strategies for low-volume products that are not dual sourced. The majority of our contract manufacturing locations for our robots are currently located in China and we added additional manufacturing capacity in Malaysia in late 2019, and we have continued to expand production in Malaysia. Our efforts to diversify manufacturing outside of China has been, and may continue to be, materially impacted as a result of COVID-19 and related travel restrictions. These manufacturers manage the supply chain for all of the raw materials and provide all facilities and labor required to manufacture our products. If these companies were to terminate their arrangements with us or fail to provide the required capacity and quality on a timely basis, there would be a disruption in manufacturing our products until replacement contract manufacturing services could be obtained or volume transferred to an alternative manufacturing partner, each of which is a costly and time-consuming process. We cannot assure you that we would be able to establish alternative manufacturing arrangements on acceptable terms or in a timely manner.
We are dependent on a limited number of suppliers for various components used in our products, and we may from time to time have sole source suppliers. The cost, quality and availability of these components are essential to the successful production and sale of our products. We are subject to the risk of, and have already experienced, industry-wide shortages, price fluctuations and long lead times in the supply of these components and other materials, which risk may be increased as a result of COVID-19. If the supply of these components were to be delayed or constrained, or if one or more of our main suppliers were to go out of business, alternative sources or suppliers may not be available on acceptable terms or at all. In the event that any of our suppliers were to discontinue production of our key product components, developing alternate sources of supply for these components would be time consuming, difficult and costly. In the event we are unable to obtain components in sufficient quantities on a timely basis and on commercially reasonable terms, our ability to sell our products in order to meet market demand would be affected and could materially and adversely affect our brand, image, business prospects, financial condition and operating results.
Our reliance on these contract manufacturers involves certain risks, including the following:
•lack of direct control over production capacity and delivery schedules;
•lack of direct control over quality assurance, manufacturing yields and production costs;
•lack of enforceable contractual provisions over the production and costs of consumer products;
•risk of loss of inventory while in transit;
•risks associated with international commerce, including unexpected changes in legal and regulatory requirements, changes in tariffs and trade policies, risks associated with the protection of intellectual property and political and economic instability; and
•risks that our attempts to add additional manufacturing resources may be significantly delayed and thereby create disruptions in production of our products.
Any interruption in the manufacture of our products would be likely to result in delays in shipment, lost sales and revenue and damage to our reputation in the market, all of which would harm our business and results of operations. In addition, because our purchase contracts with suppliers are typically denominated in U.S. dollars, changes in currency exchange rates may impact our suppliers who operate in local currency, which may cause our suppliers to seek price concessions on future orders.
If critical components of our products that we currently purchase from a small number of suppliers become unavailable, we may incur delays in shipment, which could damage our business.
We and our outsourced manufacturers obtain hardware components, various subsystems, raw materials and batteries from a limited group of suppliers, some of which are sole suppliers. We do not have long-term agreements with these suppliers obligating them to continue to sell components or products to us. If we or our outsourced manufacturers are unable to obtain components from third-party suppliers in the quantities and of the quality that we require, on a timely basis and at acceptable prices, we may not be able to deliver our products on a timely or cost-effective basis to our customers, which could cause customers to terminate their contracts with us, reduce our gross margin and seriously harm our business, results of operations and financial condition. Moreover, if any of our suppliers become financially unstable, we may have to find new suppliers. It may take several months to locate alternative suppliers, if required, or to re-tool our products to accommodate components from different suppliers. We may experience significant delays in manufacturing and shipping our products to customers and incur additional development, manufacturing and other costs to establish alternative sources of supply if we lose any of these sources.
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We cannot predict if we will be able to obtain replacement components within the time frames that we require at an affordable cost, or at all.
Conflicts with our channel and distribution partners could harm our business and operating results.
The expansion of our direct-to-consumer channel could alienate some of our channel partners and cause a reduction in product sales from these partners. Channel partners may perceive themselves to be at a disadvantage based on the direct-to-consumer sales offered through our website. Due to these and other factors, conflicts in our sales channels could arise and cause channel partners to divert resources away from the promotion and sale of our products. Any of these situations could adversely impact our business and results of operations.
If we fail to maintain or increase consumer robot sales through our distribution channels, our operating results would be negatively impacted.
We do not have long-term contracts regarding purchase volumes with any of our retail partners. As a result, purchases generally occur on an order-by-order basis, and the relationships, as well as particular orders, can generally be terminated or otherwise materially changed at any time prior to delivery, by our retail partners. A decision by a major retail partner, whether motivated by competitive considerations, financial difficulties, economic conditions or otherwise, to decrease its purchases from us, to reduce the shelf space for our products or to change its manner of doing business with us could significantly damage our consumer product sales and negatively impact our business, financial condition and results of operations. In addition, during recent years, various retailers, including some of our partners, have experienced significant changes and difficulties, including consolidation of ownership, increased centralization of purchasing decisions, restructuring, bankruptcies and liquidations. These and other financial problems of some of our retailers increase the risk of extending credit to these retailers. A significant adverse change in a retail partner relationship with us or in a retail partner’s financial position could cause us to limit or discontinue business with that partner, require us to assume more credit risk relating to that partner’s receivables or limit our ability to collect amounts related to previous purchases by that partner, all of which could harm our business and financial condition. Disruption of the iRobot on-line store could also decrease our consumer robot sales.
Risks Related to our Legal and Regulatory Environment
Significant developments in U.S. trade policies have had, and we expect will continue to have, a material adverse effect on our business, financial condition and results of operations.
The U.S. government has indicated its intent to alter its approach to international trade policy and in some cases to renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade agreements and treaties with foreign countries. Effective September 24, 2018, the U.S. government implemented a 10% tariff on certain goods imported from China, which include the majority of those imported by the Company. These tariffs were increased to 25% on May 10, 2019 and were slated to further increase to 30% in October 2019 until a last-minute interim deal was reached between the United States and China. Although the United States and China signed a new trade agreement in January 2020, most of the previously-implemented tariffs on goods imported from China remain in place (including the tariffs described above), and uncertainty remains as to the short-term and long-term future of economic relations between the United States and China.
From September 2018 until April 2020, our Roomba products were subject to Section 301 tariffs. On April 24, 2020, we were granted a temporary exclusion from Section 301 List 3 tariffs by the United States Trade Representative ("USTR"). This exclusion, as extended in August 2020, eliminated the 25% tariff on Roomba products until December 31, 2020. From January 1, 2021 to October 11, 2021, the 25% Section 301 tariff again applied to our Roomba products imported from China. Additional exclusions from this tariff were granted by the USTR effective October 12, 2021 through December 31, 2022, and January 1, 2023 through September 30, 2023. Although we have begun relocating a meaningful portion of our supply chain from China to Malaysia, we again face compression on our margin on products sold and pricing pressures on our products. Any additional or increased tariffs may in the future cause us to further increase prices to our customers which we believe has reduced, and in the future may reduce, demand for our products.
These tariffs, and other governmental action relating to international trade agreements or policies, have directly or indirectly adversely impacted demand for our products, our costs, customers, suppliers, distributors, resellers and/or the U.S. economy or certain sectors thereof and, as a result, have adversely impacted, and we expect will continue to adversely impact, our business, financial condition and results of operations. It remains unclear what the U.S. or foreign governments will or will not do with respect to tariffs, international trade agreements and policies on a short-term or long-term basis. We cannot predict future trade policy, whether exclusions will be reinstated, or the terms of any renegotiated trade agreements and their impacts on our business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to further adversely impact demand for our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could further adversely impact our business, financial condition and results of operations.
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In response to international trade policy, as well as other risks associated with concentrated manufacturing in China, we have begun relocating a meaningful portion of our supply chain from China to Malaysia. Such relocation activities increase costs and risks associated with establishing new manufacturing facilities.
Global economic conditions and any associated impact on consumer spending could have a material adverse effect on our business, results of operations and financial condition.
Continued economic uncertainty and reductions in consumer spending, particularly in certain international markets such as the European Union, China and Japan, may result in reductions in sales of our consumer robots. Additionally, disruptions in credit markets may materially limit consumer credit availability and restrict credit availability of our retail customers, which would also impact purchases of our consumer robots. Any reduction in sales of our consumer robots, resulting from reductions in consumer spending or continued disruption in the availability of credit to retailers or consumers, could materially and adversely affect our business, results of operations and financial condition.
Because we are an increasingly global business that in fiscal 2022, 2021 and 2020, generated approximately 48.0%, 51.8%, and 47.9%, respectively, of our total revenue from sales to customers outside of the United States, we are subject to a number of additional risks including foreign currency fluctuations. These foreign currency fluctuations may make our products more expensive to our distributors and end customers, which in turn may impact sales directly or the ability or willingness of our partners to invest in growing product demand.
Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar denominated sales and operating expenses worldwide. Weakening of foreign currencies relative to the U.S. dollar could adversely affect the U.S. dollar value of our foreign currency-denominated sales and earnings, and lead us to raise international pricing, which may reduce demand for our products. In some circumstances, for competitive or other reasons, we may decide not to raise local prices to fully offset the strengthening of the U.S. dollar, or for any other reason, which would adversely affect the U.S. dollar value of our foreign currency denominated sales and earnings. Conversely, a strengthening of foreign currencies relative to the U.S. dollar, while generally beneficial to our foreign currency-denominated sales and earnings, could cause us to reduce international pricing, incur losses on our foreign currency derivative instruments, and incur increased operating expenses, thereby limiting any benefit. Additionally, strengthening of foreign currencies may also increase our cost of product components denominated in those currencies, thus adversely affecting gross margins.
We use derivative instruments, such as foreign currency forward contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any, or only a portion, of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. In addition, our counterparties may be unable to meet the terms of the agreements. We seek to mitigate this risk by limiting counterparties to major financial institutions and by spreading the risk across several major financial institutions.
We are subject to a variety of U.S. and foreign laws and regulations that are central to our business; our failure to comply with these laws and regulations could harm our business or our operating results.
We are or may become subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including laws and regulations regarding consumer protection, advertising, electronic commerce, intellectual property, product liability, manufacturing, anti-bribery and anti-corruption, and economic or other trade prohibitions or sanctions. In the EU, recent changes to consumer protection laws and regulations have resulted in significant increases in the fines for non-compliance. We may also become subject to new EU laws mandating transparency for users of artificial intelligence systems.
The increasingly global nature of our business operations subjects us to domestic and foreign laws and regulations such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar anti-bribery and anti-corruption laws in other jurisdictions. Our products are also subject to U.S. export controls, including the United States Department of Commerce’s Export Administration Regulations and various economic and trade sanctions regulations established by the Treasury Department’s Office of Foreign Assets Controls. In addition, our recently acquired air purifier business subjects us to additional laws and regulations, such as the Federal Food, Drug, and Cosmetic Act, or FD&C Act, the Federal Insecticide, Fungicide and Rodenticide Act, the U.S. Toxic Substances Control Act of 1976, U.S. Department of Energy Efficiency regulations, and various similar state and foreign country laws and regulations related to health and safety and other applicable laws required to manufacture, commercialize, sell or distribute air purification products. In the U.S., certain air purifiers intended for medical use are regulated as medical devices and are subject to regulation by the U.S. Food and Drug Administration, or FDA, under the FD&C Act and its implementing regulations. The FDA regulates, among other things, premarket clearance, establishment registration and device listing, manufacturing, packaging, labeling, servicing, recordkeeping, advertising, promotion, distribution, recalls and field actions, post-marketing monitoring and reporting. In order to commercially distribute certain air purifiers, we will be required to submit a premarket notification, or 510(k), to the FDA and obtain 510(k) clearance.
We are also subject to a variety of laws and regulations regarding information security and privacy. For example, the European Union's ("EU") General Data Protection Regulation ("GDPR") and the California Consumer Privacy Act, or new
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interpretations of existing laws and regulations, impose significant requirements on how we collect, process and transfer personal data, as well as significant fines for non-compliance. These current and future data privacy laws and regulations may impede our initiatives designed to deliver targeting marketing.
Given the increasing number of foreign laws to which we are subject and the high level of complexity of these laws, there is a risk that some provisions may be inadvertently breached by us or by our subsidiaries, for example through fraudulent or negligent behavior of individual employees, our failure to comply with certain formal documentation requirements, or otherwise. If we incur liability for noncompliance under these laws or regulations, we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to discontinue certain products or services, which would negatively affect our business, financial condition, and operating results. In addition, any negative publicity directed to us as a result of lawsuits, regulatory proceedings, and legislative proposals could harm our brand or otherwise impact the growth of our business. Any costs incurred as a result of compliance efforts or other liabilities under these laws or regulations could harm our business and operating results.
We may incur costs in complying with changing tax laws in the United States and abroad, which could adversely impact our cash flow, financial condition and results of operations.
We are a U.S.-based company subject to taxes in multiple U.S. and foreign tax jurisdictions. Our profits, cash flow and effective tax rate could be adversely affected by changes in the tax rules and regulations in the jurisdictions in which we do business, unanticipated changes in statutory tax rates and changes to our global mix of earnings.
Environmental laws and regulations and unforeseen costs could negatively impact our future earnings.
The manufacture and sale of our products in certain states and countries may subject us to environmental and other regulations. We also face increasing complexity in our product design as we adjust to legal and regulatory requirements relating to our products. There is no assurance that such existing laws or future laws will not impair future earnings or results of operations.
Business disruptions resulting from international uncertainties could negatively impact our profitability.
We derive, and expect to continue to derive, a significant portion of our revenue from international sales in various European and Asian markets, and Canada. For the fiscal 2022, 2021 and 2020, sales to non-U.S. customers accounted for 48.0%, 51.8%, and 47.9% of total revenue, respectively. We expect that international revenues will continue to account for a significant percentage of our revenues for the foreseeable future. Our international revenue and operations are subject to a number of material risks, including, but not limited to:
•difficulties in staffing, managing and supporting operations in multiple countries;
•difficulties in enforcing agreements and collecting receivables through foreign legal systems and other relevant legal issues;
•fewer legal protections for intellectual property;
•foreign and U.S. taxation issues, tariffs, and international trade barriers;
•difficulties in obtaining any necessary governmental authorizations for the export of our products to certain foreign jurisdictions;
•potential fluctuations in foreign economies;
•government currency control and restrictions on repatriation of earnings;
•fluctuations in the value of foreign currencies and interest rates;
•general economic and political conditions in the markets in which we operate;
•domestic and international economic or political changes, hostilities and other disruptions in regions where we currently operate or may operate in the future;
•changes in foreign currency exchange rates;
•different and changing legal and regulatory requirements in the jurisdictions in which we currently operate or may operate in the future; and
•our relationships with international distributors, some of whom may be operating without written contracts.
Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, threats to our intellectual property, difficulty in collecting receivables, and a higher cost of doing business, any of which could negatively impact our business, financial condition or results of operations. Moreover, our sales to customers outside the United States are primarily denominated in Euro and
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Japanese Yen and fluctuations in the value of foreign currencies relative to the U.S. dollar may make our products more expensive than other products, which could harm our business.
If we experience a disaster or other business continuity problem, we may not be able to recover successfully, which could cause material financial loss, loss of human capital, regulatory actions, reputational harm, or legal liability.
If we experience a local or regional disaster or other business continuity problem, such as an earthquake, terrorist attack, pandemic or other natural or man-made disaster, our continued success will depend, in part, on the availability of our personnel, our office facilities, and the proper functioning of our computer, telecommunication and other related systems and operations. As we grow our operations in new geographic regions, the potential for particular types of natural or man-made disasters, political, economic or infrastructure instabilities, or other country- or region-specific business continuity risks increases. For example, the COVID-19 pandemic has disrupted and will continue to disrupt our supply chain and manufacturers, resulting in a disruption in manufacturing our products as further discussed in the risk factors entitled "We depend on a limited number of manufacturers, and our reputation and results of operations would be harmed if these manufacturers fail to meet our requirements" below and "Our business has been, and will continue to be, adversely affected by the continuing effects of the coronavirus pandemic" above.
The effects of regulations relating to conflict minerals may adversely affect our business.
The SEC requires companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties to research, disclose and report whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. These requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the manufacture of our products. In addition, we continue to incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.
Risks related to our Intellectual Property and Technology
If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business and results of operations could be materially harmed.
Our success depends on our ability to protect our intellectual property and other proprietary rights. We rely primarily on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. Significant technology used in our products, however, is not the subject of any patent protection, and we may be unable to obtain patent protection on such technology in the future. Moreover, existing U.S. legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer only limited protection, may not provide us with any competitive advantages, and may be challenged by third parties. In addition, the laws of countries other than the United States in which we market our products may afford little or no effective protection of our intellectual property. Patents which may be granted to us in certain foreign countries may be subject to opposition proceedings brought by third parties or result in suits by us, which may be costly and result in adverse consequences for us. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property or otherwise gaining access to our technology. Unauthorized third parties may try to copy or reverse engineer our products or portions of our products or otherwise obtain and use our intellectual property. If we fail to protect our intellectual property and other proprietary rights, our business, results of operations or financial condition could be materially harmed.
In addition, defending our intellectual property rights may entail significant expense. We believe that certain products in the marketplace may infringe our existing intellectual property rights. We have, from time to time, resorted to legal proceedings to protect our intellectual property and may continue to do so in the future. For example, on October 15, 2019, we initiated a patent infringement lawsuit in federal district court in Massachusetts against SharkNinja Operating LLC and its related entities ("SharkNinja") for infringement of five patents for technology related to robotic vacuum cleaners. In addition, we sought a preliminary injunction against SharkNinja for infringement of three U.S. patents. SharkNinja has in parallel sought declarations of non-infringement of thirteen U.S. patents owned by iRobot. On November 26, 2019, the federal district court in Massachusetts denied iRobot's motion for a preliminary injunction. On January 28, 2021, we initiated litigation against SharkNinja at the U.S. International Trade Commission ("ITC") as well as in federal district court in Massachusetts based on claims of patent infringement of five additional U.S. patents, and on January 5-12, 2022 the ITC held a trial on four of those patents and a final determination has not been made. In October 2022, we received a favorable initial determination in our patent infringement action against SharkNinja at the ITC. The ruling, which found that SharkNinja had infringed valid claims of multiple iRobot asserted patents, recommends that the ITC issue an order barring the importation of various infringing SharkNinja robotic cleaning products.
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There is no guarantee that we will prevail on other patent infringement claims against third parties. We may be required to expend significant resources to monitor and protect our intellectual property rights. In addition, any of our intellectual property rights may be challenged by others or invalidated through administrative processes or litigation. If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could result in significant expense to us and divert the attention and efforts of our management and technical employees, even if we were to prevail.
In addition, in the United States certain of our patents have been, and may continue to be, challenged by inter parte review or opposition proceedings. If our patents are subjected to inter parte review or opposition proceedings, we may incur significant costs to defend them. Further, our failure to prevail in any such proceedings could limit the patent protection available for our innovations.
We may be sued by third parties for alleged infringement of their proprietary rights, which could be costly, time-consuming and limit our ability to use certain technologies in the future.
In the past we have faced multiple lawsuits based on claims of patent infringement. If the size of our markets increases, we would be more likely to be subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of third parties. In addition, the vendors from which we license technology used in our products could become subject to similar infringement claims. Our vendors, or we, may not be able to withstand third-party infringement claims. Any claims, with or without merit, could be time-consuming and expensive, and could divert our management’s attention away from the execution of our business plan. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. There can be no assurance that we would be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all, that we would be able to develop alternative technology on a timely basis, if at all, or that we would be able to obtain a license to use a suitable alternative technology to permit us to continue offering, and our customers to continue using, our affected product. In addition, we may be required to indemnify our retail and distribution partners for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling in such a claim. An adverse determination could also prevent us from offering our products to others. Infringement claims asserted against us or our vendors may have a material adverse effect on our business, results of operations or financial condition.
In addition, we incorporate open source software into our products, and we may continue to incorporate open source software into our products in the future. Open source software is generally licensed by its authors or other third parties under open source licenses. Some of these licenses contain requirements that we make available source code for modifications or derivative works we create based upon the open source software, and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. If an author or other third party that distributes open source software that we use or license were to allege that we had not complied with the conditions of the applicable license, we could be required to incur significant legal expenses defending against those allegations and could be subject to significant damages, enjoined from offering or selling our products that contained the open source software and required to comply with the foregoing conditions. Any of the foregoing could disrupt and harm our business and financial condition.
Cybersecurity risks could adversely affect our business and disrupt our operations.
The threats to network and data security are increasingly diverse and sophisticated. Despite our efforts and processes to prevent breaches, our devices, as well as our servers, computer systems, and those of third parties that we use in our operations are vulnerable to cybersecurity risks, including cyber attacks such as viruses and worms, phishing attacks, distributed denial-of-service attacks, ransomware, and similar disruptions from unauthorized tampering with our servers and computer systems or those of third parties that we use in our operations, which could lead to interruptions, delays, loss of critical data, and loss of consumer confidence. In addition, we may be the target of email scams that attempt to acquire sensitive information or company assets. Despite our efforts to create security barriers to such threats, we may not be able to entirely mitigate these risks. These threats may be increased due to the work-from-home policies implemented by us and our customers, suppliers and distributors as a result of mitigation measures related to the COVID-19 pandemic. Any cyber attack that attempts to obtain our data and assets, disrupt our service, or otherwise access our systems, or those of third parties we use, if successful, could adversely affect our business, operating results, and financial condition, be expensive to remedy, and damage our reputation. Our cyber insurance may not protect against all of the costs and liabilities arising from a cyber attack.
