P1Y00P3Mfalse--12-31Q12020000173694619967000300680000.0010.00150000000050000000075785952773612317578595277361231P2Y00P1M11000000010.0010.00150000000500000000000P1YP1YP4YP4YP3YP3YP3Y0.33330.33330.33330.33330.33330.3333 0001736946 2020-01-01 2020-03-29 0001736946 2020-04-24 0001736946 2020-03-29 0001736946 2019-12-31 0001736946 us-gaap:ProductMember 2020-01-01 2020-03-29 0001736946 2019-01-01 2019-03-31 0001736946 us-gaap:ServiceMember 2020-01-01 2020-03-29 0001736946 us-gaap:ProductMember 2019-01-01 2019-03-31 0001736946 us-gaap:ServiceMember 2019-01-01 2019-03-31 0001736946 us-gaap:CommonStockMember 2019-03-31 0001736946 us-gaap:CommonStockMember 2020-01-01 2020-03-29 0001736946 2018-12-31 0001736946 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0001736946 us-gaap:AociIncludingPortionAttributableToNoncontrollingInterestMember 2019-01-01 2019-03-31 0001736946 us-gaap:CommonStockMember 2018-12-31 0001736946 us-gaap:RetainedEarningsMember 2019-12-31 0001736946 us-gaap:RetainedEarningsMember 2020-01-01 2020-03-29 0001736946 us-gaap:AdditionalPaidInCapitalMember 2019-03-31 0001736946 us-gaap:RetainedEarningsMember 2020-03-29 0001736946 us-gaap:RetainedEarningsMember 2019-01-01 2019-03-31 0001736946 us-gaap:RetainedEarningsMember 2018-12-31 0001736946 us-gaap:AdditionalPaidInCapitalMember 2020-01-01 2020-03-29 0001736946 us-gaap:CommonStockMember 2019-12-31 0001736946 us-gaap:CommonStockMember 2020-03-29 0001736946 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0001736946 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-03-31 0001736946 2019-03-31 0001736946 us-gaap:RetainedEarningsMember 2019-03-31 0001736946 us-gaap:AociIncludingPortionAttributableToNoncontrollingInterestMember 2020-03-29 0001736946 us-gaap:AociIncludingPortionAttributableToNoncontrollingInterestMember 2019-12-31 0001736946 us-gaap:AdditionalPaidInCapitalMember 2020-03-29 0001736946 2019-01-01 0001736946 us-gaap:CommonStockMember 2019-01-01 2019-03-31 0001736946 us-gaap:AociIncludingPortionAttributableToNoncontrollingInterestMember 2020-01-01 2020-03-29 0001736946 us-gaap:AociIncludingPortionAttributableToNoncontrollingInterestMember 2019-03-31 0001736946 us-gaap:RetainedEarningsMember 2019-01-01 0001736946 2018-08-03 2018-09-30 0001736946 us-gaap:AociIncludingPortionAttributableToNoncontrollingInterestMember 2018-12-31 0001736946 2018-07-02 2018-08-02 0001736946 arlo:PerformanceBasedRestrictedStockUnitsMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2020-01-01 2020-03-29 0001736946 us-gaap:RestrictedStockUnitsRSUMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2020-01-01 2020-03-29 0001736946 arlo:PerformanceBasedRestrictedStockUnitsMember us-gaap:ShareBasedCompensationAwardTrancheThreeMember 2020-01-01 2020-03-29 0001736946 us-gaap:RestrictedStockUnitsRSUMember us-gaap:ShareBasedCompensationAwardTrancheThreeMember 2020-01-01 2020-03-29 0001736946 us-gaap:RestrictedStockUnitsRSUMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2020-01-01 2020-03-29 0001736946 arlo:PerformanceBasedRestrictedStockUnitsMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2020-01-01 2020-03-29 0001736946 srt:MinimumMember us-gaap:RestrictedStockUnitsRSUMember arlo:EquityIncentivePlan2018Member 2020-01-01 2020-03-29 0001736946 2022-03-30 2020-03-29 0001736946 2020-03-30 2020-03-29 0001736946 2021-03-30 2020-03-29 0001736946 arlo:VerisureS.a.r.lMember arlo:NREServiceMember 2019-11-05 2020-03-29 0001736946 2019-12-30 2019-12-30 0001736946 arlo:VerisureS.a.r.lMember 2019-12-31 0001736946 2019-11-04 0001736946 2019-09-30 2019-12-31 0001736946 arlo:VerisureS.a.r.lMember 2019-11-04 2019-11-04 0001736946 arlo:VerisureS.a.r.lMember srt:ScenarioForecastMember 2020-09-28 2020-12-31 0001736946 us-gaap:ServiceOtherMember srt:MaximumMember 2019-11-04 2019-11-04 0001736946 arlo:VerisureS.a.r.lMember 2019-12-30 2019-12-30 0001736946 arlo:VerisureS.a.r.lMember arlo:NREServiceMember 2019-11-04 2019-11-04 0001736946 arlo:VerisureS.a.r.lMember 2020-01-01 2020-03-29 0001736946 arlo:NREServiceMember 2020-01-01 2020-03-29 0001736946 arlo:ITSupportMember 2019-11-04 2019-11-04 0001736946 us-gaap:ServiceOtherMember srt:MinimumMember 2019-11-04 2019-11-04 0001736946 us-gaap:USTreasurySecuritiesMember 2019-12-31 0001736946 us-gaap:USTreasurySecuritiesMember 2019-01-01 2019-12-31 0001736946 us-gaap:USTreasurySecuritiesMember 2020-03-29 0001736946 us-gaap:USTreasurySecuritiesMember 2020-01-01 2020-03-29 0001736946 us-gaap:LeaseholdImprovementsMember 2019-12-31 0001736946 us-gaap:FurnitureAndFixturesMember 2019-12-31 0001736946 us-gaap:ComputerEquipmentMember 2020-03-29 0001736946 us-gaap:ComputerEquipmentMember 2019-12-31 0001736946 us-gaap:FurnitureAndFixturesMember 2020-03-29 0001736946 us-gaap:MachineryAndEquipmentMember 2019-12-31 0001736946 us-gaap:LeaseholdImprovementsMember 2020-03-29 0001736946 us-gaap:SoftwareAndSoftwareDevelopmentCostsMember 2019-12-31 0001736946 us-gaap:SoftwareAndSoftwareDevelopmentCostsMember 2020-03-29 0001736946 us-gaap:MachineryAndEquipmentMember 2020-03-29 0001736946 2019-01-01 2019-09-29 0001736946 us-gaap:TechnologyBasedIntangibleAssetsMember 2019-12-31 0001736946 us-gaap:TechnologyBasedIntangibleAssetsMember 2020-03-29 0001736946 us-gaap:OtherIntangibleAssetsMember 2020-03-29 0001736946 us-gaap:OtherIntangibleAssetsMember 2019-12-31 0001736946 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2020-03-29 0001736946 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2020-03-29 0001736946 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001736946 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001736946 us-gaap:FairValueMeasurementsRecurringMember 2020-03-29 0001736946 us-gaap:FairValueMeasurementsRecurringMember 