If we suffer data breaches involving the designs, schematics or source code for our products, our brand, business and financial results could be adversely affected.
We attempt to securely store our designs, schematics and source code for our products as they are created. A breach, whether physical, electronic or otherwise, of the systems on which this sensitive data is stored could lead to damage or piracy of our products. If we or our partners are subject to data security breaches, we may have a loss in sales or increased costs arising
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from the restoration or implementation of additional security measures, either of which could materially and adversely affect our brand, business and financial results.
We operate our business in jurisdictions where intellectual property theft or compromise is common.
Currently, we maintain significant operations in China, where a majority of our products are manufactured. Subject to contractual confidentiality obligations, we are required to share significant product design materials with third-parties necessary for the design and manufacture of our products. We cannot be sure that our data or intellectual property will not be compromised through cyber-intrusion, theft or other means, particularly when the data or intellectual property is held by partners in foreign jurisdictions. Should our intellectual property be compromised, it may be difficult to enforce our rights in China and other foreign jurisdictions in which we operate.
We collect, store, process, and use customer data, including certain personal and robot-specific information, which subjects us to governmental regulation and other legal obligations related to privacy, information security, and data protection, and any security breaches or our actual or perceived failure to comply with such legal obligations could harm our business.
Our latest floor cleaning robots, as well as additional products in development, collect, store, process, and use certain customer data, which subjects us to governmental regulation and other legal obligations related to privacy, information security, and data protection, and any security breaches or our actual or perceived failure to comply with such legal obligations could harm our business. We collect, store, process, and use personal information and other user data, and we rely on third parties that are not directly under our control to do so as well. If our security measures, some of which are managed by third parties, are breached or fail, unauthorized persons may be able to obtain access to or acquire sensitive user data, which may expose us to a risk of loss, litigation, or regulatory proceedings. Depending on the nature of the information compromised, in the event of a data breach or other unauthorized access to or acquisition of our user data, we may also have obligations to notify users about the incident, and we may need to provide some form of remedy, such as a subscription to a credit monitoring service, for the individuals affected by the incident. In addition, the regulatory environment surrounding information security and privacy is increasingly demanding, with frequent imposition of new and changing requirements. For example, the European Union's ("EU") General Data Protection Regulation ("GDPR") and the California Consumer Privacy Act impose significant requirements on how we collect, process and transfer personal data, as well as significant fines for non-compliance. Compliance with changes in privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes. Moreover, a growing number of legislative and regulatory bodies have adopted consumer notification requirements in the event of unauthorized access to or acquisition of certain types of personal data. Such breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises user data.
Further, we may be or become subject to data localization laws mandating that data collected in a foreign country be processed and stored only within that country. Russia adopted such a law in 2014, and a similar law became effective in China in November 2021. If other countries in which we have customers were to adopt a data localization law, we could be required to expand our data storage facilities there or build new ones in order to comply. The expenditure this would require, as well as costs of compliance generally, could harm our financial condition.
Our products are complex and could have unknown defects or errors, which may give rise to claims against us, diminish our brand or divert our resources from other purposes.
Our robots rely on the interplay among behavior-based artificially intelligent systems, real-world dynamic sensors, user-friendly interfaces and tightly-integrated, electromechanical designs to accomplish their missions. Despite testing, our new or existing products have contained defects and errors and may in the future contain defects, errors or performance problems when first introduced, when new versions or enhancements are released, or even after these products have been used by our customers for a period of time. These problems have and may continue to result in expensive and time-consuming design modifications or warranty charges, delays in the introduction of new products or enhancements, significant increases in our service and maintenance costs, exposure to liability for damages, mandatory or voluntary recall or product upgrades, damaged customer relationships and harm to our reputation, any of which could materially harm our results of operations and ability to achieve market acceptance. Our quality control procedures relating to the raw materials and components that it receives from third-party suppliers as well as our quality control procedures relating to its products after those products are designed, manufactured and packaged may not be sufficient. In addition, increased development and warranty costs, including the costs of any mandatory or voluntary recall, could be substantial and could reduce our operating margins. The existence of any defects, errors, or failures in our products could also lead to product liability claims or lawsuits against us. A successful product liability claim could result in substantial cost, diminish our brand and divert management’s attention and resources, which could have a negative impact on our business, financial condition and results of operations.
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Risks Related to Ownership of our Common Stock
The market price of our common stock may fluctuate significantly.
The market price of our common stock has at times experienced substantial price volatility as a result of variations between our actual and anticipated financial results, announcements by us and our competitors, projections or speculation about our business or that of our competitors by the media or investment analysts or uncertainty about current global economic conditions. The stock market, as a whole, also has experienced extreme price and volume fluctuations that have affected the market price of the common stock of many technology companies in ways that may have been unrelated to such companies’ operating performance. In addition, the market price of our common stock may be, and we believe recently has been, significantly impacted by investors covering large short positions in our common stock. Furthermore, we believe the market price of our common stock should reflect future growth and profitability expectations. If we fail to meet these expectations, the market price of our common stock may significantly decline.
In addition, there are many other factors that may cause the market price of our common stock to fluctuate, including:
•actual or anticipated variations in our quarterly operating results, including fluctuations resulting from changes in foreign exchange rates or acquisitions by us, or the quarterly financial results of companies perceived to be similar to us;
•deterioration and decline in general economic, industry and/or market conditions;
•announcements of technological innovations or new products or services by us or our competitors;
•changes in estimates of our financial results or recommendations by market analysts;
•announcements by us or our competitors of significant projects, contracts, acquisitions, strategic alliances or joint ventures;
•the pending Merger with Amazon, and
•changes in our capital structure, such as future issuances of securities or the incurrence of additional debt.
Our financial results often vary significantly from quarter-to-quarter due to a number of factors, which may lead to volatility in our stock price.
Our quarterly revenue and other operating results have varied in the past and are likely to continue to vary significantly from quarter-to-quarter in the future. These fluctuations may be due to numerous factors including:
•the size, timing and mix of orders from retail stores and distributors for our consumer robots;
•the mix of products that we sell in the period;
•disruption of supply of our products from our manufacturers;
•disruptions to our supply chain due to inclement weather, pandemics, labor disruptions or other factors beyond our control, including COVID-19;
•seasonality in the sales of our products;
•the timing of new product introductions;
•unanticipated costs incurred in the introduction of new products;
•costs and availability of labor and raw materials;
•costs of freight and tariffs;
•changes in our rate of returns for our consumer products;
•our ability to introduce new products and enhancements to our existing products on a timely basis; and
•warranty costs associated with our consumer products.
We do not expect that our revenues will grow at rates that will allow us to achieve profitability for the foreseeable future, and we may not achieve a return to profitability in the future. We base our current and future expense levels on our internal operating plans and sales forecasts, including forecasts of holiday sales for our consumer products. A significant portion of our operating expenses, such as research and development expenses, certain marketing and promotional expenses and employee wages and salaries, do not vary directly with sales and are difficult to adjust in the short term. As a result, if sales for a quarter are below our expectations, we might not be able to reduce operating expenses for that quarter. Accordingly, a sales shortfall during a fiscal quarter, and in particular the fourth quarter of a fiscal year, could have a disproportionate effect on our operating results for that quarter or that year. Because of quarterly fluctuations, we believe that quarter-to-quarter comparisons of our
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operating results are not necessarily meaningful. Moreover, our operating results may not meet expectations of equity research analysts or investors. If this occurs, the trading price of our common stock could fall substantially either suddenly or over time.
Provisions in our certificate of incorporation and by-laws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Provisions of our certificate of incorporation and by-laws and Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:
•limitations on the removal of directors;
•a classified board of directors so that not all members of our board are elected at one time;
•advance notice requirements for stockholder proposals and nominations;
•the inability of stockholders to act by written consent or to call special meetings;
•the ability of our board of directors to make, alter or repeal our by-laws; and
•the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.
The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of directors, our by-laws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote.
In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
Risks Related to the Merger
The Merger, the pendency of the Merger or our failure to complete the Merger could have a material adverse effect on our business, results of operations, financial condition and stock price.
On August 4, 2022, we entered into the Merger Agreement with Amazon and Merger Sub, providing for the acquisition of iRobot by Amazon. Completion of the Merger is subject to the satisfaction of various conditions, including (1) the adoption of the Merger Agreement by a majority of the holders of the outstanding shares of our common stock (which we obtained at the special meeting of our stockholders held on October 17, 2022), (2) the expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and certain other approvals, clearances or expirations of waiting periods under other antitrust laws and foreign investment laws, (3) the absence of any order, injunction or law prohibiting the consummation of the Merger, (4) the accuracy of the other party’s representations and warranties, subject to certain materiality standards set forth in the Merger Agreement, (5) compliance in all material respects with the other party’s obligations under the Merger Agreement, and (6) no Material Adverse Effect (as defined in the Merger Agreement) having occurred since the date of the Merger Agreement that is continuing. There is no assurance that all of the various conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected timeframe, or at all. Furthermore, there are additional inherent risks in the Merger, including the risks detailed below.
During the period prior to the closing of the Merger, our business is exposed to certain inherent risks due to the effect of the announcement or pendency of the Merger on our business relationships, financial condition, operating results and business, including:
•uncertainty or competitive forces in the marketplace, which could lead current and prospective customers, retailers and distributors to purchase products from others or reduce, delay or cancel purchasing from us; for example, in early November 2022, we were notified by one of our top five customers by revenue that it planned to cease purchasing our products effective immediately, which we believe is a direct result of the pending Merger. Following discussions with this customer, the customer plans to purchase our products for at least the first six months of 2023;
•uncertainty caused by negative sentiment in the marketplace with respect to treatment of user data and concerns about possible changes to our products and services or policies;
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•disruption to our business and operations, including diversion of management attention and resources;
•the inability to attract and retain key personnel, and the possibility that our current employees could be distracted, and their productivity decline as a result, due to uncertainty regarding the Merger;
•the inability to pursue alternative business opportunities or make changes to our business pending the completion of the Merger, and other restrictions on our ability to conduct our business;
•our inability to solicit other acquisition proposals during the pendency of the Merger;
•the amount of the costs, fees, expenses and charges related to the Merger Agreement and the Merger; and
•other developments beyond our control, including, but not limited to, changes in domestic or global economic conditions that may affect the timing or success of the Merger.
The Merger may be delayed, and may ultimately not be completed, due to a number of factors, including:
•the receipt on September 19, 2022, of a request for additional information and documentary materials (the "Second Request") from the Federal Trade Commission ("FTC") in connection with the FTC's review of the Merger;
•the failure to obtain regulatory approvals from various governmental entities (or the imposition of any conditions, limitations or restrictions on such approvals);
•potential future stockholder litigation and other legal and regulatory proceedings, which could delay or prevent the Merger; and
•the failure to satisfy the other conditions to the completion of the Merger, including the possibility that a Material Adverse Effect on our business would permit Amazon not to close the Merger.
If the Merger does not close, our business and stockholders would be exposed to additional risks, including:
•to the extent that the current market price of our common stock reflects an assumption that the Merger will be completed, the price of our common stock could decrease if the Merger is not completed;
•investor confidence could decline, stockholder litigation could be brought against us, relationships with existing and prospective customers, distributors, retailers, service providers, investors, lenders and other business partners may be adversely impacted, we may be unable to retain key personnel, and profitability may be adversely impacted due to costs incurred in connection with the pending Merger;
•the requirement that we pay a termination fee of $56.0 million if the Merger Agreement is terminated in certain circumstances, including by the Company to enter into a superior proposal or by Amazon because the Board withdraws its recommendation in favor of the Merger; and
•the potential inability of the Company to restore business with any customers, retailers, or distributors lost due to uncertainty or competitive forces in the marketplace relating to the pending Merger, including the loss of one of the Company’s top five customers by revenue in early November 2022, that is believed to have been caused by the pending Merger, as well as the potential negative impact of these forces on the ability of the Company to attract prospective customers, which could adversely impact the Company’s business, financial condition, and stock price in the event that the Merger is not completed.
Even if successfully completed, there are certain risks to our stockholders from the Merger, including:
•the amount of cash to be paid under the Merger Agreement is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or operating results or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock;
•the fact that receipt of the all-cash per share merger consideration under the Merger Agreement is taxable to stockholders that are treated as U.S. holders for U.S. federal income tax purposes; and
•the fact that, if the Merger is completed, our stockholders will forego the opportunity to realize the potential long-term value of the successful execution of our current strategy as an independent company.
While the Merger Agreement is in effect, we are subject to restrictions on our business activities.
While the Merger Agreement is in effect, we are generally required to conduct our business in the ordinary course consistent with past practice, and are restricted from taking certain actions without Amazon’s prior consent, which is not to be unreasonably withheld, conditioned or delayed. These limitations include, among other things, certain restrictions on our ability to amend our organizational documents, acquire other businesses and assets, dispose of our assets, make investments, repurchase, reclassify or issue securities, make loans, pay dividends, incur indebtedness, make capital expenditures, enter into, amend or terminate certain contracts, change accounting policies or procedures, initiate or settle certain litigation, change tax classifications and elections, or take certain actions relating to intellectual property. These restrictions could prevent us from
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pursuing strategic business opportunities and taking actions with respect to our business, including effectively responding to competitive pressures and industry developments, that we may consider advantageous and may, as a result, materially and adversely affect our business, results of operations and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Bedford, Massachusetts, where we lease approximately 250,000 square feet. This lease expires on April 30, 2030. We also lease smaller facilities around the world. We believe that our leased facilities and additional or alternative space available to us will be adequate to meet our needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
From time to time and in the ordinary course of business, we are subject to various claims, charges and litigation. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, which could materially affect our financial condition or results of operations. See Footnote 13 to our consolidated financial statements for a description of certain of our legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on The Nasdaq Global Select Market under the symbol "IRBT." As of January 27, 2023, there were approximately 27,423,694 shares of our common stock outstanding held by approximately 184 stockholders of record.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We currently expect to retain future earnings, if any, to finance the growth and development of our business and we do not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
Information about our equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report on Form 10-K.
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ITEM 6. [RESERVED]
Not Applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this section has been derived from our consolidated financial statements and should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and are subject to the "safe harbor" created by those sections. In particular, statements contained in this Annual Report on Form 10-K that are not historical facts, including, but not limited to statements concerning our pending acquisition by Amazon, expectations regarding the timing of the Merger, new product sales, product development and offerings, ability to address consumer needs, the expansion of our addressable market, factors for differentiation of our products, product integration plans, our consumer robots, our competition, our strategy, our market position, market acceptance of our products, seasonal factors, revenue recognition, our profits, growth of our revenues, composition of our revenues, our cost of revenues, units shipped, average selling prices, the impact of promotional activity and tariffs, the timing of and ability to recover tariff refund claims, operating expenses, selling and marketing expenses, general and administrative expenses, research and development expenses, and compensation costs, our projected income tax rate, our credit and letter of credit facilities, including our ability to extend or refinance the credit facility, our valuations of investments, valuation and composition of our stock-based awards, efforts to mitigate supply chain challenges, availability of semiconductor chips, liquidity and the impact of cost-control measures and the amount of restructuring charges related to such activities, constitute forward-looking statements and are made under these safe harbor provisions. Some of the forward-looking statements can be identified by the use of forward-looking terms such as "believes," "expects," "may," "will," "should," "could," "seek," "intends," "plans," "estimates," "anticipates," or other comparable terms and negative forms of such terms. Forward-looking statements involve inherent risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. We urge you to consider the risks and uncertainties discussed in greater detail under the heading "Risk Factors" in evaluating our forward-looking statements. We have no plans to update our forward-looking statements to reflect events or circumstances after the date of this report. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.
Overview
iRobot is a leading global consumer robot company that designs and builds robots that empower people to do more. With over 30 years of artificial intelligence ("AI") and advanced robotics experience, we are focused on building thoughtful robots and developing intelligent home innovations that help make life better for millions of people around the world. iRobot's portfolio of home robots and smart home devices features proprietary technologies for the connected home and advanced concepts in cleaning, mapping and navigation, human-robot interaction and physical solutions. Leveraging this portfolio, we plan to add new capabilities and expand our offerings to help consumers make their homes easier to maintain, more efficient, more secure and healthier places to live.
Since our founding in 1990, we have developed the expertise necessary to design, build, sell and support durable, high-performance and cost-effective robots through the close integration of software, electronics and hardware. Following the introduction of the Roomba robotic vacuum cleaner ("RVC") in 2002, we have sold nearly 50 million consumer robots worldwide to become a global, market-leading consumer robotics innovator with a strong presence in a number of major geographic regions worldwide. Our core technologies serve as reusable building blocks that we adapt and expand to create next-generation robotic platforms. We believe that this approach accelerates the time to market while also reducing the costs, time and other risks associated with product development. These capabilities are amplified by iRobot OS, an evolution of our Genius Home Intelligence platform. The software intelligence of iRobot OS powers our portfolio of connected robotic floor care products, enabling an ever-expanding range of new features and thoughtful digital experiences that improve overall cleaning performance, personalization and control. By leveraging our considerable expertise and ongoing investment in AI, home understanding and machine vision technologies, iRobot OS provides consumers with greater control over where, when and how our robots work, simple integration with other smart home devices, thoughtful recommendations to further enhance the cleaning experience, and the ability to share and transfer home knowledge across multiple iRobot robots. We believe that the capabilities within iRobot OS will support our long-term vision of building out a larger ecosystem that encompasses a broader range of adjacent robotic and smart home categories. We believe that our significant expertise in robot design, engineering, and smart home technologies and targeted focus on understanding and addressing consumer needs, positions us well to expand our total addressable market and capitalize on the anticipated growth in a wider range of robotic and smart home categories.
Our total revenue for fiscal 2022 was $1,183.4 million, declining 24.4% from revenue of $1,565.0 million in fiscal 2021. Geographically, domestic revenue declined by $139.1 million, or 18.4%, and international revenue declined by $242.5 million,
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or 29.9%. Entering 2022, we were focused on further expanding our business by addressing a range of supply chain challenges that constrained our financial performance in 2021. Although we made considerable progress in addressing those supply chain challenges, market conditions in our two largest regions, North America and EMEA, eroded considerably over the course of 2022. However, we were still able to deliver several important new innovations including the launch of two upgrades to our iRobot OS platform, delivering new features and digital experiences across our entire portfolio of WiFi-connected floor cleaning robots. In September 2022, we introduced the Roomba Combo™ j7+, an advanced floor cleaning robot that can vacuum and mop in a single cleaning job. We ended 2022 with 17.6 million connected customers, an increase of 26% from 2021.
In March 2022, the Section 301 List 3 Tariff Exclusion was reinstated, which eliminated the 25% tariff on Roomba products imported from China beginning on October 12, 2021 and continuing until December 31, 2022. This exclusion, which was subsequently extended until September 30, 2023 entitled us to a refund of approximately $32.0 million in tariffs paid. During fiscal 2022, we recognized a benefit of $11.7 million from tariff refunds as reduction to cost of product revenue related to tariffs paid on products imported after October 12, 2021 and sold during fiscal 2021. As of December 31, 2022, we received $26.8 million of the tariff refund and the outstanding refund receivable of $5.2 million is recorded in other current assets on the consolidated balance sheet.
Merger Agreement
On August 4, 2022, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Amazon.com, Inc., a Delaware corporation ("Parent" or "Amazon") and Martin Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), pursuant to which Merger Sub will merge with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent. As a result of the Merger, each share of common stock of the Company, par value $0.01 per share ("Common Stock"), outstanding immediately prior to the effective time of the Merger (the "Effective Time") (subject to certain exceptions, including shares of Common Stock owned by the Company, Merger Sub, Parent or any of their respective direct or indirect wholly owned subsidiaries and shares of Common Stock owned by stockholders of the Company who have validly demanded and not withdrawn appraisal rights in accordance with Section 262 of the General Corporation Law of the State of Delaware) will, at the Effective Time, automatically be cancelled and converted into the right to receive $61.00 in cash, without interest and subject to applicable withholding taxes. If the Merger is consummated, the Company’s Common Stock will be delisted from the Nasdaq Stock Market LLC and deregistered under the Securities Exchange Act of 1934.
Fiscal Periods
We operate and report using a 52-53 week fiscal year ending on the Saturday closest to December 31. Accordingly, our fiscal quarters will end on the Saturday that falls closest to the last day of the third month of each quarter. As used in this Annual Report on Form 10-K, "fiscal 2022" refers to the 52-week fiscal year ending December 31, 2022, "fiscal 2021" refers to the 52-week fiscal year ended January 1, 2022, and "fiscal 2020" refers to the 53-week fiscal year ended January 2, 2021.
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Key Financial Metrics and Non-GAAP Financial Measures
In addition to the measures presented in our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"), we use the following key metrics, including non-GAAP financial measures, to evaluate and analyze our core operating performance and trends, and to develop short-term and long-term operational plans. The most directly comparable financial measures calculated under U.S. GAAP are gross profit and operating (loss) income. In fiscal 2022, 2021 and 2020, we had gross profit of $350.1 million, $550.3 million and $670.2 million, respectively, and operating (loss) income of ($240.4) million, ($1.1) million, and $146.3 million, respectively. A summary of key metrics and certain non-GAAP financial measures for fiscal 2022, 2021 and 2020, is as follows:
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| (dollars in thousands, except average gross selling prices) | |||||||||||||||||
| (unaudited, except for total revenue) | |||||||||||||||||
| Total Revenue | $ | 1,183,383 | $ | 1,564,987 | $ | 1,430,390 | |||||||||||
| Non-GAAP Gross Profit | $ | 348,385 | $ | 552,573 | $ | 637,174 | |||||||||||
| Non-GAAP Gross Margin | 29.4 | % | 35.3 | % | 44.5 | % | |||||||||||
| Non-GAAP Operating (Loss) Income | $ | (167,956) | $ | 38,256 | $ | 149,674 | |||||||||||
| Non-GAAP Operating Margin | (14.2) | % | 2.4 | % | 10.5 | % | |||||||||||
| Total robot units shipped (in thousands) | 4,182 | 5,602 | 5,494 | ||||||||||||||
| Average gross selling prices for robot units | $ | 337 | $ | 332 | $ | 318 | |||||||||||
Our non-GAAP financial measures reflect adjustments based on the following items. These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations from these results should be carefully evaluated.
Amortization of acquired intangible assets: Amortization of acquired intangible assets consists of amortization of intangible assets including completed technology, customer relationships, and reacquired distribution rights acquired in connection with business combinations as well as any non-cash impairment charges associated with intangible assets in connection with our past acquisitions.
Net Merger, Acquisition and Divestiture (Income) Expense: Net merger, acquisition and divestiture (income) expense primarily consists of transaction fees, professional fees, and transition and integration costs directly associated with mergers, acquisitions and divestitures, including with respect to the Merger. It also includes business combination adjustments including adjustments after the measurement period has ended.
Stock-Based Compensation: Stock-based compensation is a non-cash charge relating to stock-based awards.
Tariff Refunds: Our Section 301 List 3 Tariff Exclusion was reinstated in March 2022, which temporarily eliminates tariffs on our Roomba products imported from China beginning on October 12, 2021 until December 31, 2022. This temporary exclusion, which was subsequently extended until September 30, 2023, entitles us to a refund of all related tariffs previously paid since October 12, 2021. We exclude the refunds for tariff costs expensed during fiscal 2021 from our fiscal 2022 non-GAAP measures because those tariff refunds associated with tariff costs incurred in the past have no impact to our current period earnings.
IP Litigation Expense, Net: IP litigation expense, net relates to legal costs incurred to litigate patent, trademark, copyright and false advertising infringements, or to oppose or defend against interparty actions related to intellectual property. Any settlement payment or proceeds resulting from these infringements are included or netted against the costs.
Restructuring and Other: Restructuring charges are related to one-time actions associated with realigning resources, enhancing operational productivity and efficiency, or improving our cost structure in support of our strategy. Such actions are not reflective of ongoing operations and include costs primarily associated with severance costs, certain professional fees, costs associated with consolidation of facilities, warehouses and any other leased properties, and other non-recurring costs directly associated with resource realignments tied to strategic initiatives or changes in business conditions.
Gain/Loss on Strategic Investments: Gain/loss on strategic investments includes fair value adjustments, realized gains and losses on the sales of these investments and losses on the impairment of these investments.
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Income tax adjustments: Income tax adjustments include the tax effect of the non-GAAP adjustments, calculated using the appropriate statutory tax rate for each adjustment. We reassess the need for any valuation allowance recorded based on the non-GAAP profitability and have eliminated the effect of the valuation allowance recorded in the U.S. jurisdiction. We also exclude certain tax items, including impact from stock-based compensation windfalls/shortfalls, that are not reflective of income tax expense incurred as a result of current period earnings.
We exclude these items from our non-GAAP measures to facilitate an evaluation of our current operating performance and comparisons to our past operating performance. These items may vary significantly in magnitude or timing and do not necessarily reflect anticipated future operating activities. In addition, we believe that providing these non-GAAP measures affords investors a view of our operating results that may be more easily compared with our peer companies.
The following table reconciles gross profit, operating (loss) income, net (loss) income and net (loss) income per share on a GAAP and non-GAAP basis for fiscal 2022, 2021, and 2020:
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| (in thousands, except per share amounts) | |||||||||||||||||
| GAAP Gross Profit | $ | 350,093 | $ | 550,299 | $ | 670,229 | |||||||||||
| Amortization of acquired intangible assets | 2,812 | 1,223 | 1,920 | ||||||||||||||
| Stock-based compensation | 2,194 | 1,321 | 1,511 | ||||||||||||||
| Net merger, acquisition and divestiture expense | 462 | — | — | ||||||||||||||
| Tariff refunds | (11,727) | (270) | (36,486) | ||||||||||||||
| Restructuring and other | 4,551 | $ | — | $ | — | ||||||||||||
| Non-GAAP Gross Profit | $ | 348,385 | $ | 552,573 | $ | 637,174 | |||||||||||
| Non-GAAP Gross Margin | 29.4 | % | 35.3 | % | 44.5 | % | |||||||||||
| GAAP Operating (Loss) Income | $ | (240,383) | $ | (1,100) | $ | 146,322 | |||||||||||
| Amortization of acquired intangible assets | 15,361 | 2,253 | 2,912 | ||||||||||||||
| Stock-based compensation | 31,905 | 21,694 | 29,975 | ||||||||||||||
| Tariff refunds | (11,727) | (270) | (36,486) | ||||||||||||||
| Net merger, acquisition and divestiture expense (income) | 18,657 | 2,059 | (566) | ||||||||||||||
| IP litigation expense, net | 4,638 | 13,464 | 5,444 | ||||||||||||||
| Restructuring and other | 13,593 | 156 | 2,073 | ||||||||||||||
| Non-GAAP Operating (Loss) Income | $ | (167,956) | $ | 38,256 | $ | 149,674 | |||||||||||
| Non-GAAP Operating Margin | (14.2) | % | 2.4 | % | 10.5 | % | |||||||||||
| GAAP Net (Loss) Income | $ | (286,295) | $ | 30,390 | $ | 147,068 | |||||||||||
| Amortization of acquired intangible assets | 15,361 | 2,253 | 2,912 | ||||||||||||||
| Stock-based compensation | 31,905 | 21,694 | 29,975 | ||||||||||||||
| Tariff refunds | (11,727) | (270) | (36,486) | ||||||||||||||
| Net merger, acquisition and divestiture expense (income) | 18,657 | 2,059 | (1,241) | ||||||||||||||
| IP litigation expense, net | 4,638 | 13,464 | 5,444 | ||||||||||||||
| Restructuring and other | 13,593 | 156 | 2,073 | ||||||||||||||
| Loss (gain) on strategic investments | 19,718 | (30,063) | (43,817) | ||||||||||||||
| Income tax effect | 76,424 | (1,969) | 12,651 | ||||||||||||||
| Non-GAAP Net Income | $ | (117,726) | $ | 37,714 | $ | 118,579 | |||||||||||
| GAAP Net (Loss) Income Per Diluted Share | $ | (10.52) | $ | 1.08 | $ | 5.14 | |||||||||||
| Dilutive effect of non-GAAP adjustments | 6.19 | 0.26 | (1.00) | ||||||||||||||
| Non-GAAP Net (Loss) Income Per Diluted Share | $ | (4.33) | $ | 1.34 | $ | 4.14 | |||||||||||
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Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates and assumptions are based on historical experience and various other factors that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from our estimates.
The accounting policies, methods and estimates used to prepare our financial statements are described in Note 2 Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements in this Annual Report. We consider the following accounting policies to be those that are most important to the portrayal of our financial condition and that require a higher degree of judgment:
•revenue recognition and
•accounting for income taxes.
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Revenue is allocated to distinct performance obligations and is recognized net of allowances for returns and other credits and incentives. Revenue is recognized only to the extent that it is probable that a significant reversal of revenue will not occur and when collection is considered probable.
Frequently, our contracts with customers contain multiple promised goods or services. Such contracts may include any of the following, the consumer robot, downloadable app, cloud services, potential future unspecified software upgrades, premium customer care and extended warranties. For these contracts, we account for the promises separately as individual performance obligations if they are distinct. Performance obligations are considered distinct if they are both capable of being distinct and distinct within the context of the contract. In determining whether performance obligations meet the criteria for being distinct, we consider a number of factors, such as the degree of interrelation and interdependence between obligations, and whether or not the good or service significantly modifies or transforms another good or service in the contract. Our consumer robots are highly dependent on, and interrelated with, the embedded software and cannot function without the software. As such, the consumer robots are accounted for as a single performance obligation. We have determined that the app, cloud services and potential future unspecified software upgrades represent one performance obligation to the customer to enhance the functionality and interaction with the robot (referred to collectively as "Cloud Services"). Other services and support are considered distinct and therefore are treated as separate performance obligations.
Significant Judgments
Our contracts with customers may contain multiple promises to transfer products and services as described above. Determining whether products and services are considered distinct may require significant judgment.
Determining the standalone selling price ("SSP") for each distinct performance obligation requires judgment. We allocate revenue to all distinct performance obligations based on their relative SSPs. When available, we use observable prices to determine SSPs. When observable prices are not available, SSPs are established that reflect our best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. Our process for estimating SSPs without observable prices considers multiple factors that may vary depending upon the facts and circumstances related to each performance obligation including, market data or the estimated cost of providing the products or services.
Determining the revenue recognition period for services requires judgment. The transaction price allocated to the Cloud Services is deferred and recognized on a straight-line basis over the estimated term of the Cloud Services. Other services and support are recognized over their service periods.
Estimating variable consideration such as product returns and sales incentives requires judgment. We provide limited rights of returns for direct-to-consumer sales generated through its online stores and certain resellers and distributors. We record an allowance for product returns based on specific terms and conditions included in the customer agreements or based on historical experience and our expectation of future returns. In addition, we may provide other credits or incentives which are accounted for as variable consideration when estimating the amount of revenue to recognize. Where appropriate, these estimates take into consideration relevant factors such as our historical experience, current contractual requirements, specific known market events and forecasted inventory level in the channels. Returns and credits are estimated at the time of sale and updated at the end of each reporting period as additional information becomes available. We regularly evaluate the adequacy of our estimates for product returns and other credits and incentives. Future market conditions and product transitions may require us to take action to change such programs and related estimates. When the variables used to estimate these reserves change, or if actual results differ significantly from the estimates, we would be required to increase or reduce revenue to reflect the impact.
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Accounting for Income Taxes
We are subject to income taxes in the United States and other foreign jurisdictions. Significant judgment is required in determining our provision for income taxes, and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis using enacted tax rates in effect in the years in which those temporary differences are expected to be recovered or settled in each jurisdiction. A valuation allowance is provided if, based upon the weight of available evidence, it is more likely than not that the related benefits will not be realized. We regularly review the deferred tax assets for recoverability considering historical profitability, projected future taxable income, future reversals of existing taxable temporary differences, as well as feasible tax planning strategies in each jurisdiction.
During the third quarter of fiscal 2022, we concluded that, based on our evaluation of available positive and negative evidence, it is no longer more likely than not that our net U.S. federal and state deferred tax assets are recoverable. In assessing the realizability of our U.S. deferred tax assets, we considered our cumulative loss for the past three years, the current macroeconomic trends, and expected future reversals of existing taxable temporary differences. Such objective negative evidence limits our ability to consider other subjective evidence, such as our projections for future growth. Given the weight of objectively verifiable historical losses from our U.S. operations, we recorded a valuation allowance of $57.5 million in the third quarter of fiscal 2022 as a reserve against our net U.S. federal and state deferred tax assets. As of December 31, 2022, the total valuation allowance relative to our U.S. federal and state deferred tax assets was $94.8 million. A valuation allowance is a non-cash charge, and does not limit our ability to utilize our deferred tax assets, including our ability to utilize tax loss and credit carryforward amounts, against future taxable income. The amount of the deferred tax assets considered realizable, and the associated valuation allowance, could be adjusted in a future period if estimates of future taxable income change or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for future growth.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that, based on technical merits, the position will be sustained upon examination by the tax authorities. The tax benefits of the position recognized in the financial statements are then measured based on the largest amount of benefit that is greater than 50% likely to be realized upon settlement with a taxing authority. In addition, we recognize interest and penalties related to unrecognized tax benefits as a component of the income tax provision.
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Overview of Results of Operations
The following table sets forth our results of operations for the periods shown (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Revenue | $ | 1,183,383 | $ | 1,564,987 | $ | 1,430,390 | |||||||||||
| Cost of revenue: | |||||||||||||||||
| Cost of product revenue | 830,478 | 1,013,465 | 758,241 | ||||||||||||||
| Amortization of acquired intangible assets | 2,812 | 1,223 | 1,920 | ||||||||||||||
| Total cost of revenue | 833,290 | 1,014,688 | 760,161 | ||||||||||||||
| Gross profit | 350,093 | 550,299 | 670,229 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 166,508 | 161,331 | 156,670 | ||||||||||||||
| Selling and marketing | 293,307 | 289,848 | 265,475 | ||||||||||||||
| General and administrative | 118,112 | 99,190 | 100,770 | ||||||||||||||
| Amortization of acquired intangible assets | 12,549 | 1,030 | 992 | ||||||||||||||
| Total operating expenses | 590,476 | 551,399 | 523,907 | ||||||||||||||
| Operating (loss) income | (240,383) | (1,100) | 146,322 | ||||||||||||||
| Other (expense) income, net | (21,300) | 29,384 | 41,593 | ||||||||||||||
| (Loss) income before income taxes | (261,683) | 28,284 | 187,915 | ||||||||||||||
| Income tax expense (benefit) | 24,612 | (2,106) | 40,847 | ||||||||||||||
| Net (loss) income | $ | (286,295) | $ | 30,390 | $ | 147,068 | |||||||||||
The following table sets forth our results of operations as a percentage of revenue for the periods shown:
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Revenue | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
| Cost of revenue: | |||||||||||||||||
| Cost of product revenue | 70.2 | 64.8 | 53.0 | ||||||||||||||
| Amortization of acquired intangible assets | 0.2 | 0.1 | 0.1 | ||||||||||||||
| Total cost of revenue | 70.4 | 64.9 | 53.1 | ||||||||||||||
| Gross margin | 29.6 | 35.1 | 46.9 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 14.1 | 10.3 | 11.0 | ||||||||||||||
| Selling and marketing | 24.8 | 18.5 | 18.6 | ||||||||||||||
| General and administrative | 10.0 | 6.3 | 7.0 | ||||||||||||||
| Amortization of acquired intangible assets | 1.0 | 0.1 | 0.1 | ||||||||||||||
| Total operating expenses | 49.9 | 35.2 | 36.7 | ||||||||||||||
| Operating (loss) income | (20.3) | (0.1) | 10.2 | ||||||||||||||
| Other (expense) income, net | (1.8) | 1.9 | 3.0 | ||||||||||||||
| (Loss) income before income taxes | (22.1) | 1.8 | 13.2 | ||||||||||||||
| Income tax expense (benefit) | 2.1 | (0.1) | 2.9 | ||||||||||||||
| Net (loss) income | (24.2) | % | 1.9 | % | 10.3 | % | |||||||||||
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Comparison of Years Ended December 31, 2022, January 1, 2022 and January 2, 2021
Revenue
We primarily derive our revenue from sales of our consumer robots and accessories directly to consumers through online stores and through our Home app and indirectly through retailers and distributors. We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.
The following table shows revenue for fiscal 2022, 2021 and 2020 (dollars in thousands):
| Fiscal Year Ended | |||||||||||||||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | $ Change 2022 vs. 2021 | $ Change 2021 vs. 2020 | |||||||||||||||||||||||||
| Revenue | $ | 1,183,383 | $ | 1,564,987 | $ | 1,430,390 | $ | (381,604) | $ | 134,597 | |||||||||||||||||||
Year ended December 31, 2022 as compared to the year ended January 1, 2022
Revenue decreased 24.4% to $1,183.4 million in fiscal 2022 from $1,565.0 million in fiscal 2021. Geographically, in fiscal 2022, international revenue decreased $242.5 million, or 29.9%, which primarily reflected a 42.5% decrease in EMEA and 5.9% decrease in Japan, while domestic revenue decreased $139.1 million, or 18.4%. While fiscal 2021 revenue reflected stronger pandemic-driven consumer demand, revenue for fiscal 2022 was impacted by order reductions, delays and cancellations by retailers and distributors in EMEA and North America as macroeconomic trends in these regions deteriorated and consumer spending slowed. These decreases in revenue reflected a 25.3% decrease in total robots shipped, and unfavorable exchange rate changes on Japanese Yen, slightly offset by a 1.5% increase in gross average selling price for fiscal 2022, compared to fiscal 2021. Despite the overall decline in revenue, direct-to-consumer revenue grew 3.4% to $193.7 million due primarily to continued enhancement of our digital marketing capabilities.
Year ended January 1, 2022 as compared to the year ended January 2, 2021
Revenue increased 9.4% to $1,565.0 million in fiscal 2021 from $1,430.4 million in fiscal 2020. Despite ongoing semiconductor chip constraints and shipping delays that limited our ability to fulfill orders during the fiscal 2021 holiday season, revenue increased $134.6 million, which was primarily attributable to a 4.4% increase in average gross selling price and a 2.0% increase in units shipped in fiscal 2021, as compared to fiscal 2020. The increase in average gross selling price was primarily driven by 15.4% growth in sales of our mid and premium tier floor cleaning robots. In fiscal 2021, international revenue increased $125.1 million, or 18.2%, due primarily to 21.9% growth in EMEA and a 15.2% increase in Japan, while domestic revenue increased $9.5 million, or 1.3%. Our direct-to-consumer revenue growth of 24.2% to $187.4 million, or 12.0% of total revenue, reflected continued expansion of this channel as we invested in enhancing the online buying experience and upgrading our digital marketing capabilities.
Cost of Product Revenue
Cost of product revenue primarily consists of product cost, including costs of our contract manufacturers for production and component product costs, inbound and outbound freight, import duties, tariffs, logistics and fulfillment costs, manufacturing and tooling equipment depreciation, hosting costs and warranty cost. In addition, we include other expenses associated with supply chain logistics including personnel-related expenses of salaries and related costs. In 2022, cost of product revenue also included cost associated with consolidation of warehouses and other non-recurring cost directly associated with resource realignments tied to strategic initiatives or changes in business conditions. We outsource the manufacture of our products to contract manufacturers in southern China and Malaysia. During 2022, we continued to scale manufacturing capacity in Malaysia. In addition, because our purchase contract with our contract manufacturers in China and Malaysia are typically denominated in U.S. dollars, changes in currency exchange rates may impact our suppliers and increase our prices.
The following table shows cost of product revenue for fiscal 2022, 2021 and 2020 (dollars in thousands):
| Fiscal Year Ended | |||||||||||||||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | $ Change 2022 vs. 2021 | $ Change 2021 vs. 2020 | |||||||||||||||||||||||||
| Cost of product revenue | $ | 830,478 | $ | 1,013,465 | $ | 758,241 | $ | (182,987) | $ | 255,224 | |||||||||||||||||||
| As a percentage of revenue | 70.2 | % | 64.8 | % | 53.0 | % | |||||||||||||||||||||||
Year ended December 31, 2022 as compared to the year ended January 1, 2022
Cost of product revenue decreased $183.0 million, or 18.1%, to $830.5 million in fiscal 2022, compared to $1,013.5 million in fiscal 2021. The decrease in cost was primarily driven by the 24.4% decrease in revenue, lower Section 301 tariff
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expense and lower warranty costs in fiscal 2022, compared to fiscal 2021. In March 2022, we were granted a temporary exclusion from Section 301 List 3 tariffs which eliminated the 25% tariff on Roomba products imported from China beginning on October 12, 2021 and continuing until December 31, 2022. In late December 2022, the temporary exclusion was subsequently extended until September 30, 2023. As a result of this exclusion, during fiscal 2022, we recorded a net tariff benefit of $8.8 million including approximately $11.7 million benefit recognized to cost of product revenue related to tariffs expensed in prior year, compared to $48.3 million in tariff expense during fiscal 2021. The decrease was offset by higher supply chain cost continuing from the second half of fiscal 2021, a one-time action associated with the consolidation of warehouses of $4.0 million in the U.S., as well as higher logistics costs associated with the elevated inventory levels in fiscal 2022.
Year ended January 1, 2022 as compared to the year ended January 2, 2021
Cost of product revenue increased $255.2 million, or 33.7%, to $1,013.5 million in fiscal 2021, compared to $758.2 million in fiscal 2020. The cost of product revenue in fiscal 2021 included $48.3 million in tariff costs, whereas in fiscal 2020, we recognized a benefit of $36.5 million from tariff refunds associated with a temporary tariff exclusion, which eliminated the 25% tariff on Roomba products imported from China. The increase in cost of product revenue is also attributable to the 9.4% increase in revenue, as well as higher costs associated with the global supply chain challenges including increased oceanic transport and air freight expenses and higher raw materials and component costs associated with limited semiconductor chip availability.
Gross Profit
Our gross profit as a percentage of revenue, referred to as our gross margin, varies according to the mix of products sold, the channel mix through which we sell our products, the level of promotional activities, fluctuations of the impacts of our product and material cost saving initiatives, the foreign currency in which our products are sold, and tariff and duty costs imposed by governmental authorities.