2019-12-31 0001736946 us-gaap:ForeignExchangeForwardMember us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2019-01-01 2019-03-31 0001736946 arlo:HSBCMember 2020-03-29 0001736946 arlo:WellsFargoBankMember 2020-03-29 0001736946 us-gaap:ForeignExchangeForwardMember us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2020-01-01 2020-03-29 0001736946 arlo:HSBCMember 2019-12-31 0001736946 arlo:WellsFargoBankMember 2019-12-31 0001736946 us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember us-gaap:NondesignatedMember 2020-03-29 0001736946 us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember us-gaap:NondesignatedMember 2019-12-31 0001736946 us-gaap:OtherCurrentLiabilitiesMember us-gaap:DesignatedAsHedgingInstrumentMember 2019-12-31 0001736946 us-gaap:OtherCurrentLiabilitiesMember us-gaap:NondesignatedMember 2020-03-29 0001736946 us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember us-gaap:DesignatedAsHedgingInstrumentMember 2020-03-29 0001736946 us-gaap:PrepaidExpensesAndOtherCurrentAssetsMember us-gaap:DesignatedAsHedgingInstrumentMember 2019-12-31 0001736946 us-gaap:OtherCurrentLiabilitiesMember us-gaap:DesignatedAsHedgingInstrumentMember 2020-03-29 0001736946 us-gaap:OtherCurrentLiabilitiesMember us-gaap:NondesignatedMember 2019-12-31 0001736946 us-gaap:ForeignExchangeForwardMember us-gaap:NondesignatedMember us-gaap:OtherNonoperatingIncomeExpenseMember 2019-01-01 2019-03-31 0001736946 us-gaap:ForeignExchangeForwardMember us-gaap:NondesignatedMember us-gaap:OtherNonoperatingIncomeExpenseMember 2020-01-01 2020-03-29 0001736946 us-gaap:ForeignExchangeForwardMember us-gaap:NondesignatedMember 2020-03-29 0001736946 us-gaap:ForeignExchangeForwardMember 2020-01-01 2020-03-29 0001736946 us-gaap:ForeignExchangeForwardMember us-gaap:CashFlowHedgingMember 2020-03-29 0001736946 srt:MaximumMember us-gaap:ForeignExchangeForwardMember us-gaap:NondesignatedMember 2020-01-01 2020-03-29 0001736946 srt:MinimumMember us-gaap:ForeignExchangeForwardMember us-gaap:NondesignatedMember 2020-01-01 2020-03-29 0001736946 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2020-03-29 0001736946 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2020-01-01 2020-03-29 0001736946 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2020-01-01 2020-03-29 0001736946 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2020-03-29 0001736946 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2019-12-31 0001736946 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2019-12-31 0001736946 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-12-31 0001736946 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2020-03-29 0001736946 us-gaap:ForeignExchangeForwardMember us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2020-01-01 2020-03-29 0001736946 us-gaap:ForeignExchangeForwardMember us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2019-01-01 2019-03-31 0001736946 us-gaap:ForeignExchangeForwardMember 2019-01-01 2019-03-31 0001736946 us-gaap:ForeignExchangeForwardMember us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-03-31 0001736946 us-gaap:ForeignExchangeForwardMember us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember 2020-01-01 2020-03-29 0001736946 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2019-01-01 2019-03-31 0001736946 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2019-01-01 2019-03-31 0001736946 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-03-31 0001736946 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2019-03-31 0001736946 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2019-03-31 0001736946 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-12-31 0001736946 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2018-12-31 0001736946 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0001736946 us-gaap:RevolvingCreditFacilityMember arlo:CreditAgreementMember us-gaap:LineOfCreditMember us-gaap:PrimeRateMember 2019-11-05 2019-11-05 0001736946 us-gaap:RevolvingCreditFacilityMember arlo:CreditAgreementMember us-gaap:LineOfCreditMember 2019-11-05 0001736946 us-gaap:RevolvingCreditFacilityMember arlo:CreditAgreementMember us-gaap:LineOfCreditMember 2019-11-05 2019-11-05 0001736946 us-gaap:RevolvingCreditFacilityMember arlo:CreditAgreementMember us-gaap:LineOfCreditMember 2020-03-29 0001736946 us-gaap:LossOnLongTermPurchaseCommitmentMember 2020-03-29 0001736946 arlo:FederalActionMember 2020-03-29 0001736946 arlo:FortySixToSixtyDaysMember 2020-03-29 0001736946 srt:MinimumMember arlo:FortySixToSixtyDaysMember 2020-01-01 2020-03-29 0001736946 srt:MinimumMember arlo:ThirtyOneToFortyFiveDaysMember 2020-01-01 2020-03-29 0001736946 us-gaap:LetterOfCreditMember 2020-03-29 0001736946 arlo:BuildToSuitMember us-gaap:LetterOfCreditMember 2020-03-29 0001736946 srt:MaximumMember arlo:FortySixToSixtyDaysMember 2020-01-01 2020-03-29 0001736946 arlo:ThirtyOneToFortyFiveDaysMember 2020-03-29 0001736946 srt:MaximumMember arlo:ThirtyOneToFortyFiveDaysMember 2020-01-01 2020-03-29 0001736946 us-gaap:GeneralAndAdministrativeExpenseMember 2019-01-01 2019-03-31 0001736946 us-gaap:SellingAndMarketingExpenseMember 2020-01-01 2020-03-29 0001736946 us-gaap:CostOfSalesMember 2019-01-01 2019-03-31 0001736946 us-gaap:SellingAndMarketingExpenseMember 2019-01-01 2019-03-31 0001736946 us-gaap:ResearchAndDevelopmentExpenseMember 2020-01-01 2020-03-29 0001736946 us-gaap:GeneralAndAdministrativeExpenseMember 2020-01-01 2020-03-29 0001736946 us-gaap:ResearchAndDevelopmentExpenseMember 2019-01-01 2019-03-31 0001736946 us-gaap:CostOfSalesMember 2020-01-01 2020-03-29 0001736946 us-gaap:EmployeeStockMember 2019-01-01 2019-03-31 0001736946 us-gaap:EmployeeStockMember 2020-01-01 