The following table shows gross profit for fiscal 2022, 2021 and 2020 (dollars in thousands):
| Fiscal Year Ended | |||||||||||||||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | $ Change 2022 vs. 2021 | $ Change 2021 vs. 2020 | |||||||||||||||||||||||||
| Gross profit | $ | 350,093 | $ | 550,299 | $ | 670,229 | $ | (200,206) | $ | (119,930) | |||||||||||||||||||
| Gross margin | 29.6 | % | 35.1 | % | 46.9 | % | |||||||||||||||||||||||
Year ended December 31, 2022 as compared to the year ended January 1, 2022
Gross profit decreased $200.2 million, or 36.4%, to $350.1 million (29.6% of revenue) in fiscal 2022 from $550.3 million (35.1% of revenue) in fiscal 2021. Gross margin decreased 5.5 percentage points largely due to changes in pricing and higher promotional activity and unfavorable exchange rate changes on Japanese Yen. The decrease was partially offset by lower tariff cost as we were granted temporary exclusion from Section 301 List 3 which eliminates the 25% tariffs on Roomba products imported from China as previously described, and a $11.7 million recognized benefit from tariff refunds during the first quarter of 2022 related to tariffs expensed in fiscal 2021.
Year ended January 1, 2022 as compared to the year ended January 2, 2021
Gross profit decreased $119.9 million, or 17.9%, to $550.3 million (35.1% of revenue) in fiscal 2021 from $670.2 million (46.9% of revenue) in fiscal 2020. The decrease in gross margin was primarily driven by Section 301 List 3 tariff costs of $48.3 million included in fiscal 2021, while we recognized a benefit of $36.5 million from tariff refunds in fiscal 2020. The remainder of the decrease in gross margin was driven by supply chain headwinds with increases in air and oceanic transportation, higher material costs and pricing and promotional activity.
Research and Development
Research and development expenses consist primarily of:
•salaries and related costs for our engineers;
•contractors and consulting expenses;
•costs of components and test equipment used for product, tooling and prototype development;
•occupancy and other overhead costs;
•acquisition-related costs associated with the Merger, including retention bonuses; and
•restructuring charges.
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Our research and development team develops new software and hardware products as well as improves and enhances our existing software and hardware products to address customer demands and emerging trends. We have significantly expanded our research and development in software intelligence, resulting in recent upgrades to the iRobot OS platform, along with ongoing investment in AI, home understanding and machine vision technologies. We are committed to consistently maintaining our high level of innovative design and development of new products as we strive to enhance our ability to serve our existing consumer markets as well as new markets for robots. We anticipate that in fiscal 2023, research and development expenses will slightly increase in absolute dollars and as a percentage of revenue.
The following table shows research and development costs for fiscal 2022, 2021 and 2020 (dollars in thousands):
| Fiscal Year Ended | |||||||||||||||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | $ Change 2022 vs. 2021 | $ Change 2021 vs. 2020 | |||||||||||||||||||||||||
| Research and development | $ | 166,508 | $ | 161,331 | $ | 156,670 | $ | 5,177 | $ | 4,661 | |||||||||||||||||||
| As a percentage of revenue | 14.1 | % | 10.3 | % | 11.0 | % | |||||||||||||||||||||||
Year ended December 31, 2022 as compared to the year ended January 1, 2022
Research and development expenses increased $5.2 million, or 3.2%, to $166.5 million (14.1% of revenue) in fiscal 2022 from $161.3 million (10.3% of revenue) in fiscal 2021. This increase was primarily due to a $4.2 million increase in people-related costs associated with additional headcount during the first half of 2022, $1.8 million of retention bonuses associated with the pending Merger and $1.3 million of severance-related costs associated with the August 2022 restructuring, partially offset by a $3.2 million decrease in short-term incentive compensation costs.
Year ended January 1, 2022 as compared to the year ended January 2, 2021
Research and development expenses increased $4.7 million, or 3.0%, to $161.3 million (10.3% of revenue) in fiscal 2021 from $156.7 million (11.0% of revenue) in fiscal 2020. This increase is primarily due to an $8.0 million increase in people-related costs associated with additional headcount and higher program-related costs of $4.6 million during fiscal 2021, offset by lower short-term incentive compensation of $8.0 million resulting from changes in assessments mainly driven by supply chain challenges as further discussed elsewhere in this Annual Report on Form 10-K.
Selling and Marketing
Our selling and marketing expenses consist primarily of:
•salaries and related costs for sales and marketing personnel;
•advertising, marketing and other brand-building costs;
•product display expenses;
•customer service costs;
•technology subscription and cloud expenses;
•acquisition-related costs associated with the Merger, including retention bonuses; and
•restructuring charges.
We anticipate that in fiscal 2023, selling and marketing expenses will decrease in absolute dollars and as a percentage of revenue due to planned reductions in working media and other demand generation activities, and the anticipated impact of reductions in headcount associated with the February 2023 restructuring and related hiring plans for the remainder of the year.
The following table shows selling and marketing costs for fiscal 2022, 2021 and 2020 (dollars in thousands):
| Fiscal Year Ended | |||||||||||||||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | $ Change 2022 vs. 2021 | $ Change 2021 vs. 2020 | |||||||||||||||||||||||||
| Selling and marketing | $ | 293,307 | $ | 289,848 | $ | 265,475 | $ | 3,459 | $ | 24,373 | |||||||||||||||||||
| As a percentage of revenue | 24.8 | % | 18.5 | % | 18.6 | % | |||||||||||||||||||||||
Year ended December 31, 2022 as compared to the year ended January 1, 2022
Selling and marketing expenses increased by $3.5 million, or 1.2%, to $293.3 million (24.8% of revenue) in fiscal 2022 from $289.8 million (18.5% of revenue) in fiscal 2021. This increase was primarily driven by $2.5 million severance-related costs associated with the August 2022 restructuring, a $2.4 million increase in people-related costs associated with additional headcount during the first half of 2022 and a $2.2 million increase related to stock-based compensation driven by lower expense in the prior year from our performance-based restricted stock units that are based on certain financial performance targets. In
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addition, the increase was also attributable to a $1.7 million increase in technology related costs including cloud service and maintenance and support fees, and $1.3 million retention bonuses associated with the pending Merger. These increases were partially offset by a $4.2 million decrease from prior year on consulting services costs that supported enhancements of our direct-to-consumer sales channel, digital marketing and e-commerce capabilities, and a $1.5 million decrease on product display related costs.
Year ended January 1, 2022 as compared to the year ended January 2, 2021
Selling and marketing expenses increased by $24.4 million, or 9.2%, to $289.8 million (18.5% of revenue) in fiscal 2021 from $265.5 million (18.6% of revenue) in fiscal 2020. This increase was primarily attributable to higher people-related costs of $12.4 million associated with additional headcount, higher marketing spend of $7.8 million associated with increased used of working media to drive sales growth and new launches, as well as $6.5 million higher technology related cost including cloud service and maintenance and support fees as we continue to invest in our digital marketing and e-commerce capabilities. These increases were offset by lower short-term incentive compensation of $3.3 million resulting from changes in assessments driven by supply chain challenges as further discussed elsewhere in this Annual Report on Form 10-K.
General and Administrative
Our general and administrative expenses consist primarily of:
•salaries and related costs for executives and administrative personnel;
•professional services costs;
•information systems and infrastructure costs;
•travel and related costs;
•occupancy and other overhead costs;
•acquisition-related costs associated with the Merger, including retention bonuses; and
•restructuring charges.
The following table shows general and administrative costs for fiscal 2022, 2021 and 2020 (dollars in thousands):
| Fiscal Year Ended | |||||||||||||||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | $ Change 2022 vs. 2021 | $ Change 2021 vs. 2020 | |||||||||||||||||||||||||
| General and administrative | $ | 118,112 | $ | 99,190 | $ | 100,770 | $ | 18,922 | $ | (1,580) | |||||||||||||||||||
| As a percentage of revenue | 10.0 | % | 6.3 | % | 7.0 | % | |||||||||||||||||||||||
Year ended December 31, 2022 as compared to the year ended January 1, 2022
General and administrative expenses increased by $18.9 million, or 19.1%, to $118.1 million (10.0% of revenue) in fiscal 2022 from $99.2 million (6.3% of revenue) in fiscal 2021. This increase was primarily driven by a $13.9 million increase in acquisition-related costs, including retention bonuses and legal fees, associated with the pending Merger and a $6.2 million increase related to stock-based compensation driven by lower expense in prior year from our performance-based restricted stock units that are based on certain financial performance targets. The increase was also attributable to $4.5 million in restructuring charges associated with the Facility restructuring as described in Note 2 to the consolidated financial statements and August 2022 restructuring in fiscal 2022, a $3.0 million increase on enterprise software maintenance, support and services cost, and a $2.7 million increase related to the allowance for credit losses. These increases were partially offset by a $10.2 million decrease in legal fees driven by lower intellectual property litigation costs.
Year ended January 1, 2022 as compared to the year ended January 2, 2021
General and administrative expenses increased by $1.6 million, or 1.6%, to $99.2 million (6.3% of revenue) in fiscal 2021 from $100.8 million (7.0% of revenue) in fiscal 2020. This decrease is primarily attributable to lower vesting expectations related to our performance-based stock-based compensation and lower short-term incentive compensation of $14.9 million and a $4.6 million decrease in the allowance for credit losses associated with the uncertainty of collection from certain customer accounts resulting from the pandemic. The decrease is offset by an increase of $8.8 million in legal fees driven by higher intellectual property litigation costs and a $4.6 million increase associated with people related cost resulting from additional headcount.
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Amortization of Acquired Intangible Assets
Amortization of acquired technology and reacquired distribution rights are recorded within cost of revenue whereas the amortization of acquired customer relationships, non-compete agreements and tradenames are recorded within operating expenses. Reacquired distribution rights are amortized on an accelerated basis, while all other intangible assets are amortized over their respective estimated useful lives on a straight-line basis, consistent with the pattern in which the economic benefits are being utilized.
The following table shows total amortization expense for fiscal 2022, 2021 and 2020 (dollars in thousands):
| Fiscal Year Ended | |||||||||||||||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | $ Change 2022 vs. 2021 | $ Change 2021 vs. 2020 | |||||||||||||||||||||||||
| Cost of revenue | $ | 2,812 | $ | 1,223 | $ | 1,920 | $ | 1,589 | $ | (697) | |||||||||||||||||||
| Operating expense | 12,549 | 1,030 | 992 | 11,519 | 38 | ||||||||||||||||||||||||
| Total amortization expense | $ | 15,361 | $ | 2,253 | $ | 2,912 | $ | 13,108 | $ | (659) | |||||||||||||||||||
| As a percentage of revenue | 1.3 | % | 0.1 | % | 0.2 | % | |||||||||||||||||||||||
The increases in amortization of acquired intangible assets during fiscal 2022 as compared to fiscal 2021, was primarily related to an $11.1 million impairment loss on acquired intangible assets recorded during the third quarter of 2022.
Other (expense) income, net
Other (expense) income, net includes interest income, interest expense, foreign currency gains (losses) as well as gains (losses) from strategic investments. The following table shows other (expense) income, net for fiscal 2022, 2021 and 2020 (dollars in thousands):
| Fiscal Year Ended | |||||||||||||||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | $ Change 2022 vs. 2021 | $ Change 2021 vs. 2020 | |||||||||||||||||||||||||
| Other (expense) income, net | $ | (21,300) | $ | 29,384 | $ | 41,593 | $ | (50,684) | $ | (12,209) | |||||||||||||||||||
| As a percentage of revenue | (1.8) | % | 1.9 | % | 3.0 | % | |||||||||||||||||||||||
Other (expense) income, net amounted to ($21.3) million, $29.4 million and $41.6 million for fiscal 2022, 2021 and 2020, respectively. During fiscal 2022, 2021, and 2020, other (expense) income, net, included a net loss of $19.7 million, a net gain of $30.1 million and a net gain of $43.8 million from our strategic investments, respectively.
Income Tax Provision (Benefit)
The following table shows income tax provision (benefit) for fiscal 2022, 2021 and 2020 (dollars in thousands):
| Fiscal Year Ended | |||||||||||||||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | $ Change 2022 vs. 2021 | $ Change 2021 vs. 2020 | |||||||||||||||||||||||||
| Income tax provision (benefit) | $ | 24,612 | $ | (2,106) | $ | 40,847 | $ | 26,718 | $ | (42,953) | |||||||||||||||||||
| As a percentage of pre-tax income | (9.4) | % | (7.4) | % | 21.7 | % | |||||||||||||||||||||||
Year ended December 31, 2022 as compared to the year ended January 1, 2022
We recorded an income tax provision of $24.6 million and an income tax benefit of $2.1 million for fiscal 2022 and fiscal 2021, respectively. The provision for fiscal 2022 resulted in an effective income tax rate of (9.4)%. The $2.1 million benefit for fiscal 2021 resulted in an effective income tax rate of (7.4)%.
Our effective income tax rate of (9.4)% for fiscal 2022 differed from the federal statutory tax rate of 21% primarily due to the recording of a full valuation allowance against our U.S. deferred tax assets. During the third quarter of fiscal 2022, we concluded that, based on our evaluation of available positive and negative evidence, it is no longer more likely than not that our net U.S. federal and state deferred tax assets are recoverable. In assessing the realizability of our U.S. deferred tax assets, the key factors used to determine positive and negative evidence included our recent losses resulting in cumulative loss for the three-year period ended December 31, 2022, current macroeconomic trends, and expected future reversals of existing taxable temporary differences. Such objective negative evidence limits our ability to consider other subjective evidence, such as our projections for future growth. Given the weight of objectively verifiable historical cumulative three-year losses from our U.S.
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operations, we recorded a valuation allowance of $57.5 million in the third quarter of fiscal 2022 as a reserve against our net U.S. federal and state deferred tax assets. As of December 31, 2022, the total valuation allowance relative to our U.S. federal and state deferred tax assets was $94.8 million. A valuation allowance is a non-cash charge, and does not limit our ability to utilize our deferred tax assets, including our ability to utilize tax loss and credit carryforward amounts, against future taxable income. The amount of the deferred tax assets considered realizable, and the associated valuation allowance, could be adjusted in a future period if estimates of future taxable income change or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for future growth.
Year ended January 1, 2022 as compared to the year ended January 2, 2021
We recorded an income tax benefit of $2.1 million and income tax provision of $40.8 million for fiscal 2021 and fiscal 2020, respectively. The $2.1 million benefit for fiscal 2021 resulted in an effective income tax rate of (7.4)%. The $40.8 million provision for fiscal 2020 resulted in an effective income tax rate of 21.7%.
Our effective income tax rate of (7.4)% for fiscal 2021 differed from the federal statutory tax rate of 21% primarily due to the impact of tax benefits related to research and development tax credits, the deduction for Foreign Derived Intangible Income and a discrete tax benefit associated with stock-based compensation. The decrease in the effective income tax rate of (7.4)% for fiscal 2021 as compared to 21.7% for fiscal 2020 is primarily driven by lower income in 2021 and the impact of tax benefits during the period.
Liquidity and Capital Resources
At December 31, 2022, our principal sources of liquidity were cash and cash equivalents totaling $117.9 million. Our working capital, which represents our total current assets less total current liabilities, was $232.1 million as of December 31, 2022, compared to $393.9 million as of January 1, 2022. Cash and cash equivalents held by our foreign subsidiaries totaled $30.8 million as of December 31, 2022. The undistributed earnings of our foreign subsidiaries remain permanently reinvested outside of the United States as of December 31, 2022. We believe our existing cash balance, expected future operating cash flows and our credit facility will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. See more detailed discussion below.
On August 4, 2022, we entered into the Merger Agreement with Amazon and Merger Sub, providing for the acquisition of iRobot by Amazon. We have agreed to various covenants and agreements, including, among others, agreements to conduct our business in the ordinary course of business between the execution of the Merger Agreement and the closing of the Merger. Outside of certain limited exceptions, we may not take certain actions without Amazon’s consent, including (i) acquiring businesses and disposing of significant assets, (ii) incurring expenditures above specified thresholds; (iii) incurring additional debt above specified thresholds, (iv) issuing additional securities, or (v) repurchasing shares of our outstanding common stock. We do not believe these restrictions will prevent us from meeting our ongoing costs of operations, working capital needs or capital expenditure requirements.
We manufacture and distribute our products through contract manufacturers and third-party logistics providers. We believe this approach gives us the advantages of relatively low capital investment and significant flexibility in scheduling production and managing inventory levels. By leasing our office facilities, we also minimize the cash needed for expansion, and only invest periodically in leasehold improvements a portion of which is often reimbursed by the landlords of these facilities. Accordingly, our capital spending is generally limited to machinery and tooling, leasehold improvements, business applications software and computer and equipment. During the fiscal years ended December 31, 2022 and January 1, 2022, we spent $12.3 million and $29.9 million, respectively, on capital expenditures.
Our strategy for delivering consumer products to our distributors and retail customers gives us the flexibility to provide container shipments directly from our contract manufacturers in Southern China and Malaysia to our customers or, alternatively, allows our distributors and certain retail customers to take possession of product on a domestic basis. Accordingly, our inventory consists of goods shipped to our third-party logistics providers for the fulfillment of distributor, retail and direct-to-consumer sales. Our contract manufacturers are also responsible for purchasing and stocking components required for the production of our products, and they typically invoice us when the finished goods are shipped.
Cash used in operating activities
Year ended December 31, 2022 as compared to the year ended January 1, 2022
Net cash used in our operations for the fiscal year ended December 31, 2022 was $90.0 million, of which the principal components were our net loss of $286.3 million, partially offset by the non-cash charges of $117.3 million and the cash inflow of $79.0 million from change in working capital. The change in working capital was driven by net cash inflows of $94.8 million and $49.4 million related to accounts receivable and inventory, respectively, offset by net cash outflow of $73.6 million in accounts payable driven by a decrease in accrued expense and payables primarily due to lower inventory purchases.
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Year ended January 1, 2022 as compared to the year ended January 2, 2021
Net cash used in our operations for the fiscal year ended January 1, 2022 was $32.0 million, of which the principal components were the cash outflow of $86.3 million from change in working capital, partially offset by our net income of $30.4 million and non-cash charges of $23.9 million. The cash outflow from changes in working capital is mainly driven by cash used in inventory of $151.2 million offset by cash inflow from the increase in accounts payable of $82.3 million.
Cash provided by (used in) investing activities
Year ended December 31, 2022 as compared to the year ended January 1, 2022
Net cash provided by investing activities for the fiscal year ended December 31, 2022 was $2.2 million. During the year ended December 31, 2022, we received $17.7 million from the sales and maturities of our investment while we paid $3.2 million for the purchases of investments. We invested $12.3 million in the purchase of property and equipment, primarily related to machinery and tooling for new products.
Year ended January 1, 2022 as compared to the year ended January 2, 2021
Net cash used in investing activities for the fiscal year ended January 1, 2022 was $48.1 million. During the year ended January 1, 2022, we acquired Aeris for $71.4 million, net of cash acquired, and invested $29.9 million in the purchase of property and equipment, including machinery and tooling for new products. In addition, we made strategic investments of $10.8 million while proceeds from the sales and maturities of marketable securities amounted to $64.0 million.
Cash provided by (used in) financing activities
Year ended December 31, 2022 as compared to the year ended January 1, 2022
Net cash provided by financing activities for the fiscal year ended December 31, 2022 was $2.9 million. During the year ended December 31, 2022, we received $4.7 million from employee stock plans and paid $1.8 million upon vesting of restricted stock where 30,023 shares were retained by us to cover employee tax withholdings.
Year ended January 1, 2022 as compared to the year ended January 2, 2021
Net cash used in financing activities for the fiscal year ended January 1, 2022 was $148.4 million, which primarily reflects the repurchase of 1,198,218 shares of our common stock for $100.0 million under an accelerated share repurchase agreement during the third quarter of 2021, and the repurchase of 446,954 shares of our common stock for $50.0 million under a stock repurchase program during the second quarter of 2021.
Working Capital Facility
Credit Facility
As of December 31, 2022, we had a $150.0 million secured revolving line of credit which expires in June 2023, and no outstanding borrowings under our revolving credit facility.
The credit facility contains customary terms and conditions for credit facilities of this type, including restrictions on our ability to incur or guarantee additional indebtedness, create liens, enter into transactions with affiliates, make loans or investments, sell assets, pay dividends or make distributions on, or repurchase, our stock, and consolidate or merge with other entities.
The credit facility contains customary events of default, including for payment defaults, breaches of representations, breaches of affirmative or negative covenants, cross defaults to other material indebtedness, bankruptcy and failure to discharge certain judgments. If a default occurs and is not cured within any applicable cure period or is not waived, our obligations under the credit facility may be accelerated.
On May 4, 2022, we entered into a Second Amendment (the "Second Amendment") to the Amended and Restated Credit Agreement (as amended, the "Credit Agreement") with Bank of America N.A. (the "Lender") with an effective date of March 31, 2022. The Second Amendment waives the quarterly tested leverage and interest coverage covenants in the Credit Agreement for the first, second and third quarters of 2022. The interest coverage ratio calculation for the fourth quarter of 2022 was changed to a trailing nine months. Additionally, a new liquidity covenant was added for the remainder of 2022. The Second Amendment also increased the borrowing rate under the Credit Agreement for 2022 to LIBOR plus 1.5%.