2020-03-29 0001736946 arlo:NETGEARMember us-gaap:EmployeeStockOptionMember 2020-01-01 2020-03-29 0001736946 arlo:FirstAnniversaryMember us-gaap:PerformanceSharesMember arlo:EquityIncentivePlan2018Member us-gaap:IPOMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2019-01-01 2019-12-31 0001736946 us-gaap:EmployeeStockOptionMember 2020-01-01 2020-03-29 0001736946 arlo:NETGEARMember us-gaap:EmployeeStockOptionMember 2020-03-29 0001736946 arlo:MarketBasedPerformanceRestrictedStockUnitsMember 2020-03-29 0001736946 us-gaap:EmployeeStockMember arlo:EmployeeStockPurchasePlanMember 2020-03-29 0001736946 us-gaap:EmployeeStockMember arlo:EmployeeStockPurchasePlanMember 2020-01-01 2020-03-29 0001736946 srt:ExecutiveOfficerMember arlo:PerformanceBasedRestrictedStockUnitsMember 2020-01-01 2020-03-29 0001736946 arlo:EmployeeStockOptionIPOPerformanceBasedVestingMember 2019-01-01 2019-12-31 0001736946 srt:ExecutiveOfficerMember arlo:RSUPSUMPSUMember arlo:EquityIncentivePlan2018Member 2019-07-01 2019-09-29 0001736946 us-gaap:PerformanceSharesMember arlo:EquityIncentivePlan2018Member us-gaap:IPOMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2019-01-01 2019-12-31 0001736946 arlo:EquityIncentivePlan2018Member 2020-03-03 0001736946 us-gaap:EmployeeStockOptionMember 2020-03-29 0001736946 us-gaap:EmployeeStockOptionMember arlo:EquityIncentivePlan2018Member 2020-01-01 2020-03-29 0001736946 srt:MaximumMember arlo:EquityIncentivePlan2018Member 2020-01-01 2020-03-29 0001736946 us-gaap:EmployeeStockOptionMember arlo:EquityIncentivePlan2018Member us-gaap:ShareBasedCompensationAwardTrancheOneMember 2020-01-01 2020-03-29 0001736946 srt:MaximumMember arlo:MarketBasedPerformanceRestrictedStockUnitsMember 2020-03-29 0001736946 arlo:EmployeeStockOptionIPOPerformanceBasedVestingMember arlo:EquityIncentivePlan2018Member 2020-01-01 2020-01-31 0001736946 srt:ExecutiveOfficerMember us-gaap:RestrictedStockUnitsRSUMember 2019-07-01 2019-09-29 0001736946 arlo:RestrictedStockUnitsPerformanceBasedRestrictedStockUnitsMarketBasedPerformanceRestrictedStockUnitsMember 2020-03-29 0001736946 arlo:PerformanceBasedRestrictedStockUnitsMember arlo:EquityIncentivePlan2018Member 2020-01-01 2020-03-29 0001736946 arlo:SecondAnniversaryMember us-gaap:PerformanceSharesMember arlo:EquityIncentivePlan2018Member us-gaap:IPOMember us-gaap:ShareBasedCompensationAwardTrancheThreeMember 2019-01-01 2019-12-31 0001736946 arlo:FirstAnniversaryMember us-gaap:PerformanceSharesMember arlo:EquityIncentivePlan2018Member us-gaap:IPOMember us-gaap:ShareBasedCompensationAwardTrancheThreeMember 2019-01-01 2019-12-31 0001736946 us-gaap:EmployeeStockMember 2020-03-03 0001736946 arlo:SecondAnniversaryMember us-gaap:PerformanceSharesMember arlo:EquityIncentivePlan2018Member us-gaap:IPOMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2019-01-01 2019-12-31 0001736946 arlo:NETGEARMember us-gaap:RestrictedStockUnitsRSUMember 2020-01-01 2020-03-29 0001736946 arlo:RestrictedStockUnitsPerformanceBasedRestrictedStockUnitsMarketBasedPerformanceRestrictedStockUnitsMember 2020-01-01 2020-03-29 0001736946 srt:ExecutiveOfficerMember arlo:MarketBasedPerformanceRestrictedStockUnitsMember 2019-07-01 2019-09-29 0001736946 arlo:NETGEARMember us-gaap:RestrictedStockUnitsRSUMember 2020-03-29 0001736946 us-gaap:PerformanceSharesMember arlo:EquityIncentivePlan2018Member us-gaap:IPOMember us-gaap:ShareBasedCompensationAwardTrancheThreeMember 2019-01-01 2019-12-31 0001736946 srt:ExecutiveOfficerMember arlo:PerformanceBasedRestrictedStockUnitsMember 2019-07-01 2019-09-29 0001736946 arlo:EmployeeStockPurchasePlanMember 2020-03-03 0001736946 arlo:EquityIncentivePlan2018Member us-gaap:IPOMember us-gaap:ShareBasedCompensationAwardTrancheOneMember 2019-01-01 2019-12-31 0001736946 us-gaap:EmployeeStockOptionMember 2019-12-31 0001736946 us-gaap:RestrictedStockUnitsRSUMember 2020-01-01 2020-03-29 0001736946 us-gaap:RestrictedStockUnitsRSUMember 2019-12-31 0001736946 us-gaap:RestrictedStockUnitsRSUMember 2020-03-29 0001736946 arlo:NETGEARMember us-gaap:RestrictedStockUnitsRSUMember 2019-12-31 0001736946 arlo:NETGEARMember us-gaap:EmployeeStockOptionMember 2019-12-31 0001736946 arlo:EquityIncentivePlan2018Member 2019-12-31 0001736946 arlo:EquityIncentivePlan2018Member 2020-01-01 2020-03-29 0001736946 arlo:EquityIncentivePlan2018Member 2020-03-29 0001736946 srt:MinimumMember arlo:EquityIncentivePlan2018Member 2020-01-01 2020-03-29 0001736946 arlo:EquityIncentivePlan2018Member us-gaap:IPOMember us-gaap:ShareBasedCompensationAwardTrancheTwoMember 2019-01-01 2019-12-31 0001736946 arlo:MarketBasedPerformanceRestrictedStockUnitsMember 2020-01-01 2020-03-29 0001736946 country:US 2019-01-01 2019-03-31 0001736946 country:US 2020-01-01 2020-03-29 0001736946 us-gaap:EMEAMember 2019-01-01 2019-03-31 0001736946 srt:AsiaPacificMember 2020-01-01 2020-03-29 0001736946 srt:AsiaPacificMember 2019-01-01 2019-03-31 0001736946 arlo:AmericasExcludingUnitedStatesMember 2020-01-01 2020-03-29 0001736946 arlo:AmericasExcludingUnitedStatesMember 2019-01-01 2019-03-31 0001736946 us-gaap:EMEAMember 2020-01-01 2020-03-29 0001736946 us-gaap:EMEAMember 2020-03-29 0001736946 arlo:AmericasExcludingUnitedStatesMember 2020-03-29 0001736946 country:CN 2019-12-31 0001736946 arlo:AsiaPacificExcludingChinaMember 2020-03-29 0001736946 us-gaap:EMEAMember 2019-12-31 0001736946 country:CN 2020-03-29 0001736946 arlo:AmericasExcludingUnitedStatesMember 2019-12-31 0001736946 arlo:AsiaPacificExcludingChinaMember 2019-12-31 0001736946 country:US 2019-12-31 0001736946 country:US 2020-03-29 0001736946 us-gaap:SubsequentEventMember 2020-05-01 2020-05-31 iso4217:USD xbrli:shares xbrli:shares xbrli:pure arlo:region arlo:derivative_instrument iso4217:USD arlo:segment