On October 28, 2022, we entered into a Third Amendment to the Credit Agreement (the "Third Amendment"). The Third Amendment temporarily increased the commitments under the facility to $200.0 million for the time period from October 28, 2022 to December 29, 2022. On December 30, 2022, the commitment was reduced by $50.0 million and returned to the previous $150.0 million. In addition, the Third Amendment replaced the quarterly tested leverage and interest coverage covenants with a new minimum cash requirement of $25.0 million to be tested on October 31, 2022 and November 30, 2022. The Third Amendment also requires that the borrowing under the Credit Agreement must be below $75.0 million on December 30, 2022 and for ten consecutive days during the first quarter in 2023. The Third Amendment changed the borrowing rate under
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the Credit Agreement to SOFR plus 1.5% plus a credit spread adjustment of 0.1%. In connection with the Third Amendment, the Company entered into a security and pledge agreement granting the Lender a security interest in substantially all of its U.S. assets.
On January 17, 2023, we entered into a Fourth Amendment (the "Fourth Amendment") to the Credit Agreement which reduced the amount of the facility from $150.0 million to $100.0 million and increased the interest rate of (1) Term SOFR Loans to 4.50%, (2) Base Rate Loans to 3.50%, and (3) unused Commitments to 3.50%. In addition, the Fourth Amendment established a borrowing base for the revolving facility equal to the total of 80% of eligible receivables, 50% of eligible inventory, and upon the satisfaction of certain conditions, up to 30% of eligible in-transit inventory, all subject to any applicable reserves. Additionally, the Fourth Amendment required us to maintain $25.0 million of cash in the U.S. at all times, which is tested monthly and replaced the requirement that the borrowing under the Credit Agreement be under $75.0 million (1) on December 30, 2022 and (2) for ten consecutive days during the first quarter in 2023, and replaced it with a requirement that the borrowing under the Credit Agreement be $25.0 million or less (1) on December 29, 2023 and (2) for thirty consecutive days between January 17, 2023 and September 17, 2024. The Fourth Amendment also extended the maturity date of the Credit Agreement from June 30, 2023 to September 17, 2024, and continues to be secured by substantially all of our U.S. assets.
As of December 31, 2022, we were in compliance with covenants under the Credit Agreement.
Lines of Credit
We have a secured letter of credit facility with Bank of America, N.A., available to fund letters of credit up to an aggregate outstanding amount of $5.0 million. As of December 31, 2022, we had letters of credit outstanding of $0.4 million under our letter of credit facility and other lines of credit with Bank of America, N.A.
We have an unsecured guarantee line of credit with Mizuho, Bank Ltd., available to fund import tax payments up to an aggregate outstanding amount of 250.0 million Japanese Yen. As of December 31, 2022, we had no outstanding balance under the guarantee line of credit.
Liquidity
The accompanying audited consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
We have a long history of profitable operations, positive operating cash flows and substantial liquidity that was further strengthened during the first year of the COVID-19 pandemic as consumer demand for our products increased considerably. During fiscal 2022, our revenue declined 24% from fiscal 2021 primarily due to lower orders from retailers and distributors in the United States and EMEA largely resulting from a decline in consumer sentiment, and resultant spending, driven by high inflation, rising interest rates, rising energy costs, the potential recessionary outlook and geopolitical instability, which was exacerbated by the Russia-Ukraine war. The lower revenue has resulted in operating losses of $240.4 million and operating cash outflows of $90.0 million for the fiscal 2022. As a result, our cash and cash equivalents and short-term investments have declined from $234.5 million as of January 1, 2022 to $117.9 million as of December 31, 2022.
As of December 31, 2022, we have no outstanding borrowings from our $150.0 million available revolving line of credit which expires on June 30, 2023. On January 17, 2023, we entered into a Fourth Amendment (the "Fourth Amendment") to the Credit Agreement which reduces the amount of the facility from $150.0 million to $100.0 million and extends the maturity date of the Credit Agreement from June 30, 2023 to September 17, 2024 (see Note 8 for additional details about our Credit Agreement).
We have considered and assessed our ability to continue as a going concern for the one year from the date that the audited consolidated financial statements are issued. Our assessment included the preparation of cash flow forecasts taking into account actions already implemented. We considered additional actions within our control that we would implement, if necessary, to maintain liquidity and operations in the ordinary course. We have already undertaken the following actions to improve profitability and operating cash flows and align the organization to the lower revenue level:
•During August 2022, we initiated a restructuring of our operations designed to better align our cost structure with near-term revenue and cash flow generation, advance key strategic priorities, increase efficiencies and improve our profitability going forward. As part of this August 2022 restructuring, we reduced our workforce and terminated approximately 100 employees, which represents 8% of our workforce and eliminated a number of open positions entering the third quarter of 2022. As a follow-on action to our August 2022 restructuring of operations and in anticipation that market conditions will remain challenging into 2023, we initiated a new restructuring program at the beginning of February 2023 and reduced our workforce by approximately 85 employees or 7%. In addition to the reduction in force, our 2023 operating plan incorporates scaled back working media and other demand-generation activities, limited investment in non-robotic product categories and minimal new hiring plans in 2023. At December 31, 2022, we had 1,254 employees. Including the aforementioned reductions in force of approximately 85 employees,
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we have had a total reduction of 203 employees since the end of fiscal 2021. In addition to the reduction of our headcount, we signed a sublease agreement for a portion of our headquarter during the fourth quarter of fiscal 2022 and plan to further consolidate our global facilities footprint during fiscal 2023. We currently anticipate that our August 2022 and February 2023 restructuring actions will deliver net cost savings of approximately $42.0 million in 2023, including actions associated with the facilities consolidation.
•Inventory has consumed a significant amount of cash and we continue to manage our inventory level carefully. As of December 31, 2022, the inventory balance was $285.3 million, or 95 days, a reduction of $133.8 million, or 95 days from the third quarter of fiscal 2022. In 2023, we will continue to manage our inventory to a level that aligns with current run rates of the business. As such, we have temporarily reduced robot production since late January 2023 at our contract manufacturing partners in China and Malaysia with plans to increase production in April 2023.
While we estimate such actions will be sufficient to allow us to maintain liquidity and our operations in the ordinary course for at least 12 months from the issuance of these financial statements, there can be no assurance we will generate sufficient future cash flows from operations due to potential factors, including, but not limited to, further inflation, the continued rising interest rates, ongoing recessionary conditions or continued reduced demand for our products. If we are not successful in increasing demand for our products, or if macroeconomic conditions further constrain consumer demand, we may continue to experience adverse impacts to revenue and profitability. Additional actions within our control to maintain our liquidity and operations include optimizing our production volumes with contract manufacturers by reducing inventory supply forecast for cancellable purchase orders, further reducing discretionary spending in all areas of the business, decreasing working media spending and realigning resources through ongoing attrition without rehiring activity. Should we require further funding in the future, there can be no assurance that we will be able to obtain additional debt financing on terms acceptable to us, or at all.
The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.
Contractual Obligations
We generally do not enter into binding purchase commitments. Our principal commitments consist of obligations under our credit facility, leases for office space, inventory related purchase obligations, and minimum contractual obligations. Other obligations consist primarily of subscription services. The following table describes our commitments to settle contractual obligations in cash as of December 31, 2022 (in thousands):
| Payments Due by Period | |||||||||||||||||||||||||||||
| Less Than 1 Year | 1 to 3 Years | 3 to 5 Years | More Than 5 Years | Total | |||||||||||||||||||||||||
| Operating leases (1) | $ | 6,916 | $ | 11,191 | $ | 10,516 | $ | 11,601 | $ | 40,224 | |||||||||||||||||||
| Inventory-related purchase obligations (2) | 18,469 | — | — | — | 18,469 | ||||||||||||||||||||||||
| Minimum contractual payments | 12,750 | 24,917 | 1,500 | — | 39,167 | ||||||||||||||||||||||||
| Other obligations | 9,240 | 7,244 | — | — | 16,484 | ||||||||||||||||||||||||
| Total | $ | 47,375 | $ | 43,352 | $ | 12,016 | $ | 11,601 | $ | 114,344 | |||||||||||||||||||
(1)Operating leases obligations include cash inflows from existing contractual facility sublease through April 2030 as of December 31, 2022.
(2)Includes estimated obligations under purchase orders related to inventory. Excludes purchase orders that can be cancelled without penalty.
At December 31, 2022, we had outstanding purchase orders aggregating approximately $151.5 million. Included in the outstanding purchase orders, $18.5 million are not cancellable without penalty which is a decrease of $23.4 million from prior year as we continue to manage liquidity. The purchase orders, the majority of which are with our contract manufacturers for the purchase of inventory in the normal course of business, are for manufacturing and non-manufacturing related goods and services, and are cancellable without penalty.
Recently Issued Accounting Pronouncements
See Note 2 to the accompanying consolidated financial statements for a description of certain recently issued accounting standards which may impact our financial statements in future reporting periods.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Exchange Rate Sensitivity
Our international revenue and expenses are denominated in multiple currencies, including British Pounds, Canadian Dollars, Chinese Renminbi, Euros, Japanese Yen and Swiss Franc. As such, we have exposure to adverse changes in exchange rates associated with the revenue and operating expenses of our foreign operations. Any fluctuations in other currencies will have minimal direct impact on our international revenue.
In addition to international business conducted in foreign currencies, we have international revenue denominated in U.S. dollars. As the U.S. dollar strengthens or weakens against other currencies, our international distributors may be impacted, which could affect their profitability and our ability to maintain current pricing levels on our international consumer products.
We regularly monitor the forecast of non-U.S. dollar revenue and expenses and the level of non-U.S. dollar monetary asset and liability balances to determine if any actions, including possibly entering into foreign currency contracts, should be taken to minimize the impact of fluctuating exchange rates on our results of operations. Periodically, we enter into forward exchange contracts to hedge against foreign currency fluctuations. These contracts may or may not be designated as cash flow hedges for accounting purposes. We use cash flow hedges primarily to reduce the effects of foreign exchange rate changes on sales in Euros and Japanese Yen. These contracts typically have maturities of three years or less. At December 31, 2022 and January 1, 2022, we had outstanding cash flow hedges with a total notional value of $362.9 million and $423.3 million, respectively.
We also enter into economic hedges that are not designated as hedges from an accounting standpoint to reduce or eliminate the effects of foreign exchange rate changes typically related to short term trade receivables and payables. These contracts have maturities of twelve months or less. At December 31, 2022 and January 1, 2022, we had outstanding economic hedges with a total notional value of $242.0 million and $325.4 million, respectively.
At December 31, 2022, assuming all other variables are constant, if the U.S. Dollar weakened or strengthened by 10%, the fair market value of our foreign currency contracts would increase or decrease by approximately $43.7 million.
Interest Rate Sensitivity
At December 31, 2022, we had unrestricted cash and cash equivalents of $117.9 million. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Some of the securities in which we invest, however, may be subject to market risk. This means a change in prevailing interest rates may cause the fair market value of the investment to fluctuate. To minimize this risk in the future, we have the ability to invest in a variety of securities including, commercial paper, money market funds, debt securities and certificates of deposit. Due to the short-term nature of these investments, we believe we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. As of December 31, 2022, all of our cash and cash equivalents were held in demand deposits and money market funds.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
iROBOT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |||||
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of iRobot Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of iRobot Corporation and its subsidiaries (the "Company") as of December 31, 2022 and January 1, 2022, and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and January 1, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or
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disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Product Returns
As described in Notes 2 and 3 to the consolidated financial statements, the Company provides limited rights of returns for direct-to-consumer sales generated through its on-line stores and certain resellers and distributors. The Company records an allowance for product returns based on specific terms and conditions included in the customer agreements or based on historical experience and management’s expectation of future returns. Returns and credits are estimated at the time of sale and updated at the end of each reporting period as additional information becomes available. As of December 31, 2022, the Company had reserves for product returns of $49.2 million.
The principal considerations for our determination that performing procedures relating to the allowance for product returns is a critical audit matter are (i) the significant judgment by management in developing the allowance for product returns related to management’s expectation of future returns; and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the allowance for product returns and management’s expectation of future returns.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including the estimation of the allowance for product returns. These procedures also included, among others (i) testing management’s process for developing the allowance for product returns, (ii) evaluating the appropriateness of management’s approach to calculate the allowance for product returns, (iii) testing the completeness and accuracy of underlying historical sales and returns data used by management to develop the allowance for product returns, and (iv) evaluating the reasonableness of management’s expectation of future returns based on historical experience by customer by product.
/s/ PricewaterhouseCoopers LLP
February 14, 2023
We have served as the Company’s auditor since 1999.
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iROBOT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
| December 31, 2022 | January 1, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short term investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventory | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Deferred tax assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Deferred revenue and customer advances | |||||||||||
| Total current liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Deferred tax liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 13) | |||||||||||
Preferred stock, | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying Notes to Consolidated Financial Statements
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iROBOT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Revenue | $ | $ | $ | ||||||||||||||
| Cost of revenue: | |||||||||||||||||
| Cost of product revenue | |||||||||||||||||
| Amortization of acquired intangible assets | |||||||||||||||||
| Total cost of revenue | |||||||||||||||||
| Gross profit | |||||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | |||||||||||||||||
| Selling and marketing | |||||||||||||||||
| General and administrative | |||||||||||||||||
| Amortization of acquired intangible assets | |||||||||||||||||
| Total operating expenses | |||||||||||||||||
| Operating (loss) income | ( | ( | |||||||||||||||
| Other (expense) income, net | ( | ||||||||||||||||
| (Loss) income before income taxes | ( | ||||||||||||||||
| Income tax expense (benefit) | ( | ||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | |||||||||||||
| Net (loss) income per share: | |||||||||||||||||
| Basic | $ | ( | $ | $ | |||||||||||||
| Diluted | $ | ( | $ | $ | |||||||||||||
| Number of shares used in per share calculations: | |||||||||||||||||
| Basic | |||||||||||||||||
| Diluted | |||||||||||||||||
See accompanying Notes to Consolidated Financial Statements
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iROBOT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Net (loss) income | $ | ( | $ | $ | |||||||||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||||||||
| Net foreign currency translation adjustments | ( | ( | |||||||||||||||
| Net unrealized gains (losses) on cash flow hedges, net of tax | ( | ||||||||||||||||
| Net gains on cash flow hedge reclassified into earnings, net of tax | ( | ( | ( | ||||||||||||||
| Net unrealized losses on marketable securities, net of tax | ( | ( | |||||||||||||||
| Total comprehensive (loss) income | $ | ( | $ | $ | |||||||||||||
See accompanying Notes to Consolidated Financial Statements
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iROBOT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) ("AOCI") | Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Value | ||||||||||||||||||||||||||||||||||
| Balance at December 28, 2019 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | |||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||
| Stock withheld to cover tax withholdings requirements upon restricted stock vesting | ( | — | ( | ( | |||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||
| Directors' deferred compensation | |||||||||||||||||||||||||||||||||||
| Stock repurchases | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Balance at January 2, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | |||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||
| Stock withheld to cover tax withholdings requirements upon restricted stock vesting | ( | — | ( | ( | |||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||
| Directors' deferred compensation | |||||||||||||||||||||||||||||||||||
| Stock repurchases | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | |||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||
| Stock withheld to cover tax withholdings requirements upon restricted stock vesting | ( | — | ( | ( | |||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||
| Net loss | ( | ( | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements
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iROBOT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | |||||||||||||
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Loss (gain) on equity investments | ( | ( | |||||||||||||||
| Stock-based compensation | |||||||||||||||||
| Deferred income taxes, net | ( | ||||||||||||||||
| Other | ( | ||||||||||||||||
| Changes in operating assets and liabilities — (use) source, excluding effects of acquisition | |||||||||||||||||
| Accounts receivable | ( | ||||||||||||||||
| Inventory | ( | ( | |||||||||||||||
| Other assets | ( | ( | |||||||||||||||
| Accounts payable | ( | ||||||||||||||||
| Accrued expenses and other liabilities | ( | ( | |||||||||||||||
| Net cash (used in) provided by operating activities | ( | ( | |||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Additions of property and equipment | ( | ( | ( | ||||||||||||||
| Purchase of investments | ( | ( | ( | ||||||||||||||
| Cash paid for business acquisition, net of cash acquired | ( | ||||||||||||||||
| Sales and maturities of investments | |||||||||||||||||
| Net cash provided by (used in) investing activities | ( | ( | |||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Proceeds from employee stock plans | |||||||||||||||||
| Income tax withholding payment associated with restricted stock vesting | ( | ( | ( | ||||||||||||||
| Stock repurchases | ( | ( | |||||||||||||||
| Net cash provided by (used in) financing activities | ( | ( | |||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ( | |||||||||||||||
| Cash and cash equivalents, at beginning of period | |||||||||||||||||
| Cash and cash equivalents, at end of period | $ | $ | $ | ||||||||||||||
| Supplemental disclosure of cash flow information | |||||||||||||||||
| Cash paid for income taxes | $ | $ | $ | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements
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iROBOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Nature of the Business | ||||
iRobot Corporation ("iRobot" or the "Company") designs, builds and sells robots and home innovations that make life better. The Company's portfolio of home robots and smart home devices features proprietary technologies for the connected home and advanced concepts in cleaning, mapping and navigation, human-robot interaction and physical solutions. iRobot's durable and high-performing robots are designed using the close integration of software, electronics and hardware. The Company’s revenue is primarily generated from product sales through a variety of distribution channels, including chain stores and other national retailers, through the Company's own website and app, dedicated e-commerce websites, the online arms of traditional retailers and through value-added distributors and resellers worldwide.
Merger Agreement
On August 4, 2022, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Amazon.com, Inc., a Delaware corporation ("Parent" or "Amazon") and Martin Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), pursuant to which Merger Sub will merge with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent. As a result of the Merger, each share of common stock of the Company, par value $0.01 per share ("Common Stock"), outstanding immediately prior to the effective time of the Merger (the "Effective Time") (subject to certain exceptions, including shares of Common Stock owned by the Company, Merger Sub, Parent or any of their respective direct or indirect wholly owned subsidiaries and shares of Common Stock owned by stockholders of the Company who have validly demanded and not withdrawn appraisal rights in accordance with Section 262 of the General Corporation Law of the State of Delaware) will, at the Effective Time, automatically be cancelled and converted into the right to receive $61.00 in cash, without interest and subject to applicable withholding taxes. If the Merger is consummated, the Company’s Common Stock will be delisted from the Nasdaq Stock Market LLC and deregistered under the Securities Exchange Act of 1934.
| 2. | Summary of Significant Accounting Policies | ||||
Basis of Presentation and Foreign Currency Translation
The accompanying consolidated financial statements include those of iRobot and its subsidiaries, after elimination of all intercompany balances and transactions. iRobot has prepared the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP").
For the Company's subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated into U.S. dollars at period-end foreign exchange rates. Revenues and expenses are translated into U.S. dollars at the average foreign exchange rates for the period. Translation adjustments are excluded from the determination of net income (loss) and are recorded in accumulated other comprehensive income (loss), a separate component of stockholders' equity.
Liquidity
The accompanying audited consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
The Company has a long history of profitable operations, positive operating cash flows and substantial liquidity that was further strengthened during the first year of the COVID-19 pandemic as consumer demand for iRobot's products increased considerably. During fiscal 2022, the Company’s revenue declined 24 % from fiscal 2021 primarily due to lower orders from retailers and distributors in the United States and EMEA largely resulting from a decline in consumer sentiment, and resultant spending, driven by high inflation, rising interest rates, rising energy costs, the potential recessionary outlook and geopolitical instability, which was exacerbated by the Russia-Ukraine war. The lower revenue has resulted in operating losses of $240.4 million and operating cash outflows of $90.0 million for the fiscal 2022. As a result, the Company's cash and cash equivalents
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and short-term investments have declined from $234.5 million as of January 1, 2022 to $117.9 million as of December 31, 2022.
As of December 31, 2022, the Company has no outstanding borrowings from its $150.0 million available revolving line of credit which expires on June 30, 2023. On January 17, 2023, the Company entered into a Fourth Amendment (the "Fourth Amendment") to the Credit Agreement which reduces the amount of the facility from $150.0 million to $100.0 million and extends the maturity date of the Credit Agreement from June 30, 2023 to September 17, 2024 (see Note 8 for additional details about its Credit Agreement).
Management has considered and assessed its ability to continue as a going concern for the one year from the date that the audited consolidated financial statements are issued. Management’s assessment included the preparation of cash flow forecasts taking into account actions already implemented. Management considered additional actions within its control that it would implement, if necessary, to maintain liquidity and operations in the ordinary course. Management has already undertaken the following actions to improve profitability and operating cash flows and align the organization to the lower revenue level:
•During August 2022, the Company initiated a restructuring of its operations designed to better align its cost structure with near-term revenue and cash flow generation, advance key strategic priorities, increase efficiencies and improve its profitability going forward. As part of this August 2022 restructuring, the Company reduced its workforce and terminated approximately 100 employees, which represents 8 % of its workforce and eliminated a number of open positions entering the third quarter of 2022. As a follow-on action to the company’s August 2022 restructuring of operations and in anticipation that market conditions will remain challenging into 2023, the Company initiated a new restructuring program at the beginning of February 2023 and reduced its workforce by approximately 85 employees or 7 %. In addition to the reduction in force, iRobot’s 2023 operating plan incorporates scaled back working media and other demand-generation activities, limited investment in non-robotic product categories and minimal new hiring plans in 2023. At December 31, 2022, the Company had 1,254 employees. Including the aforementioned reduction in force of 85 employees, the Company has had a total reduction of 203 employees since the end of fiscal 2021. In addition to the reduction of its headcount, the Company signed a sublease agreement for a portion of its headquarter during the fourth quarter of fiscal 2022 and plans to further consolidate its global facilities footprint during fiscal 2023. iRobot currently anticipates that its August 2022 and February 2023 restructuring actions will deliver net cost savings of approximately $42.0 million in 2023, including actions associated with the facilities consolidation.