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 (Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    

Commission file number: 001-38618
ARLO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter) 
Delaware
38-4061754
(State or other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
 
 
 
3030 Orchard Parkway

San Jose,
California
95134
(Address of principal executive offices)
(Zip Code)
(408) 890-3900
(Registrant’s telephone number including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
Title of Each Class 
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
 
ARLO
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer
 
 
Accelerated filer
 
 ☒
Non-Accelerated filer
 
 
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 

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

The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 77,452,280 as of April 24, 2020.

1


EXPLANATORY NOTE

As previously disclosed in the Current Report on Form 8-K filed by Arlo Technologies, Inc. (“Arlo” or the “Company”) on May 5, 2020, the Company expected that the filing of this Quarterly Report on Form 10-Q for the quarter ended March 29, 2020 (the “Report”), originally due on May 8, 2020, would be delayed due to disruptions caused by the COVID-19 pandemic. In particular, the Company’s stock price experienced volatility during the period covered by the Report, resulting in the need to conduct an impairment assessment of the Company's intangible, long-lived assets and goodwill, and the uncertainty caused by the COVID-19 pandemic complicated the analysis required in connection with such impairment assessment, resulting in the Company needing additional time to complete such assessment.

The Company relied on Release No. 34-88465 issued by the Securities and Exchange Commission on March 25, 2020, pursuant to Section 36 of the Securities Exchange Act of 1934, as amended, to delay the filing of this Report.



2


ARLO TECHNOLOGIES, INC.

TABLE OF CONTENTS
 
 
 
Page No.
Item 1.
4
 
4
 
5
 
6
 
7
 
8
 
9
Item 2.
37
Item 3.
48
Item 4.
48
 
 
 
 
 
 
Item 1.
49
Item 1A.
49
Item 6.
84
 
85

3


PART I: FINANCIAL INFORMATION

Item 1.
Financial Statements

ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of
 
March 29,
2020
 
December 31,
2019
 
(In thousands)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
176,425

 
$
236,680

Short-term investments (amortized cost of $30,068 and $19,967, allowance for credit losses of $0 and $0)
30,157

 
19,990

Accounts receivable (net of allowance for credit losses of $863 and $609)
61,376

 
127,317

Inventories
61,027

 
68,624

Prepaid expenses and other current assets
12,569

 
16,958

Total current assets
341,554

 
469,569

Property and equipment, net
19,284

 
21,352

Operating lease right-of-use assets, net
30,184

 
31,300

Intangibles, net
950

 
1,306

Goodwill
11,038

 
11,038

Restricted cash
4,117

 
4,139

Other non-current assets
3,049

 
4,008

Total assets
$
410,176

 
$
542,712

LIABILITIES AND STOCKHOLDERS EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
39,103

 
$
111,650

Deferred revenue
46,875

 
50,362

Accrued liabilities
100,447

 
127,400

Income tax payable
4,120

 
4,489

Total current liabilities
190,545

 
293,901

Non-current deferred revenue
12,973

 
15,736

Non-current operating lease liabilities
27,776

 
29,001

Non-current income taxes payable
92

 
92

Other non-current liabilities
229

 
606

Total liabilities
231,615

 
339,336

Commitments and contingencies (Note 11)


 


Stockholders’ Equity:
 
 
 
Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding

 

Common stock: $0.001 par value; 500,000,000 shares authorized; shares issued and outstanding: 77,361,231 at March 29, 2020 and 75,785,952 at December 31, 2019
77

 
76

Additional paid-in capital
349,212

 
334,821

Accumulated other comprehensive income
117

 
(2
)
Accumulated deficit
(170,845
)
 
(131,519
)
Total stockholders’ equity
178,561

 
203,376

Total liabilities and stockholders’ equity
$
410,176

 
$
542,712


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

4


ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended
 
March 29,
2020
 
March 31,
2019
 
(In thousands, except per share data)
Revenue:
 
 
 
Products
$
50,723

 
$
46,608

Services
14,727

 
11,272

Total revenue
65,450

 
57,880

Cost of revenue:
 
 
 
Products
52,188

 
50,284

Services
9,309

 
5,651

Total cost of revenue
61,497

 
55,935

Gross profit
3,953

 
1,945

 
 
 
 
Operating expenses:
 
 
 
Research and development
15,243

 
18,161

Sales and marketing
11,038

 
14,221

General and administrative
18,784

 
10,536

Separation expense
79

 
906

Gain on sale of business
(292
)
 

Total operating expenses
44,852

 
43,824

 
 
 
 
Loss from operations
(40,899
)
 
(41,879
)
Interest income
535

 
862

Other income (expense), net
1,183

 
(47
)
Loss before income taxes
(39,181
)
 
(41,064
)
Provision for income taxes
145

 
220

Net loss
$
(39,326
)
 
$
(41,284
)
 
 
 
 
Net loss per share:
 
 
 
Basic
$
(0.51
)
 
$
(0.55
)
Diluted
$
(0.51
)
 
$
(0.55
)
Weighted average shares used to compute net loss per share:
 
 
 
Basic
76,560

 
74,409

Diluted
76,560

 
74,409


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


5


ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
Three Months Ended
 
March 29,
2020
 
March 31,
2019
 
(In thousands)
Net loss
$
(39,326
)
 
$
(41,284
)
Other comprehensive income (loss), before tax:
 
 
 
Unrealized gain on derivative instruments
53

 
40

Unrealized gain on available-for-sale securities
66

 
21

Total other comprehensive income (loss), before tax
119

 
61

Tax benefit (provision) related to derivative instruments

 
(5
)
Total other comprehensive income (loss), net of tax
119

 
56

Comprehensive loss
$
(39,207
)
 
$
(41,228
)

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


6


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


Shares
 
Amount
 
 Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total
 
(In thousands)
Balance as of December 31, 2019
75,786

 
$
76

 
$
334,821

 
$
(2
)
 
$
(131,519
)
 
$
203,376

Net loss

 

 

 

 
(39,326
)
 
(39,326
)
Stock-based compensation expense

 

 
11,985

 

 

 
11,985

Settlement of liability classified RSUs

 

 
2,573

 

 

 
2,573

Issuance of common stock under stock-based compensation plans
1,375

 
1

 

 

 

 
1

Issuance of common stock under Employee Stock Purchase Plan
732

 
1

 
1,853

 

 

 
1,854

Restricted stock unit withholdings
(532
)
 
(1
)
 
(2,020
)
 

 

 
(2,021
)
Change in unrealized gains and losses on available-for-sale securities, net of tax

 

 

 
66

 

 
66

Change in unrealized gains and losses on derivatives, net of tax

 

 

 
53

 

 
53

Balance as of March 29, 2020
77,361

 
$
77


$
349,212

 
$
117


$
(170,845
)
 
$
178,561

 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 


Shares
 
Amount
 
 Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Total
 
(In thousands)
Balance as of December 31, 2018
74,247

 
$
74

 
$
315,277

 
$

 
$
(45,849
)
 
$
269,502

Cumulative-effect adjustment from adoption of ASC 842, net of tax

 

 

 

 
281

 
281

Net loss

 

 

 

 
(41,284
)
 
(41,284
)
Stock-based compensation expense

 

 
4,653

 

 

 
4,653

Issuance of common stock under stock-based compensation plans
481

 
1

 

 

 

 
1

Restricted stock unit withholdings
(176
)
 

 
(1,068
)
 

 

 
(1,068
)
Change in unrealized gains and losses on available-for-sale securities, net of tax

 

 

 
21

 

 
21

Change in unrealized gains and losses on derivatives, net of tax

 

 

 
35

 

 
35

Balance as of March 31, 2019
74,552

 
$
75

 
$
318,862

 
$
56

 
$
(86,852
)
 
$
232,141


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


7


ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended
 
March 29,
2020
 
March 31,
2019
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(39,326
)
 
$
(41,284
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,773

 
2,375

Premium amortization / discount accretion on investments, net
(5
)
 
(137
)
Stock-based compensation expense
12,773

 
4,653

Allowance for credit losses and inventory reserves
1,709

 
3,280

Gain on sale of business
(292
)
 

Deferred income taxes
100

 
(12
)
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
65,685

 
94,174

Inventories
6,142

 
(9,411
)
Prepaid expenses and other assets
5,273

 
13,114

Accounts payable
(71,834
)
 
(27,486
)
Deferred revenue
(6,251
)
 
(2,254
)
Accrued and other liabilities
(25,651
)
 
(52,497
)
Net cash used in operating activities
(48,904
)
 
(15,485
)
Cash flows from investing activities:
 
 

Purchases of property and equipment
(1,111
)
 
(4,260
)
Purchases of short-term investments
(20,096
)
 
(9,897
)
Proceeds from maturities of short-term investments
10,000

 
15,000

Net cash provided (cash used) by investing activities
(11,207
)
 
843

Cash flows from financing activities:
 
 
 
Proceeds related to employee benefit plans
1,854

 
1

Restricted stock unit withholdings
(2,020
)
 
(1,068
)
Net cash used in financing activities
(166
)
 
(1,067
)
Net decrease in cash and cash equivalents and restricted cash
(60,277
)
 
(15,709
)
Cash and cash equivalents and restricted cash, at beginning of period
240,819

 
155,424

Cash and cash equivalents and restricted cash, at end of period
$
180,542

 
$
139,715

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Purchases of property and equipment included in accounts payable and accrued liabilities
$
323

 
$
1,880

De-recognition of build-to-suit assets and liabilities
$

 
$
(21,610
)

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


8


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



Note 1.    The Company and Basis of Presentation

The Company

The Company combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle. The Company's cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection. The Company conducts business across three geographic regions - Americas; Europe, Middle-East and Africa (“EMEA”); and Asia Pacific (“APAC”) - and primarily generates revenue by selling devices through retail channels, wholesale distribution and wireless carrier channels and paid subscription services through in-app purchases.