•Inventory has consumed a significant amount of cash and the Company continues to manage its inventory level carefully. As of December 31, 2022, the inventory balance was $285.3 million, or 95 days, a reduction of $133.8 million, or 95 days from the third quarter of fiscal 2022. In 2023, the Company will continue to manage its inventory to a level that aligns with current run rates of the business. As such, iRobot has temporarily reduced robot production since late January 2023 at its contract manufacturing partners in China and Malaysia with plans to increase production in April 2023.
While management estimates such actions will be sufficient to allow it to maintain liquidity and its operations in the ordinary course for at least 12 months from the issuance of these financial statements, there can be no assurance the Company will generate sufficient future cash flows from operations due to potential factors, including, but not limited to, further inflation, the continued rising interest rates, ongoing recessionary conditions or continued reduced demand for the Company’s products. If the Company is not successful in increasing demand for its products, or if macroeconomic conditions further constrain consumer demand, the Company may continue to experience adverse impacts to revenue and profitability. Additional actions within the Company’s control to maintain its liquidity and operations include optimizing its production volumes with contract manufacturers by reducing inventory supply forecast for cancellable purchase orders, further reducing discretionary spending in all areas of the business, decreasing working media spending and realigning resources through ongoing attrition without rehiring activity. Should the Company require further funding in the future, there can be no assurance that it will be able to obtain additional debt financing on terms acceptable to the Company, or at all.
The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties.
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Use of Estimates
The preparation of these financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenue and expenses. These estimates and judgments, include but are not limited to, revenue recognition, including performance obligations, standalone selling price, variable consideration and other obligations such as sales incentives and product returns; allowance for credit losses; impairment of goodwill and long-lived assets; valuation of non-marketable equity investments; product warranties; inventory excess and obsolescence; loss contingencies; accounting for stock-based compensation including valuation and assessments of performance-based awards; accounting for income taxes and related valuation allowances. The Company bases its estimates and assumptions on historical experience, market participant fair value considerations, projected future cash flows, current economic conditions, and various other factors that the Company believes are reasonable under the circumstances. Actual results and outcomes may differ from the Company’s estimates and assumptions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity of three months or less at the time of purchase to be cash and cash equivalents. The Company invests its excess cash primarily in money market funds or demand deposit accounts of major financial institutions. Accordingly, its cash and cash equivalents are subject to minimal credit and market risk. At December 31, 2022 and January 1, 2022, cash and cash equivalents totaled $117.9 million and $201.5 million, respectively. These cash and cash equivalents are carried at cost, which approximates fair value.
Short Term Investments
The Company's short term investments include marketable equity securities with readily determinable fair value. The fair value of investments is determined based on quoted market prices at the reporting date for those instruments. The change in fair value of the Company's investments in marketable equity securities is recognized as unrealized gains and losses in other (expense) income, net at the end of each reporting period.
Investments consisted of the following (in thousands):
| December 31, 2022 | January 1, 2022 | ||||||||||||||||||||||
| Cost | Fair Market Value | Cost | Fair Market Value | ||||||||||||||||||||
| Marketable equity securities | $ | $ | $ | $ | |||||||||||||||||||
| Total short term investments | $ | $ | $ | $ | |||||||||||||||||||
On July 22, 2021, Matterport, Inc. ("Matterport"), of which the Company held non-marketable equity securities, completed a merger with a special purpose acquisition company and began trading on Nasdaq under the symbol "MTTR." Prior to the merger, the Company accounted for the shares in Matterport as equity securities without readily determinable fair value. Upon consummation of the merger, the Company received 1.6 million shares of MTTR. The post merger Matterport shares received were subject to time based contractual sales restrictions which expired in January 2022. These shares were accounted for as marketable equity securities and measured at fair value with unrealized gains and losses recognized in other (expense) income, net at the end of each reporting period. During fiscal 2021, the Company recorded gains of $30.2 million associated with the Matterport investment.
During the first quarter of 2022, the Company sold these Matterport shares and received net proceeds of $16.2 million. In addition, the Company received an additional 0.2 million shares of Matterport during the first quarter of 2022 upon achievement of conditions set forth in the merger agreement, and sold these shares during the second quarter of 2022 for net proceeds of $1.2 million. During fiscal 2022, the Company recognized losses of $17.1 million in other (expense) income, net related to the sales of Matterport shares. As of December 31, 2022, the Company did not have any short term investments.
On July 1, 2020, Teladoc Health, Inc. ("Teladoc") closed on its previously announced acquisition of InTouch Health, of which the Company held non-marketable equity securities. In exchange for its shares of InTouch Health, the Company received 0.2 million shares of Teladoc and recorded a gain of $38.6 million to other income, net during fiscal 2020. The Teladoc shares received were subject to time based contractual sales restrictions which expired in January 2021. These shares were accounted for as marketable equity securities and measured at fair value with unrealized gains and losses recognized in other (expense) income, net at the end of each reporting period. As a result, the Company entered into an economic hedge in July 2020 to reduce the Company's exposure to stock price fluctuations during the restricted period. During the first quarter of 2021, the Company received net proceeds of $51.5 million related to the sale of Teladoc shares with gross proceeds of $60.1 million, net of settlement payment of $8.6 million for the related economic hedge.
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Accounts receivable allowances
Allowance for product returns: The Company records an allowance for product returns based on specific terms and conditions included in the customer agreements or based on historical experience and the Company's expectation of future returns.
Allowance for other credits and incentives: The Company records an allowance related to customer incentives such as discounts, promotions, price protection and other support programs. The allowance is based on specific terms and conditions included in customer agreements, specific programs and sell-through expectations, historical experience and other factors.
Activity related to accounts receivable allowances was as follows (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Allowance for product returns | |||||||||||||||||
| Balance at beginning of period | $ | $ | $ | ||||||||||||||
| Provision | |||||||||||||||||
| Deduction | ( | ( | ( | ||||||||||||||
| Balance at end of period | $ | $ | $ | ||||||||||||||
| Allowance for other credits and incentives | |||||||||||||||||
| Balance at beginning of period | $ | $ | $ | ||||||||||||||
| Provision | |||||||||||||||||
| Deduction | ( | ( | ( | ||||||||||||||
| Balance at end of period | $ | $ | $ | ||||||||||||||
Inventory
Inventory primarily consists of finished goods and, to a lesser extent, components, which are purchased from contract manufacturers. Inventory is stated at the lower of cost or net realizable value with cost being determined using the standard cost method, which approximates actual costs determined on the first-in, first-out basis. Inventory costs primarily consist of materials, inbound freight, import duties, tariffs, and other handling fees. The Company writes down its inventory for estimated obsolescence or excess inventory based upon assumptions around market conditions and estimates of future demand. Net realizable value is the estimated selling price less estimated costs of completion, disposal and transportation. Adjustments to reduce inventory to net realizable value are recognized in cost of revenue and have not been significant for the periods presented.
Tariff Refunds
In April 2020, the Company was granted a temporary exclusion from Section 301 List 3 tariffs by the United States Trade Representative ("USTR"). This exclusion, as extended in August 2020, eliminated the 25% tariff on Roomba products imported from China until December 31, 2020 and entitled the Company to a refund of approximately $57.0 million in tariffs paid since the date the Section 301 List 3 tariffs were imposed. The Company recognized a benefit of $36.5 million from tariff refund during fiscal 2020.
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In March 2022, the Section 301 List 3 Tariff Exclusion was reinstated, which eliminated the 25% tariff on Roomba products imported from China beginning on October 12, 2021 and continuing until December 31, 2022. This exclusion, which was subsequently extended until September 30, 2023 entitled the Company to a refund of approximately $32.0 million in tariffs paid. During fiscal 2022, the Company recognized a benefit of $11.7 million from tariff refunds as reduction to cost of product revenue related to tariffs paid on products imported after October 12, 2021 and sold during fiscal 2021. As of December 31, 2022, the Company had received $26.8 million of the tariff refund and the outstanding refund receivable of $5.2 million is recorded in other current assets on the consolidated balance sheet.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives as follows:
| Estimated Useful Life | |||||
| Computer and equipment | |||||
| Furniture and fixtures | |||||
| Machinery and tooling | |||||
| Business applications software | |||||
| Leasehold improvements | |||||
Capitalization of Cloud Computing Arrangements
The Company incurs costs to implement cloud computing arrangements that are hosted by third-party vendors. Beginning in fiscal 2020, and continuing through fiscal 2022, the Company began investing and implementing various new direct-to-consumer and marketing technology and tools. Implementation costs incurred during the application development stage are capitalized until the software is ready for its intended use. The costs are then amortized on a straight-line basis over the term of the associated hosting arrangement and are recognized as an operating expense within the consolidated statements of operations. During fiscal 2022 and 2021, the Company recorded amortization expenses of $1.8 million and $0.6 million, respectively, for these implementation costs. Capitalized costs were $7.3 million and $7.4 million as of December 31, 2022 and January 1, 2022, respectively, and are reported as a component of other assets on the Company's consolidated balance sheets.
Business Combinations
The Company allocates the purchase price of each acquisition to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition. Goodwill is measured as the excess of the purchase price over the value of net identified assets acquired. While the Company uses its best estimates and assumptions to accurately value assets acquired, liabilities assumed, and contingent consideration, where applicable, at the acquisition date, its estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which is generally one year from the acquisition date, any adjustment to the assets acquired and liabilities assumed is recorded against goodwill in the period in which the amount is determined. Any adjustment identified subsequent to the measurement period or the Company's final determination of estimated fair value, whichever comes first, is included in operating results in the period in which the adjustment is determined.
Goodwill and Other Long-Lived Assets
Goodwill represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets acquired. Goodwill is not amortized but rather is assessed for impairment at the reporting unit level annually during the fourth quarter of each fiscal year or more frequently if the Company believes indicators of impairment exist. Goodwill impairment, if any, is determined by comparing the reporting unit's fair value to its carrying value. An impairment loss is recognized in an amount equal to the excess of the reporting unit's carrying value over its fair value, up to the amount of goodwill allocated to the reporting unit.
Other long-lived assets primarily consist of property and equipment, operating lease right-of-use assets and intangible assets. The Company periodically evaluates the recoverability of other long-lived assets whenever events and changes in circumstances, such as reductions in demand or significant economic slowdowns in the industry, indicate that the carrying amount of an asset may not be fully recoverable. When indicators of impairment are present, the carrying values of the asset group are evaluated in relation to the future undiscounted cash flows of the underlying business. The net book value of the underlying asset is adjusted to fair value if the sum of the expected discounted cash flows is less than book value. Fair values
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are based on estimates of market prices and assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.
The impairment assessment of goodwill and other long-lived assets involves significant estimates and assumptions, which may be unpredictable and inherently uncertain. These estimates and assumptions include identification of reporting units and asset groups, long-term growth rates, profitability, estimated useful lives, comparable market multiples, and discount rates. Any changes in these assumptions could impact the result of the impairment assessment. There was no no
Strategic Investments
The Company holds non-marketable equity securities as part of its strategic investments portfolio. The Company classifies the majority of these securities as equity securities without readily determinable fair values and measures these investments at cost, less any impairment, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. These investments are valued using significant unobservable inputs or data in an inactive market and the valuation requires the Company's judgment due to the absence of market prices and inherent lack of liquidity. The Company monitors non-marketable equity investments for impairment indicators, such as deterioration in the investee's financial condition and business forecasts and lower valuations in recent or proposed financings. The estimated fair value is based on quantitative and qualitative factors including, but not limited to, subsequent financing activities by the investee and projected discounted cash flows. The Company performs an assessment on a quarterly basis to assess whether triggering events for impairment exist and to identify any observable price changes. During fiscal 2022, the Company recorded impairment charges of $3.9 million related to investments in non-marketable equity securities. Changes in fair value of non-marketable equity investments are recorded in other (expense) income, net on the consolidated statements of operations. At December 31, 2022 and January 1, 2022, the Company's equity securities without readily determinable fair values totaled $15.1 million and $16.3 million, respectively, and are included in other assets on the consolidated balance sheets.
Warranty
The Company generally provides a one-year warranty on all of its products except in countries where a two-year warranty is required against defects in materials and workmanship. The Company's standard warranty provides for repair or replacement of the associated products during the warranty period. The Company records estimated warranty costs in the period the related revenue is recognized based on historical experience, expectations of future costs to repair or replace including freight and knowledge of specific product failures outside the Company's historical experience. Actual results could differ from these estimates, which could cause increases or decreases to the warranty reserves in future periods.
Financial Instruments and Hedging Activities
The Company utilizes derivative instruments to partially offset its financial risks to foreign exchange risk. The Company does not engage in speculative hedging activity. In order to account for a derivative instrument as a cash flow hedge, specific criteria must be met, including: (i) ensuring at the inception of the hedge that formal documentation exists for both the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge and (ii) at the inception of the hedge and on an ongoing basis, the hedging relationship is expected to be highly effective in achieving offsetting changes in fair value attributed to the hedged risk during the period that the hedge is designated. Cash flow hedge amounts that are included in the assessment of hedge effectiveness are deferred in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. Deferred gains and losses associated with cash flow hedges are recognized as a component of net sales in the same period as the related revenue is recognized. Absent meeting these criteria, changes in fair value are recognized in other (expense) income, net, in the consolidated statements of operations. The Company may also enter into non-designated foreign currency contracts to offset a portion of the foreign currency exchange gains and losses generated by the remeasurement of certain assets and liabilities denominated in non-functional currencies. Changes in fair value are recognized in other (expense) income, net, in the consolidated statements of operations.
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Fair Value Measurements
The Company accounts for certain assets and liabilities at fair value. The fair value is established based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. These tiers include:
•Level 1 - observable inputs such as quoted prices for identical instruments in active markets;
•Level 2 - inputs other than quoted prices in active markets that are either directly or indirectly observable; and
•Level 3 - unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Stock-Based Compensation
The Company accounts for stock-based compensation through recognition of the fair value of the stock-based compensation as a charge against earnings. The Company issues equity incentive awards in the form of restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs"). The fair value for RSUs is based on the closing share price of the Company's common stock on the date of grant. PSUs are aligned to specified performance targets such as financial metrics or the relative returns of the Company's common stock ("TSRs"). The fair value of PSUs aligned to specified performance metrics is determined based on the number of units expected to vest upon achievement of the performance conditions. The fair value for PSUs aligned to the TSR is based on a Monte Carlo simulation model. The Company recognizes stock-based compensation as an expense on a straight-line basis, over the requisite service period. The Company accounts for forfeitures as they occur, rather than applying an estimated forfeiture rate.
Research and Development
Costs incurred in the research and development of the Company’s products are expensed as incurred.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in the income tax provision.
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Concentration of Credit Risk and Significant Customers
Financial instruments which potentially expose the Company to concentrations of credit risk consist of accounts receivable and cash and cash equivalents. Management believes its credit policies are prudent and reflect normal industry terms and business risk. At December 31, 2022 and January 1, 2022, one customer accounted for 16.6 % and 14.5 % , respectively, of the Company's accounts receivable balance. For the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, there was one customer that accounted for 10% or more of total revenue, representing 22.6 %, 21.8 % and 22.7 %, of the Company's total revenue, respectively.
The Company maintains its cash in bank deposit accounts and money market funds at high quality financial institutions. The individual balances, at times, may exceed federally insured limits. These deposits may be redeemed upon demand, and management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and, accordingly, minimal credit risk exists with respect to cash and cash equivalents.
Restructuring Charges
During August 2022, the Company initiated a restructuring of its operations designed to better align its cost structure with near-term revenue and cash flow generation ("August 2022 restructuring"). The Company recorded restructuring charges of $5.2 million for employee severance and benefit costs related to the termination of approximately 100 employees, and made severance and benefit payments of approximately $3.6 million resulting from the restructuring during fiscal 2022. These restructuring charges are recorded in the consolidated statement of operations.
In October 2022, the Company approved a plan to market portions of its headquarters with the intent to reduce its global office footprint ("Facility restructuring"). During December 2022, the Company executed an agreement to sublease a portion of the space. As a result of the execution of the sublease agreement, the subleased space was considered as one asset group and the Company determined that indicators of impairment existed related to the right-of-use asset and property and equipment associated with the subleased space. Accordingly, the Company conducted an impairment test to assess whether the fair value of the asset group was lower than its carrying value. The results of the impairment test indicated that the fair value of the asset group was lower than its carrying value. The Company determined the fair value of the asset group using a discounted cash flow method. The assumptions used in the discounted cash flow analysis included projected sublease income over the sublease term and a discount rate based on the weighted-average cost of capital. Based on the results of the Company’s assessment, the Company recognized an impairment loss of $3.4 million, of which $2.3 million was allocated to the right-of-use asset and $1.1 million was allocated to property and equipment. This impairment loss is recorded under general and administrative expenses in the consolidated statement of operations for the fiscal year ended December 31, 2022.
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Net (loss) income | $ | ( | $ | $ | |||||||||||||
| Weighted-average shares outstanding | |||||||||||||||||
| Dilutive effect of employee stock plans | |||||||||||||||||
| Diluted weighted-average shares outstanding | |||||||||||||||||
| Basic (loss) income per share | $ | ( | $ | $ | |||||||||||||
| Diluted (loss) income per share | $ | ( | $ | $ | |||||||||||||
Employee stock awards representing approximately 0.9 million, 0.1 million and 0.2 million shares of common stock for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively, were excluded from the computation of diluted earnings per share as their effect would have been antidilutive.
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| 3. | Revenue Recognition | ||||
The Company primarily derives its revenue from the sale of consumer robots and accessories. The Company sells products directly to consumers through online stores and indirectly through resellers and distributors. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenue is allocated to distinct performance obligations and is recognized net of allowances for returns and other credits and incentives. Revenue is recognized only to the extent that it is probable that a significant reversal of revenue will not occur and when collection is considered probable. Taxes collected from customers, which are subsequently remitted to governmental authorities, are excluded from revenue. Shipping and handling expenses are considered fulfillment activities and are expensed as incurred.
Frequently, the Company’s contracts with customers contain multiple promised goods or services. Such contracts may include any of the following, the consumer robot, downloadable app, cloud services, accessories on demand, potential future unspecified software upgrades, premium customer care and extended warranties. For these contracts, the Company accounts for the promises separately as individual performance obligations if they are distinct. Performance obligations are considered distinct if they are both capable of being distinct and distinct within the context of the contract. In determining whether performance obligations meet the criteria for being distinct, the Company considers a number of factors, such as the degree of interrelation and interdependence between obligations, and whether or not the good or service significantly modifies or transforms another good or service in the contract. The Company’s consumer robots are highly dependent on, and interrelated with, the embedded software and cannot function without the software. As such, the consumer robots are accounted for as a single performance obligation. The Company has determined that the app, cloud services and potential future unspecified software upgrades represent one performance obligation to the customer to enhance the functionality and interaction with the robot (referred to collectively as "Cloud Services"). Other services and support are considered distinct and therefore are treated as separate performance obligations.
The Company allocates revenue to all distinct performance obligations based on their relative stand-alone selling prices ("SSPs"). When available, the Company uses observable prices to determine SSPs. When observable prices are not available, SSPs are established that reflect the Company’s best estimates of what the selling prices of the performance obligations would be if they were sold regularly on a stand-alone basis. The Company’s process for estimating SSPs without observable prices considers multiple factors that may vary depending upon the facts and circumstances related to each performance obligation including market data or the estimated cost of providing the products or services. The transaction price allocated to the robot is recognized as revenue at a point in time when control is transferred, generally as title and risk of loss pass, and when collection is considered probable. The transaction price allocated to the Cloud Services is deferred and recognized on a straight-line basis over the estimated term of the Cloud Services. Other services and support are recognized over their service periods. For contracts with a duration of greater than one year, the transaction price allocated to performance obligations that are unsatisfied as of December 31, 2022 and January 1, 2022 was $23.2 million and $20.9 million, respectively.
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Disaggregation of Revenue
The following table provides information about disaggregated revenue by geographical region (in thousands):
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||
| United States | $ | $ | $ | ||||||||
| EMEA | |||||||||||
| Japan | |||||||||||
| Other | |||||||||||
| Total revenue | $ | $ | $ | ||||||||
Contract Balances
The following table provides information about receivables and contract liabilities from contracts with customers (in thousands):
| December 31, 2022 | January 1, 2022 | ||||||||||
| Accounts receivable, net | $ | $ | |||||||||
| Unbilled receivables | |||||||||||
| Contract liabilities | |||||||||||
| 4. | Leases | ||||
The Company's leasing arrangements primarily consist of operating leases for its facilities which include corporate, sales and marketing and research and development offices and equipment under various non-cancelable lease arrangements. The operating leases expire at various dates through 2030. For leases with terms greater than 12 months, the Company records the related right-of-use asset and lease obligation at the present value of lease payments over the term. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the lease term. The Company's leases typically include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. The Company does not separate lease and non-lease components of contracts and excludes all variable lease payments from the measurement of right-of-use assets and lease liabilities. The Company's variable lease payments generally include usage based nonlease components. The Company's lease agreements do not contain any residual value guarantees or restrictive covenants.