The Company has dual corporate headquarters located in San Jose, California and Carlsbad, California and also maintains offices to provide sales and customer support at various global locations.

Basis of Presentation

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

These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair statement of the unaudited condensed consolidated financial statements for interim periods.

Reclassification

Certain reclassifications have been made to the prior year’s condensed consolidated statements of cash flows to conform to the current year’s presentation. The reclassifications had no effect on the net cash used (provided by) in operating activities, investing activities or financing activities on the prior year’s statement of cash flows.

Fiscal periods

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

Use of estimates

The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Management bases its estimates on various assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates and operating results for the three months ended

9



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

March 29, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any future period.

Note 2.    Significant Accounting Policies and Recent Accounting Pronouncements

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes during the three months ended March 29, 2020, other than the accounting policy discussed below.

Trade accounts receivable

The Company is exposed to credit losses primarily through sales of products and services. The Company's allowance for current estimated credit losses methodology for trade accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default.

The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding the novel coronavirus ("COVID-19") pandemic and determined that the estimate of credit losses was not significantly impacted. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables.

Recent accounting pronouncements

Emerging Growth Company Status

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

Accounting Pronouncements Recently Adopted

ASU 2016-13 - Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326), which replaces the incurred-loss impairment methodology and requires immediate recognition of estimated credit losses expected to occur for most financial assets, including trade receivables. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. The Company adopted Topic 326 on January 1, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. The cumulative-effect adjustment recorded on January 1, 2020, is immaterial.

ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning January 1, 2022 (or January 1, 2021 should the Company cease to be classified as an EGC), with early adoption permitted. The Company early adopted ASU 2019-12 in the first quarter of 2020. The impact of the adoption of ASU 2019-12 on its financial statements is immaterial.

10



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


Accounting Pronouncements Not Yet Effective
In March 2020, FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its financial statements and related disclosures.

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

Note 3.    Deferred Revenue

Deferred Revenue

Deferred revenue consists of advance payments and deferred revenue, where the Company has unsatisfied performance obligations. Deferred revenue primarily consists of prepaid services and customer billings in advance of revenues being recognized from the Company's subscription contracts.

Transaction Price Allocated to the Remaining Performance Obligations

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

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 29, 2020:
 
 
1 year
 
2 years
 
Greater than 2 years
 
Total
 
 
(In thousands)
Performance obligations
 
$
59,916

 
$
10,258

 
$
3,120

 
$
73,294



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

For the three months ended March 29, 2020 and March 31, 2019, $8.6 million and $9.2 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $14.9 million and $11.5 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. $8.7 million and $8.6 million of this recognized revenue was included in the contract liability balance at the beginning of the period. There were no significant changes in estimates during the period that would affect the contract balances.

Disaggregation of Revenue


11



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

The Company conducts business across three geographic regions: Americas, EMEA, and APAC. Sales and usage-based taxes are excluded from revenue. Refer to Note 14, Segment and Geographic Information, for revenue by geography.

Note 4.    Disposal of Business

On November 4, 2019, the Company and Verisure S.à.r.l. (“Verisure”) concurrently entered into an Asset Purchase Agreement (the “Purchase Agreement”) and Supply Agreement (the “Supply Agreement” and together with the Purchase Agreement, the “Verisure Agreements”). The Verisure Agreements created a strategic partnership that leverages both the Company and Verisure’s capabilities to create incremental scale to address the ever-growing demand for residential and commercial security. The strategic partnership combines the Company’s innovative connected cameras and cloud services platform with Verisure’s professionally monitored security solutions to provide a new level of smart security for European customers. The Purchase Agreement provided that, upon the terms and subject to the conditions set forth in the Purchase Agreement, the Company transferred, sold and assigned to Verisure certain assets (the "Assets") related to the Company’s commercial operations in Europe (the "Business") to Verisure for $50.0 million in cash plus additional cash for certain inventory. The Purchase Agreement contained customary representations and warranties regarding Verisure, the Business and the Assets, indemnification provisions, termination rights and other customary provisions. Further, the Company has agreed not to engage in any business that competes with the Business for a period of three years.

The transaction closed on December 30, 2019 for $52.7 million including working capital adjustments and resulted in a pretax gain of $54.9 million in the fourth quarter of 2019. In the first quarter of 2020, the Company recorded an additional gain of $292 thousand that was recorded in Gain on sale of business in the Company's unaudited condensed consolidated statements of operations as a result of the final working capital adjustment.

The assets and liabilities sold and assigned to Verisure were determined to have met the criteria to be classified as held for sale as of November 4, 2019, the execution date of the Purchase Agreement. The transaction contemplated by the Purchase Agreement did not meet the criteria for discontinued operations as the Company is expected to have continued involvement in Europe through manufacturing and shipping of products to the region through sales to Verisure as part of the Supply Agreement and therefore no significant change in revenue from the region is expected; it was determined the transaction did not represent a strategic shift. The Company also assessed whether a loss is needed to be recorded upon initial classification of the assets and liabilities as held for sale to adjust its carrying amount to the fair value less cost to sell. As the carrying amount of the assets and liabilities was lower than fair value less cost to sell, no adjustment was necessary. As of the closing date of December 30, 2019, the Company concluded that no impairment exists for the assets and no adjustment was necessary for the liabilities. Further, the Company reassessed the fair value and cost to sell, and noted that they did not change since the initial classification of the assets and liabilities as held for sale. Given such, no loss adjustment was necessary.

The Supply Agreement provides that Verisure is the exclusive distributor of Company products in Europe for all channels, and will non-exclusively distribute the Company's products through its direct channels globally for an initial term of five years. During the five-year period commencing January 1, 2020, Verisure has an aggregate minimum purchase commitment of $500 million, which includes annual minimum commitments. On December 30, 2019, Verisure prepaid the Company $20 million for product purchases in fiscal 2020 and will prepay $40.0 million on the first anniversary of the closing of the Purchase Agreement for product purchases in fiscal 2021.

The Supply Agreement also includes certain Non-recurring Engineering ("NRE") services to be delivered to Verisure, including developing certain custom products specified by Verisure in exchange for an aggregate of $10.0 million, payable in installments upon meeting certain development milestones. As of March 29, 2020, Verisure has paid $2.5 million for this NRE service. For the three months ended March 29, 2020, the Company recognized service revenue of $946 thousand for this NRE service.


12



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

As part of the Purchase Agreement, the Company also entered into a Transition Services Agreement with Verisure (“Verisure TSA”) to assist Verisure with the transition of the Company’s European commercial operations. These transition services primarily include IT support for 12 months, and other services for three to six months, including sales and marketing, operations and supply chain, finance, legal, and human resources which may be extended as mutually agreed upon by the parties. As compensation for these transition services, the Company will be reimbursed by Verisure based on actual direct costs plus allocation of overhead. For the three months ended March 29, 2020, the Company charged Verisure $1.1 million for Verisure TSA services which was recorded as Other income, given such services are not related to the primary business in which the Company operates. The related Verisure TSA expenses in the same amount were recognized as incurred and reported under their natural expense classification.

Note 5.    Balance Sheet Components

Cash and Cash Equivalents and Restricted cash

The Company maintains certain cash balances restricted as to withdrawal or use. The restricted cash is comprised primarily of cash used as a collateral for a letter of credit associated with the Company’s lease agreement for its headquarters in San Jose, California. The Company deposits restricted cash with high credit quality financial institutions. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same amounts shown on the statements of cash flows:
 
As of
 
March 29,
2020
 
December 31,
2019
 
(In thousands)
Cash and cash equivalents
$
176,425

 
$
236,680

Restricted cash
4,117

 
4,139

Total as presented on the unaudited condensed consolidated statements of cash flows
$
180,542

 
$
240,819


 
As of
 
March 31,
2019
 
December 31,
2018
 
(In thousands)
Cash and cash equivalents
$
135,582

 
$
151,290

Restricted cash
4,133

 
4,134

Total as presented on the unaudited condensed consolidated statements of cash flows
$
139,715

 
$
155,424


Available-for-sale short-term investments
 
As of March 29, 2020
 
As of December 31, 2019
 
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
(In thousands)
U.S. treasuries
$
30,068

 
$
89

 
$

 
$
30,157

 
$
19,967

 
$
23

 
$

 
$
19,990



The Company’s short-term investments are classified as available-for-sale and consist of government securities with an original maturity or remaining maturity at the time of purchase of greater than three months and no more than twelve months. Accordingly, none of the available-for-sale securities have unrealized losses greater than twelve months. The Company did not recognize any allowance for credit losses related to available for sale short-term investment for the three months ended March 29, 2020.


13



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

Accounts receivable, net
 
As of
 
March 29,
2020
 
December 31,
2019
 
(In thousands)
Gross accounts receivable
$
62,239

 
$
127,926

Allowance for credit losses
(863
)
 
(609
)
Total accounts receivable, net
$
61,376

 
$
127,317



The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected.
 
Three Months Ended
 
March 29, 2020
 
(In thousands)
Balance at the beginning of the period
$
609

Adoption of ASU 2016-13, cumulative-effect adjustment to retained earnings

Provision for expected credit losses
254

Amounts written off charged against the allowance

Balance at the end of the period
$
863



Inventories

Inventories consist of finished goods which are valued at the lower of cost or net realizable value, with cost being determined using the first-in, first-out method as of March 29, 2020.

Property and equipment, net

The components of property and equipment are as follows:
 
As of
 
March 29,
2020
 
December 31,
2019
 
(In thousands)
Machinery and equipment
$
13,808

 
$
13,402

Software
11,941

 
11,945

Computer equipment
4,093

 
4,047

Furniture and fixtures
4,040

 
4,075

Leasehold improvements 
8,022

 
8,087

Total property and equipment, gross
41,904

 
41,556

Accumulated depreciation and amortization
(22,620
)
 
(20,204
)
Total property and equipment, net
$
19,284

 
$
21,352




14



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

Depreciation and amortization expense pertaining to property and equipment was $2.4 million and $2.0 million for the three months ended March 29, 2020 and March 31, 2019, respectively.

Intangibles, net
 
As of March 29, 2020
 
As of December 31, 2019
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
 
(In thousands)
Technology
$
9,800

 
$
(8,883
)
 
$
917

 
$
9,800

 
$
(8,540
)
 
$
1,260

Other
500

 
(467
)
 
33

 
500

 
(454
)
 
46

Total intangibles, net
$
10,300

 
$
(9,350
)
 
$
950

 
$
10,300

 
$
(8,994
)
 
$
1,306



As of March 29, 2020, the remaining weighted-average estimated useful life of intangibles was 0.7 years. Amortization of intangibles was $356 thousand and $381 thousand for the three months ended March 29, 2020 and March 31, 2019, respectively. There was no impairment recorded for the three months ended March 29, 2020 and March 31, 2019.

As of March 29, 2020, estimated amortization expense related to finite-lived intangibles for the remaining year was $950 thousand.

Goodwill

There was no change in the carrying amount of goodwill during the three months ended March 29, 2020 and the goodwill as of December 31, 2019 and March 29, 2020 was $11.0 million.

Goodwill Impairment

The Company performs an annual assessment of goodwill at the reporting unit level on the first day of the fourth fiscal quarter and during interim periods if there are triggering events to reassess goodwill. The uncertainty brought about by COVID-19 pandemic has adversely impacted the Company's stock price. The resulting impact to the Company’s market capitalization is a qualitative factor to consider when evaluating whether events or changes in circumstances indicate that it is more likely than not that a potential goodwill impairment exists. The Company concluded that the decline in the price of its common stock as a result of the COVID-19 impact was an indicator that the Company’s goodwill might be impaired. As a result, the Company performed a quantitative assessment as of March 29, 2020.