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The Company's existing leases do not provide a readily determinable implicit rate. Therefore, the Company estimates its incremental borrowing rate to discount the lease payments. At December 31, 2022, the Company's weighted average discount rate was 4.02 %, while the weighted average remaining lease term was 6.70 years.
The components of lease expense were as follows (in thousands):
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Operating lease cost | $ | $ | $ | ||||||||||||||
| Variable lease cost | |||||||||||||||||
| Total lease cost | $ | $ | $ | ||||||||||||||
Supplemental cash flow information related to leases was as follows (in thousands):
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||
| Operating cash flows from operating leases | $ | $ | $ | ||||||||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||||||||
| Operating leases | $ | $ | $ | ||||||||||||||
Maturities of operating lease liabilities were as follows as of December 31, 2022 (in thousands):
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total minimum lease payments | $ | ||||
| Less: imputed interest | |||||
| Present value of future minimum lease payments | $ | ||||
| Less: current portion of operating lease liabilities (Note 7) | |||||
| Long-term lease liabilities | $ | ||||
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| 5. | Property and Equipment | ||||
Property and equipment consists of the following (in thousands):
| December 31, 2022 | January 1, 2022 | ||||||||||
| Computer and equipment | $ | $ | |||||||||
| Furniture and fixtures | |||||||||||
| Machinery and tooling | |||||||||||
| Leasehold improvements | |||||||||||
| Business applications software | |||||||||||
| Other | |||||||||||
| Subtotal | |||||||||||
| Less: accumulated depreciation | |||||||||||
| Property and equipment, net | $ | $ | |||||||||
As of December 31, 2022 and January 1, 2022, the net book value of capitalized internal-use software costs was $2.8 million and $4.9 million, respectively, which are included within business applications software.
| 6. | Goodwill and Other Intangible Assets | ||||
The following table summarizes the activity in the carrying amount of goodwill and intangible assets for fiscal 2022 and 2021 (in thousands):
| Goodwill | Intangible assets | ||||||||||
Balance as of January 2, 2021 | $ | $ | |||||||||
| Acquisition | |||||||||||
| Amortization | — | ( | |||||||||
| Effect of foreign currency translation | ( | ( | |||||||||
Balance as of January 1, 2022 | |||||||||||
| Purchase accounting adjustments | ( | ||||||||||
| Amortization | — | ( | |||||||||
| Effect of foreign currency translation | ( | ( | |||||||||
Balance as of December 31, 2022 | $ | $ | |||||||||
In fiscal 2021, the Company closed its acquisition of Aeris Cleantec AG ("Aeris"), a fast-growing provider of premium air purifiers, for approximately $71.4 million in cash. As a result, the Company recognized goodwill of $52.7 million and acquired intangible assets of $21.0 million mainly related to developed technology with a weighted estimated useful life of 5 years. The acquisition was a stock purchase and the goodwill resulting from this acquisition is not deductible for tax purposes. The results of operations of the acquired entity has been included within its consolidated results of operations from the acquisition date and was not material to its consolidated financial statements.
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Intangible assets consisted of the following (in thousands):
| December 31, 2022 | January 1, 2022 | ||||||||||||||||||||||||||||||||||
| Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||
| Completed technology | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Tradename | |||||||||||||||||||||||||||||||||||
| Customer relationships | |||||||||||||||||||||||||||||||||||
| Reacquired distribution rights | |||||||||||||||||||||||||||||||||||
| Non-competition agreements | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Amortization expense related to acquired intangible assets was $15.4 million, $2.3 million and $2.9 million for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively.
During the third quarter of 2022, the Company evaluated its long-lived assets, including intangible assets, for indicators of impairment given recent and anticipated unfavorable changes in the macroeconomic environment on the Company's short-term forecasts as well as the Company's negative operating cash flows and operating losses. As a result, the Company determined indicators of impairment existed for the asset group associated with the Company's acquisition of Aeris Cleantec AG and performed an undiscounted cash flow analysis. Based on this undiscounted cash flow analysis, the Company determined that the cash flows expected to be generated by this asset group over the estimated remaining useful life were not sufficient to recover the carrying value of the asset group. As a result, the Company was required to perform Step 3 of the impairment test and determine the fair value of the asset group utilizing the income approach which is based on a discounted cash flow analysis. The Company concluded that the fair value of the asset group was below its carrying value and recorded an $11.1 million impairment loss on these intangible assets. The impairment loss is recorded in amortization of acquired intangible assets under operating expenses on the consolidated statement of operations.
The estimated future amortization expense related to current intangible assets in each of the five succeeding fiscal years is expected to be as follows (in thousands):
| Cost of Revenue | Operating Expenses | Total | |||||||||||||||
| 2023 | $ | $ | $ | ||||||||||||||
| 2024 | |||||||||||||||||
| 2025 | |||||||||||||||||
| 2026 | |||||||||||||||||
| 2027 | |||||||||||||||||
| Thereafter | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
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| 7. | Accrued Expenses | ||||
Accrued expenses consist of the following (in thousands):
| December 31, 2022 | January 1, 2022 | ||||||||||
| Accrued warranty | $ | $ | |||||||||
| Accrued compensation and benefits | |||||||||||
| Accrued sales and other indirect taxes payable | |||||||||||
| Derivative liability | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Accrued income taxes | |||||||||||
| Accrued bonus | |||||||||||
| Accrued manufacturing and logistics cost (1) | |||||||||||
| Accrued other | |||||||||||
| $ | $ | ||||||||||
(1)Accrued manufacturing and logistics cost as of January 1, 2022 included $22.2 million related to Section 301 List 3 tariffs which impose a 25% tariff on Roomba products imported from China. The Company was granted a temporary exclusion in March 2022 through December 31, 2022, which was subsequently extended until September 30, 2023. As a result, amounts accrued at December 31, 2022 are not material.
| 8. | Working Capital Facility | ||||
Credit Facility
As of December 31, 2022, we had a $150.0 million secured revolving line of credit which expires in June 2023, and no outstanding borrowings under our revolving credit facility.
The credit facility contains customary terms and conditions for credit facilities of this type, including restrictions on our ability to incur or guarantee additional indebtedness, create liens, enter into transactions with affiliates, make loans or investments, sell assets, pay dividends or make distributions on, or repurchase, our stock, and consolidate or merge with other entities.
The credit facility contains customary events of default, including for payment defaults, breaches of representations, breaches of affirmative or negative covenants, cross defaults to other material indebtedness, bankruptcy and failure to discharge certain judgments. If a default occurs and is not cured within any applicable cure period or is not waived, our obligations under the credit facility may be accelerated.
On May 4, 2022, we entered into a Second Amendment (the "Second Amendment") to the Amended and Restated Credit Agreement (as amended, the "Credit Agreement") with Bank of America N.A. (the "Lender") with an effective date of March 31, 2022. The Second Amendment waived the quarterly tested leverage and interest coverage covenants in the Credit Agreement for the first, second and third quarters of 2022. The interest coverage ratio calculation for the fourth quarter of 2022 was changed to a trailing nine months. Additionally, a new liquidity covenant was added for the remainder of 2022. The Second Amendment also increased the borrowing rate under the Credit Agreement for 2022 to LIBOR plus 1.5 %.
On October 28, 2022, we entered into a Third Amendment to the Credit Agreement (the "Third Amendment"). The Third Amendment temporarily increased the commitments under the facility to $200.0 million for the time period from October 28, 2022 to December 29, 2022. On December 30, 2022, the commitment was reduced by $50.0 million and returned to the previous $150.0 million. In addition, the Third Amendment replaced the quarterly tested leverage and interest coverage covenants with a new minimum cash requirement of $25.0 million to be tested on October 31, 2022 and November 30, 2022. The Third Amendment also requires that the borrowing under the Credit Agreement must be below $75.0 million on December 30, 2022 and for consecutive days during the first quarter in 2023. The Third Amendment changed the borrowing rate under the Credit Agreement to SOFR plus 1.5 % plus a credit spread adjustment of 0.1 %. In connection with the Third Amendment, the Company entered into a security and pledge agreement granting the Lender a security interest in substantially all of its U.S. assets.
On January 17, 2023, the Company entered into a Fourth Amendment (the "Fourth Amendment") to the Credit Agreement which reduced the amount of the facility from $150.0 million to $100.0 million and increased the interest rate of (1) Term
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SOFR Loans to 4.50 %, (2) Base Rate Loans to 3.50 %, and (3) unused Commitments to 3.50 %. In addition, the Fourth Amendment established a borrowing base for the revolving facility equal to the total of 80 % of eligible receivables, 50 % of eligible inventory, and upon the satisfaction of certain conditions, up to 30 % of eligible in-transit inventory, all subject to any applicable reserves. Additionally, the Fourth Amendment required the Company to maintain $25.0 million of cash in the U.S. at all times, which is tested monthly and replaced the requirement that the borrowing under the Credit Agreement be under $75.0 million (1) on December 30, 2022 and (2) for consecutive days during the first quarter in 2023, and replaced it with a requirement that the borrowing under the Credit Agreement be $25.0 million or less (1) on December 29, 2023 and (2) for consecutive days between January 17, 2023 and September 17, 2024. The Fourth Amendment also extended the maturity date of the Credit Agreement from June 30, 2023 to September 17, 2024, and continues to be secured by substantially all of its U.S. assets.
As of December 31, 2022, we were in compliance with covenants under the Credit Agreement.
Lines of Credit
The Company has a secured letter of credit facility with Bank of America, N.A., available to fund letters of credit up to an aggregate outstanding amount of $5.0 million. As of December 31, 2022, the Company had letters of credit outstanding of $0.4 million under the letter of credit facility and other lines of credit with Bank of America, N.A.
| 9. | Derivative Instruments and Hedging Activities | ||||
The Company operates internationally and, in the normal course of business, is exposed to fluctuations in foreign currency exchange rates. The foreign currency exposures typically arise from transactions denominated in currencies other than the functional currency of the Company's operations, primarily the British Pound, Canadian Dollar, Euro and Japanese Yen. The Company uses derivative instruments that are designated in cash flow hedge relationships to reduce or eliminate the effects of foreign exchange rate change on sales. These contracts typically have maturities of three years or less. At December 31, 2022 and January 1, 2022, the Company had outstanding cash flow hedges with a total notional value of $362.9 million and $423.3 million, respectively.
The Company also enters into economic hedges that are not designated as hedges from an accounting standpoint to reduce or eliminate the effects of foreign exchange rate changes typically related to short term trade receivables and payables. These contracts typically have maturities of twelve months or less. As of December 31, 2022 and January 1, 2022, the Company had outstanding foreign currency economic hedges with a total notional value of $242.0 million and $325.4 million, respectively.
During the third quarter of 2022, the appreciation of the U.S. dollar resulted in the Company’s foreign currency forward contracts being substantially in-the-money. Given the increased cash value of the hedges and the Company’s overall desire to strengthen its cash position, the Company terminated the contracts during the third quarter of 2022, resulting in cash proceeds of $51.7 million which were recognized within cash used in operating activities in the consolidated statement of cash flows. Amounts previously recorded in AOCI were frozen at the time of termination, and will be recognized in earnings when the original forecasted transaction occurs. In conjunction with the termination of the existing contracts, the Company entered into new foreign currency forward contracts with the same notional values and value dates.
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The fair values of derivative instruments are as follows (in thousands):
| Fair Value | |||||||||||||||||
| Classification | December 31, 2022 | January 1, 2022 | |||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||
| Foreign currency forward contracts | Other current assets | $ | $ | ||||||||||||||
| Foreign currency forward contracts | Other assets | ||||||||||||||||
| Foreign currency forward contracts | Accrued expenses | ||||||||||||||||
| Derivatives designated as cash flow hedges: | |||||||||||||||||
| Foreign currency forward contracts | Other current assets | $ | $ | ||||||||||||||
| Foreign currency forward contracts | Other assets | ||||||||||||||||
| Foreign currency forward contracts | Accrued expenses | ||||||||||||||||
| Foreign currency forward contracts | Long-term liabilities | ||||||||||||||||
Gain (loss) associated with derivative instruments not designated as hedging instruments are as follows (in thousands):
| Fiscal year ended | |||||||||||||||||||||||
| Classification | December 31, 2022 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||||
| Gain (loss) recognized in income | Other (expense) income, net | $ | $ | ( | $ | ( | |||||||||||||||||
The following tables reflect the effect of derivatives designated as cash flow hedging for the years ended (in thousands):
| Gain (loss) recognized in OCI on Derivative (1) | ||||||||||||||||||||
| Fiscal year ended | ||||||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||
| Foreign currency forward contracts | $ | $ | $ | ( | ||||||||||||||||
(1)The amount represents the change in fair value of derivative contracts due to changes in spot rates.
| Gain (loss) recognized in earnings on cash flow hedging instruments | ||||||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||
| Revenue | Revenue | Revenue | ||||||||||||||||||
| Consolidated statements of operations in which the effects of cash flow hedging instruments are recorded | $ | $ | $ | |||||||||||||||||
| Gain on cash flow hedging relationships: | ||||||||||||||||||||
| Foreign currency forward contracts: | ||||||||||||||||||||
| Amount of gain reclassified from AOCI into earnings | $ | $ | $ | |||||||||||||||||
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| 10. | Fair Value Measurements | ||||
Fair Value Measurements - Recurring Basis
The Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
| Fair Value Measurements as of | |||||||||||||||||
| December 31, 2022 | |||||||||||||||||
| Level 1 | Level 2 (1) | Level 3 | |||||||||||||||
| Assets: | |||||||||||||||||
| Money market funds | $ | $ | $ | ||||||||||||||
| Derivative instruments (Note 9) | |||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | ||||||||||||||
| Liabilities: | |||||||||||||||||
| Derivative instruments (Note 9) | $ | $ | $ | ||||||||||||||
| Total liabilities measured at fair value | $ | $ | $ | ||||||||||||||
| Fair Value Measurements as of | |||||||||||||||||
| January 1, 2022 | |||||||||||||||||
| Level 1 | Level 2 (1) | Level 3 | |||||||||||||||
| Assets: | |||||||||||||||||
| Money market funds | $ | $ | $ | ||||||||||||||
Marketable equity securities, $ | |||||||||||||||||
| Derivative instruments (Note 9) | |||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | ||||||||||||||
| Liabilities: | |||||||||||||||||
| Derivative instruments (Note 9) | $ | $ | $ | ||||||||||||||
| Total liabilities measured at fair value | $ | $ | $ | ||||||||||||||
(1)Level 2 fair value estimates are based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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 of the asset may not be recoverable. During fiscal 2022, in connection with the long-lived assets impairment analysis, certain intangible assets, right-of-use assets and property and equipment 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 within Level 3 of the fair value hierarchy. The fair value of the remaining intangible assets, right-of-use assets and property and equipment were $5.5 million, $1.6 million and $0.6 million, respectively. The Company recognized impairment charges of $11.1 million, $2.3 million and $1.1 million, respectively, related to intangible assets, right-of-use assets and property and equipment on its consolidated statement of operations. See Note 2, Summary of Significant Accounting Policies, and Note 6, Goodwill and Other Intangible Assets, for additional information.
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| 11. | Stockholders' Equity | ||||
Preferred Stock
The Company has authorized 5,000,000 0.01 No
Common Stock
Common stockholders are entitled to one vote for each share held and to receive dividends if and when declared by the Company's board of directors and subject to and qualified by the rights of holders of the preferred stock. Upon dissolution or liquidation of the Company, holders of common stock will be entitled to receive all available assets subject to any preferential rights of any then outstanding preferred stock.
Share Repurchase Activity
The Company's Board of Directors approved a stock repurchase program authorizing up to $200.0 million in share repurchases from time to time until September 2021, which was extended until March 31, 2022.
On August 2, 2021, the Company entered into an accelerated share repurchase ("ASR") agreement with Wells Fargo Bank, National Association ("Wells Fargo"), under which the Company paid $100.0 million and received an aggregate initial share delivery of 943,285 shares of its common stock, which were immediately retired. In September 2021, Wells Fargo delivered an additional 254,933 shares of the Company's common stock to complete settlement of the ASR agreement. Under this agreement, the Company repurchased a total of 1,198,218 shares of its common stock at an average price of $83.46 , totaling $100.0 million during the third quarter of 2021. The final number of shares repurchased was based on the volume-weighted average price of its common stock over the duration of the ASR agreement, less a discount.
| 12. | Stock-Based Compensation | ||||
The Company has awards and options outstanding under three stock incentive plans: the 2005 Stock Option and Incentive Plan (the "2005 Plan"), the 2015 Stock Option and Incentive Plan (the "2015 Plan") and the 2018 Stock Option and Incentive Plan (the "2018 Plan" and together with the 2005 Plan and the 2015 Plan, the "Plans"). The 2018 Plan is the only one of the three plans under which new awards may currently be granted. Under the 2018 Plan, which became effective on May 23, 2018, 1,750,000 shares were initially reserved for issuance in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, unrestricted stock awards, cash-based awards, and dividend equivalent rights. On May 21, 2020, the stockholders approved an amendment to the 2018 Plan to increase the number of aggregate shares authorized for issuance to 2,495,000 shares, an increase of 745,000 shares. On May 27, 2022, the stockholders approved an amendment to the 2018 Plan to increase the number of aggregate shares authorized for issuance to 3,395,000 shares, an increase of 900,000 shares. Stock awards returned to the Plans, with the exception of those issued under the 2005 Plan, as a result of their expiration, cancellation or termination are automatically made available for issuance under the 2018 Plan. As of December 31, 2022, there were 1,394,174 shares available for future grant under the 2018 Plan. The Company recognized $31.9 million, $21.7 million and $30.0 million of stock-based compensation expense during the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively.
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Stock-based compensation breaks down by expense classification as follows (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Cost of revenue | $ | $ | $ | ||||||||||||||
| Research and development | |||||||||||||||||
| Selling and marketing | |||||||||||||||||
| General and administrative | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
Time-based restricted stock units entitle the holder to a specific number of shares of common stock upon vesting, typically over a three or four year period. As of December 31, 2022, the unamortized compensation costs associated with restricted stock units was $71.1 million with a weighted-average remaining recognition period of 2.19 years.
The following table summarizes the time-based restricted stock unit activity for fiscal 2022, 2021 and 2020:
| Number of Shares Underlying Restricted Stock | Weighted Average Grant Date Fair Value | ||||||||||
Outstanding at December 28, 2019 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding at January 2, 2021 | |||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding at January 1, 2022 | |||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding at December 31, 2022 | $ | ||||||||||
The aggregate intrinsic value of outstanding time-based restricted stock units at December 31, 2022 was $54.5 million based on the Company's closing stock price on December 31, 2022 of $48.13 , with a weighted average remaining contractual term of 1.22 years.
Performance-Based Restricted Stock Units
The Company grants performance-based restricted stock units ("PSUs") to certain of its employees that vest on the satisfaction of service and performance or market conditions. The performance conditions are based on certain financial performance targets at the end of a three year performance period, and therefore awards generally cliff vest at the end of a three year performance period. The market conditions are based on the relative TSRs compared to a certain index for each performance period, and therefore awards vest at the end of each performance period. The number of shares actually vested may range from 0 % to 200 % of the target number of PSUs granted based on the actual achievement of the conditions.
The unamortized fair value as of December 31, 2022 associated with performance based restricted stock units was $4.7 million with a weighted-average remaining recognition period of 0.99 years.
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The following table summarizes the performance-based restricted stock unit activity for fiscal 2022, 2021 and 2020:
| Number of Shares Underlying PSU | Weighted Average Grant Date Fair Value | ||||||||||
| Outstanding at December 28, 2019 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding at January 2, 2021 | |||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Outstanding at January 1, 2022 | |||||||||||
| Granted | |||||||||||
| Vested | |||||||||||
| Forfeited | ( | ||||||||||
| Outstanding at December 31, 2022 | $ | ||||||||||
The aggregate intrinsic value of outstanding PSUs was $17.7 million based on the Company's closing stock price on December 31, 2022 of $48.13 with a weighted average remaining contractual term of 0.99 years.
Employee Stock Purchase Plan
In May 2017, the Company’s stockholders approved the 2017 Employee Stock Purchase Plan ("ESPP"). Eligible employees could purchase the Company’s common stock through payroll deductions at a price equal to 85 % of the lower of the fair market values of the stock as of the beginning or the end of six-month offering periods beginning November 15 and May 15 of each year. An employee’s payroll deductions under the ESPP were limited to 15 % of the employee’s compensation, up to $4,000 each period, for the purchase of common stock not to exceed 1,000 shares per offering period. The Company recognized $0.8 million, $1.2 million, and $1.0 million of stock-based compensation expense during the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively. The final offering period under the ESPP closed on November 15, 2022, and under the terms of the Merger Agreement, no additional offering period may be commenced. The Company will terminate the ESPP immediately prior to, but contingent upon the occurrence of, the closing of the Merger.
| 13. | Commitments and Contingencies | ||||
Legal Proceedings
From time to time and in the ordinary course of business, the Company is subject to various claims, charges and litigation. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, which could materially affect our financial condition or results of operations.
Outstanding Purchase Orders
As of December 31, 2022, we had outstanding purchase orders aggregating approximately $151.5 million. Included in the outstanding purchase orders, $18.5 million are not cancellable without penalty which is a decrease of $23.4 million from prior year as we continue to manage liquidity. The purchase orders, the majority of which are with our contract manufacturers for the purchase of inventory in the normal course of business, are for manufacturing and non-manufacturing related goods and services.
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Guarantees and Indemnification Obligations
The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies and agrees to reimburse the indemnified party for losses incurred by the indemnified party, generally the Company’s customers, in connection with any patent, copyright, trade secret or other proprietary right infringement claim by any third party. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2022 and January 1, 2022, respectively.
Warranty
The Company provides warranties on most products and has established a reserve for warranty obligations based on estimated warranty costs. The reserve is included as part of accrued expenses (Note 7) in the accompanying consolidated balance sheets.
Activity related to the warranty accrual was as follows (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Balance at beginning of period | $ | $ | $ | ||||||||||||||
| Provision | |||||||||||||||||
| Warranty claims | ( | ( | ( | ||||||||||||||
| Balance at end of period | $ | $ | $ | ||||||||||||||
Merger Contingencies
On August 4, 2022, the Company entered into the Merger Agreement with Amazon.com, Inc., subject to the terms of which Amazon has agreed to acquire the Company. The Merger is conditioned upon, among other things, the expiration of the applicable waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act"), certain other approvals, clearances or expirations of waiting periods under other antitrust laws and foreign investment laws, and other customary closing conditions. On September 19, 2022, the Company and Amazon each received a request for additional information and documentary material (the "Second Request") from the Federal Trade Commission ("FTC") in connection with the FTC's review of the transactions contemplated by the Merger Agreement. The effect of the Second Request is to extend the waiting period imposed by the HSR Act, until 30 days after the Company and Amazon have substantially complied with the Second Request, unless that period is extended voluntarily by the parties or terminated sooner by the FTC. The Company and Amazon continue to work cooperatively with the FTC staff in its review of the Merger. Completion of the Merger remains subject to the expiration or termination of the waiting period under the HSR Act.
At a special meeting of stockholders of the Company on October 17, 2022, stockholders approved the Merger. In connection with the transaction, the Company expects to incur professional fees and expenses of approximately $30.0 million that are contingent upon consummation of the Merger.
| 14. | Employee Benefits | ||||
The Company sponsors a retirement plan under Section 401(k) of the Internal Revenue Code (the "Retirement Plan"). Eligible US employees may make tax-deferred contributions, and the Company, at its sole discretion, and subject to the limits prescribed by the IRS, may make either a nonelective contribution on behalf of all eligible employees or a matching contribution on behalf of all plan participants.
The Company elected to make a matching contribution of approximately $3.9 million, $3.8 million and $3.0 million for the plan years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively. The employer contribution represents a matching contribution at a rate of 50 % of each employee’s first six percent contribution. Accordingly, each employee participating is entitled up to a maximum of three percent of his or her eligible annual payroll.
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| 15. | Income Taxes | ||||
(Loss) income before provision for income taxes was as follows (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Domestic | $ | ( | $ | $ | |||||||||||||
| Foreign | ( | ||||||||||||||||
| (Loss) income before income taxes | $ | ( | $ | $ | |||||||||||||
The components of income tax provision (benefit) were as follows (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Current | |||||||||||||||||
| Federal | $ | ( | $ | $ | |||||||||||||
| State | |||||||||||||||||
| Foreign | |||||||||||||||||
| Total current income tax provision | $ | $ | $ | ||||||||||||||
| Deferred | |||||||||||||||||
| Federal | $ | $ | ( | $ | |||||||||||||
| State | ( | ||||||||||||||||
| Foreign | ( | ( | ( | ||||||||||||||
| Total deferred income tax provision (benefit) | ( | ||||||||||||||||
| Total income tax provision (benefit) | $ | $ | ( | $ | |||||||||||||
The reconciliation of statutory federal income tax to the income tax provision (benefit) is as follows (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Statutory federal income tax | $ | ( | $ | $ | |||||||||||||
| State taxes (net of federal benefit) | ( | ||||||||||||||||
| Federal and state credits | ( | ( | ( | ||||||||||||||
| Excess tax expenses (benefits) from stock-based compensation | ( | ||||||||||||||||
| Foreign-derived intangible income | ( | ( | ( | ||||||||||||||
| Executive compensation | |||||||||||||||||
| Foreign tax rate differential | |||||||||||||||||
| Change in valuation allowance | |||||||||||||||||
| Non-deductible transaction costs | |||||||||||||||||
| Other | ( | ( | |||||||||||||||
| $ | $ | ( | $ | ||||||||||||||
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The components of net deferred tax assets were as follows (in thousands):
| December 31, 2022 | January 1, 2022 | ||||||||||
| Deferred tax assets: | |||||||||||
| Capitalized research and development(1) | $ | $ | |||||||||
| Revenue reserves | |||||||||||
| Accruals and other liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Tax credits and net operating loss carryforwards | |||||||||||
| Stock-based compensation | |||||||||||
| Other | |||||||||||
| Total deferred tax assets | |||||||||||
| Valuation allowance | ( | ( | |||||||||
| Total deferred tax assets net of valuation | |||||||||||
| Deferred tax liabilities: | |||||||||||
| Intangible assets | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Unrealized gains from securities and hedging instruments | |||||||||||
| Other | |||||||||||
| Total deferred tax liabilities | |||||||||||
| Net deferred tax assets | $ | $ | |||||||||
(1)The Tax Cuts and Jobs Act (TCJA) requires taxpayers to capitalize and amortize research and experimental (R&D) expenditures under section 174 for tax years beginning after December 31, 2021. This rule became effective for the Company during the year and resulted in the capitalization of R&D costs $224.5 million. The Company will amortize these costs for tax purposes over 5 years if the R&D was performed in the U.S. and over 15 years if the R&D was performed outside the U.S.
The Company intends to continue to invest all of its unremitted foreign earnings, as well as the capital in its foreign subsidiaries, indefinitely outside of the U.S. At December 31, 2022, the Company has unremitted foreign earnings for which any unrecognized deferred tax liability on these unremitted earnings would be immaterial.
The Company has federal and foreign net operating loss carryforwards of $3.8 million and $29.0 million, respectively, as of December 31, 2022. As of December 31, 2022, the Company has a full valuation allowance of $0.9 million against its U.S. net operating loss carryforwards and a valuation allowance of $4.7 million in certain foreign jurisdictions for net operating loss carryforwards and other deferred tax assets that have statutory limitations on deductibility. The Company has federal research and development credit carryforwards of $4.6 million as of December 31, 2022 that will expire in 2043. It has state research and development credit carryforwards of $23.1 million and $19.4 million as of December 31, 2022 and January 1, 2022, respectively, which expire from 2029 to 2038. Under the Internal Revenue Code and state law, certain substantial changes in the Company’s ownership could result in an annual limitation on the amount of these tax carryforwards which can be utilized in future years. During the third quarter of fiscal 2022, the Company concluded that, based on its evaluation of available positive and negative evidence, it is no longer more likely than not that its net U.S. federal and state deferred tax assets are recoverable. In assessing the realizability of its U.S. deferred tax assets, the key factors used to determine positive and negative evidence included its recent losses resulting in cumulative loss for the three-year period ended December 31, 2022, current macroeconomic trends, and expected future reversals of existing taxable temporary differences. Such objective negative evidence limits the Company's ability to consider other subjective evidence, such as its projections for future growth. Given the weight of objectively verifiable historical losses from the Company's U.S. operations, the Company recorded a valuation allowance of $57.5 million in the third quarter of fiscal 2022 as a reserve against our net U.S. federal and state deferred tax assets. The change in valuation allowance for all of fiscal 2022 was $86.3 million. As of December 31, 2022, January 1, 2022 and January 2, 2021, the Company had a valuation allowance of $99.4 million, $13.1 million and $7.6 million, respectively, for all of its U.S. deferred tax assets and certain foreign deferred tax assets for which the Company believes do not meet the "more likely than not" criteria for recognition. A valuation allowance is a non-cash charge, and does not limit the Company’s ability to utilize its deferred tax assets, including its ability to utilize tax loss and credit carryforward amounts, against future taxable income. The amount of the deferred tax assets considered realizable, and the associated valuation allowance, could be adjusted
77
in a future period if estimates of future taxable income change or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projections for future growth.
The following table summarized the activity related to the Company's gross unrecognized tax benefits (in thousands):
| Fiscal Year Ended | |||||||||||||||||
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Balance at beginning of period | $ | $ | $ | ||||||||||||||
| Increase for tax positions related to the current year | |||||||||||||||||
| Increase for tax positions related to prior years | |||||||||||||||||
| Decrease related to settlement with taxing authorities | ( | ||||||||||||||||
| Decrease for lapses of statute of limitations | ( | ( | |||||||||||||||
| Balance at end of period | $ | $ | $ | ||||||||||||||
The Company accrues interest and, if applicable, penalties for any uncertain tax positions as a component of income tax expense. As of December 31, 2022, January 1, 2022 and January 2, 2021 there were no 10.8 million benefit, inclusive of interest, to the income tax provision.
| 16. | Industry Segment, Geographic Information and Significant Customers | ||||
The Company operates as one operating segment. The Company's consumer robots are offered to consumers through a variety of distribution channels, including chain stores and other national retailers, through the Company's own website and app, dedicated e-commerce websites, the online arms of traditional retailers, and through value-added distributors and resellers worldwide.
Geographic Information
For the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, sales to non-U.S. customers accounted for 48.0 %, 51.8 % and 47.9 % of total revenue, respectively.
The following table provides information about revenue by geographical region (in thousands):
| December 31, 2022 | January 1, 2022 | January 2, 2021 | |||||||||||||||
| Domestic | $ | $ | $ | ||||||||||||||
| International | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
Significant Customers
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, we have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), of the effectiveness, as of the end of the period covered by this report, of the design and operation of our "disclosure controls and procedures" as defined in Rule 13a-15(e) promulgated by the SEC under the Exchange Act. Based upon that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures, as of the end of such period, were adequate and effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information was accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our principal executive and financial officers, we assessed the Company’s internal control over financial reporting as of December 31, 2022, based on criteria for effective internal control over financial reporting established in Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2022 based on the specified criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2022, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2022.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2022.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2022.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2022.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our independent public accounting firm is PricewaterhouseCoopers LLP, Boston, Massachusetts, PCAOB Auditor ID 238 .
The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2022.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)The following are filed as part of this Annual Report on Form 10-K:
1.Financial Statements
The following consolidated financial statements are included in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2022 and January 1, 2022
Consolidated Statements of Operations for the Years ended December 31, 2022, January 1, 2022 and January 2, 2021
Consolidated Statements of Comprehensive (Loss) Income for the Years ended December 31, 2022, January 1, 2022 and January 2, 2021
Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2022, January 1, 2022 and January 2, 2021
Consolidated Statements of Cash Flows for the Years ended December 31, 2022, January 1, 2022 and January 2, 2021
Notes to Consolidated Financial Statements
2.Financial Statement Schedules
All other schedules have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the Notes thereto.
3.Exhibits — See item 15(b) of this report below
(b)Exhibits
The following exhibits are filed as part of and incorporated by reference into this Annual Report:
Exhibit Number | Description | |||||||
| Form of Second Amended and Restated Certificate of Incorporation of the Registrant dated November 15, 2005 | ||||||||
| Amended and Restated By-laws of the Registrant (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on March 9, 2016 and incorporated by reference herein) | ||||||||
| First Amendment to the Amended and Restated By-laws of iRobot Corporation (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on August 5, 2022 and incorporated by reference herein) | ||||||||
| Specimen Stock Certificate for shares of the Registrant’s Common Stock | ||||||||
Description of the Registrant's securities registered under Section 12 of the Securities Exchange Act of 1934 (filed as Exhibit 4.2 to the Registrant's Annual Report on Form 10-K filed on February 13, 2020 and incorporated by reference herein) | ||||||||
Form of Amended and Restated Indemnification Agreement (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 9, 2020 (File No. 001-36414) and incorporated by reference herein) | ||||||||
| Form of Executive Agreement between the Registrant and certain executive officers of the Registrant, as amended (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 2, 2010 and incorporated by reference herein) | ||||||||
| Employment Agreement between the Registrant and Colin Angle, dated as of January 1, 1997 | ||||||||
| 2005 Stock Option and Incentive Plan, as amended, and forms of agreements thereunder (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 2, 2009 and incorporated by reference herein) | ||||||||
| Non-Employee Directors’ Deferred Compensation Program, as amended (filed as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the year ended December 29, 2007 and incorporated by reference herein) | ||||||||
| Lease Agreement between the Registrant and Boston Properties Limited Partnership for premises located at 4-18 Crosby Drive, Bedford, Massachusetts, dated as of February 22, 2007 (as amended through the eighth amendment) | ||||||||
81
| Ninth Amendment to Lease Agreement between the Registrant and Boston Properties Limited Partnership for premises located at 4-18 Crosby Drive, Bedford, Massachusetts, dated as of January 28, 2022 (filed as Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K for the year ended January 1, 2022 and incorporated by reference herein) | ||||||||
| Form of Deferred Stock Award Agreement under the 2005 Stock Option and Incentive Plan (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2008 and incorporated by reference herein) | ||||||||
| Form of Restricted Stock Award Agreement under the 2005 Stock Option and Incentive Plan (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2008 and incorporated by reference herein) | ||||||||
| Amended and Restated Credit Agreement between the Registrant and Bank of America N.A., dated December 20, 2013 (filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the year ended December 28, 2013 and incorporated by reference herein) | ||||||||
| First Amendment to Amended and Restated Credit Agreement between the Registrant and Bank of America N.A., dated June 29, 2018 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 5, 2018 and incorporated by reference herein) | ||||||||
| Second Amendment to Amended and Restated Credit Agreement between the Registrant and Bank of America, N.A. dated as of May 4, 2022 (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 2, 2022 and incorporated by reference herein) | ||||||||
| Third Amendment to Amended and Restated Credit Agreement by and between Bank of America, N.A. and iRobot Corporation, dated October 28, 2022 (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on November 1, 2022 and incorporated by reference herein) | ||||||||
| Amended and Restated Reimbursement Agreement between the Registrant and Bank of America N.A., dated December 20, 2013 (filed as Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K for the year ended December 28, 2013 and incorporated by reference herein) | ||||||||
| First Amendment to Amended and Restated Reimbursement Agreement between the Registrant and Bank of America N.A., dated June 29, 2018 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on July 5, 2018 and incorporated by reference herein) | ||||||||
| Second Amendment to Amended and Restated Reimbursement Agreement between the Registrant and Bank of America, N.A. dated as of May 4, 2022 (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 2, 2022 and incorporated by reference herein) | ||||||||
| Third Amendment to Amended and Restated Reimbursement Agreement by and between Bank of America, N.A. and iRobot Corporation, dated October 28, 2022 (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on November 1, 2022 and incorporated by reference herein) | ||||||||
| Security and Pledge Agreement by and between Bank of America, N.A. and iRobot Corporation, dated October 28, 2022 (filed as Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on November 1, 2022 and incorporated by reference herein) | ||||||||
| Manufacturing Services Agreement between the Registrant and Kin Yat Industrial Company Limited, dated as of January 22, 2014 (filed as Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K for the year ended December 29, 2018 and incorporated by reference herein) | ||||||||
| 2015 Stock Option and Incentive Plan and forms of agreements thereunder (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 27, 2015 and incorporated by reference herein) | ||||||||
| Form of Performance-Based Restricted Stock Unit Award Agreement under the 2015 Stock Option Incentive Plan (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 2, 2016 and incorporated by reference herein) | ||||||||
| iRobot Corporation 2017 Employee Stock Purchase Plan (filed as Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K for the year ended December 30, 2017 and incorporated by reference herein) | ||||||||
| iRobot Corporation 2018 Stock Option and Incentive Plan (filed as Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 filed on June 7, 2018 (File No. 333-225482) and incorporated by reference herein) | ||||||||
| iRobot Corporation Senior Executive Incentive Compensation Plan as Amended and Restated (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2019 and incorporated by reference herein) | ||||||||
| Amendment to the iRobot Corporation 2018 Stock Option and Incentive Plan (filed as Exhibit 99.1 to the Registrant's Registration Statement on Form S-8 on June 30, 2020 (File No. 333-239573) and incorporated by reference herein) | ||||||||
| Agreement and Plan of Merger, dated as of August 4, 2022, by and among iRobot Corporation, Amazon.com, Inc., and Martin Merger Sub, Inc. (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on August 5, 2022 and incorporated by reference herein) | ||||||||
| Subsidiaries of the Registrant | ||||||||
82
| Consent of PricewaterhouseCoopers LLP | ||||||||
| 24.1 | Power of Attorney (incorporated by reference to the signature page of this report on Form 10-K) | |||||||
| Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 | ||||||||
| Certification Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 | ||||||||
| Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 104* | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*) | |||||||
| † | Indicates a management contract or any compensatory plan, contract or arrangement. | ||||
| # | Confidential treatment requested for portions of this document. | ||||
| ## | Certain exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the SEC a copy of any omitted exhibits or schedules upon request. | ||||
| + | Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished supplementally to the SEC upon request. | ||||
| (1) | Incorporated by reference herein to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-126907) | ||||
| * | Filed herewith | ||||
| ** | Furnished herewith | ||||
83
ITEM 16. FORM 10-K SUMMARY
Not applicable.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| iROBOT CORPORATION | |||||||||||
| By: | /s/ Colin M. Angle | ||||||||||
| Colin M. Angle Chairman of the Board, Chief Executive Officer and Director | |||||||||||
Date: February 14, 2023
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Colin M. Angle and Julie Zeiler, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated on February 14, 2023.
| Signature | Title(s) | ||||
/s/ COLIN M. ANGLE | Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) | ||||
| Colin M. Angle | |||||
/s/ JULIE ZEILER | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||||
| Julie Zeiler | |||||
/s/ KARIAN WONG | SVP, Finance (Principal Accounting Officer) | ||||
| Karian Wong | |||||
/s/ MOHAMAD ALI | Director | ||||
| Mohamad Ali | |||||
/s/ DEBORAH G. ELLINGER | Director | ||||
| Deborah G. Ellinger | |||||
/s/ KAREN M. GOLZ | Director | ||||
| Karen M. Golz | |||||
/s/ RUEY-BIN KAO | Director | ||||
| Ruey-Bin Kao | |||||
85
/s/ EVA MANOLIS | Director | ||||
| Eva Manolis | |||||
/s/ ANDREW MILLER | Director | ||||
| Andrew Miller | |||||
/s/ MICHELLE V. STACY | Director | ||||
| Michelle V. Stacy | |||||
86
Exhibit 21.1
iROBOT CORPORATION
SUBSIDIARIES OF THE REGISTRANT
| Subsidiary Legal Name | Jurisdiction of Incorporation/Formation | |||||||
| iRobot US Holdings, LLC | Delaware | |||||||
| iRobot Holdings LLC | Delaware | |||||||
| Aeris HealthInc. | Delaware/California | |||||||
| Guangzhou iRobot Robot Technology Consulting Company Limited | China | |||||||
| iRobot (Shanghai) Ltd. | China | |||||||
| iRobot (HK) Limited | Hong Kong | |||||||
| iRobot Japan G.K. | Japan | |||||||
| iRobot UK Ltd. | United Kingdom | |||||||
| iRobot France SAS | France | |||||||
| iRobot Belgium SPRL | Belgium | |||||||
| iRobot Portugal, Unipessoal Lda | Portugal | |||||||
| iRobot Austria GmbH | Austria | |||||||
| iRobot Germany GmbH | Germany | |||||||
| iRobot Netherlands B.V. | Netherlands | |||||||
| iRobot Iberia S.L. | Spain | |||||||
| Aeris Cleantec AG | Switzerland | |||||||
| Aeris Beijing, Ltd. | China | |||||||
| Aeris Health SEA Pte, Ltd | Singapore | |||||||
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (Nos. 333-265677, 333-239573, 333-225482, 333-219686, 333-204669, 333-193998, 333-186700, 333-184320, 333-179593, 333-172333, 333-164993, 333-157306, 333-149373, 333-140707, 333-129576) of iRobot Corporation of our report dated February 14, 2023 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 14, 2023
Exhibit 31.1
Certifications
I, Colin M. Angle, certify that:
1. I have reviewed this Annual Report on Form 10-K of iRobot Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 14, 2023
/s/ COLIN M. ANGLE | |||||
| Colin M. Angle | |||||
| Chief Executive Officer | |||||
Exhibit 31.2
Certifications
I, Julie Zeiler, certify that:
1. I have reviewed this Annual Report on Form 10-K of iRobot Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 14, 2023
/s/ JULIE ZEILER | |||||
| Julie Zeiler | |||||
| Chief Financial Officer | |||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of iRobot Corporation (the "Company") for the year ended December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Colin M. Angle, the Chief Executive Officer of the Company and Julie Zeiler, the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to our knowledge, that:
(1)the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certification is being provided pursuant to 18 U.S.C. 1350 and is not to be deemed a part of the Report, nor is it to be deemed to be “filed” for any purpose whatsoever.
| Dated | February 14, 2023 | /s/ COLIN M. ANGLE | ||||||
| Colin M. Angle Chief Executive Officer | ||||||||
| Dated | February 14, 2023 | /s/ JULIE ZEILER | ||||||
| Julie Zeiler Chief Financial Officer | ||||||||