The Company operates as one operating and reportable segment. The Company estimated the fair value of the business using the discounted cash flow model ("DCF model"), as management believes forecasted operating cash flows are the best indicator of current fair value. The assumptions used in the DCF model include weighted-average cost of capital, projected revenue based on projected revenue growth rate, projected operating expenses, income taxes as well as capital expenditures and change in working capital. Estimating the fair value of the business was a subjective process involving the use of estimates and judgments, particularly related to future cash flows, which are inherently uncertain. Based on the results of the quantitative assessment, the respective fair value was in excess of the carrying amount by $94.1 million, or 52.7%.

As fair value was greater than carrying amount, goodwill was not impaired as of March 29, 2020. If there is a further decline in the Company’s stock price based on market conditions and deterioration of the Company’s business, the Company may have to record a charge to its earnings for the goodwill impairment of up to $11.0 million. The

15



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

Company determined that no events occurred or circumstances changed during the three months ended March 29, 2020 that would more likely than not reduce the fair value of the Company below its carrying amount.

Other non-current assets
 
As of
 
March 29,
2020
 
December 31, 2019
 
(In thousands)
Non-current deferred income taxes
$
1,218

 
$
1,318

Deposits
790

 
764

Other
1,041

 
1,926

Total other non-current assets
$
3,049

 
$
4,008



Accrued liabilities
 
As of
 
March 29,
2020
 
December 31,
2019
 
(In thousands)
Sales and marketing
$
37,242

 
$
53,974

Sales returns 
26,620

 
28,817

Accrued employee compensation
6,440

 
11,795

Current operating lease liabilities
4,138

 
3,912

Warranty obligation
3,188

 
3,169

Freight
1,480

 
2,690

Other
21,339

 
23,043

Total accrued liabilities
$
100,447

 
$
127,400




16



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

Note 6.    Fair Value Measurements

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of March 29, 2020 and December 31, 2019:
 
As of March 29, 2020
 
As of December 31, 2019
 
Total
 
Quoted market
prices in active
markets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Total
 
Quoted market
prices in active
markets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents: money-market funds (<90 days)
$
51,544

 
$
51,544

 
$

 
$
31,472

 
$
31,472

 
$

Available-for-sale securities: U.S. treasuries (1)
30,157

 
30,157

 

 
19,990

 
19,990

 

Foreign currency forward contracts (2)
106

 

 
106

 
27

 

 
27

Total assets measured at fair value
$
81,807

 
$
81,701

 
$
106

 
$
51,489

 
$
51,462

 
$
27

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (3)
$
225

 
$

 
$
225

 
$
375

 
$

 
$
375

Total liabilities measured at fair value
$
225

 
$

 
$
225

 
$
375

 
$

 
$
375

_________________________
(1) 
Included in Short-term investments on the Company’s unaudited condensed consolidated balance sheets.
(2) 
Included in Prepaid expenses and other current assets on the Company’s unaudited condensed consolidated balance sheets.
(3) 
Included in Accrued liabilities on the Company’s unaudited condensed consolidated balance sheets.

The Company’s investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company enters into foreign currency forward contracts with only those counterparties that have long-term credit ratings of A-/A3 or higher. The Company’s foreign currency forward contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that take into account the contract terms as well as currency rates and counterparty credit rates. The Company verifies the reasonableness of these pricing models using observable market data for related inputs into such models. Additionally, the Company includes an adjustment for non-performance risk in the recognized measure of fair value of derivative instruments. As of March 29, 2020 and December 31, 2019, the adjustment for non-performance risk did not have a material impact on the fair value of the Company’s foreign currency forward contracts. The carrying value of non-financial assets and liabilities measured at fair value in the financial statements on a recurring basis, including accounts receivable and accounts payable, approximate fair value due to their short maturities. As of March 29, 2020 and December 31, 2019, the Company has no Level 3 fair value assets or liabilities.

Note 7.    Derivative Financial Instruments

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


17



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

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

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

Fair value of derivative instruments

The fair values of the Company’s derivative instruments and the line items on the unaudited condensed consolidated balance sheets to which they were recorded as of March 29, 2020 and December 31, 2019 are summarized as follows:
Derivative Assets
 
Balance Sheet
Location
 
March 29, 2020
 
December 31, 2019
 
Balance Sheet
Location
 
March 29, 2020
 
December 31, 2019
 
 
 
 
(In thousands)
 
 
 
(In thousands)
Derivative assets not designated as hedging instruments
 
Prepaid expenses and other current assets
 
$
106

 
$
27

 
Accrued liabilities
 
$
225

 
$
347

Derivative assets designated as hedging instruments
 
Prepaid expenses and other current assets
 

 

 
Accrued liabilities
 

 
28

Total
 
 
 
$
106

 
$
27

 
 
 
$
225

 
$
375



Refer to Note 6, Fair Value Measurements, for detailed disclosures regarding fair value measurements in accordance with the authoritative guidance for fair value measurements and disclosures.

Gross amounts offsetting of derivative instruments

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

The following tables set forth the offsetting of derivative assets as of March 29, 2020 and December 31, 2019:

18



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

As of March 29, 2020
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets
 
Net Amounts Of Assets Presented in the Unaudited Condensed Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
 
 
(In thousands)
HSBC
 
$

 
$

 
$

 
$

 
$

 
$

Wells Fargo Bank
 
106

 

 
106

 
(106
)
 

 

Total
 
$
106

 
$

 
$
106

 
$
(106
)
 
$

 
$



December 31, 2019
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets
 
Net Amounts Of Assets Presented in the Unaudited Condensed Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
 
 
(In thousands)
HSBC
 
$
6

 
$

 
$
6

 
$
(6
)
 
$

 
$

Wells Fargo Bank
 
21

 

 
21

 
(21
)
 

 

Total
 
$
27

 
$

 
$
27

 
$
(27
)
 
$

 
$




The following tables set forth the offsetting of derivative liabilities as of March 29, 2020 and December 31, 2019
As of March 29, 2020
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets
 
Net Amounts Of Liabilities Presented in the Unaudited Condensed Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
 
 
(In thousands)
HSBC
 
$
46

 
$

 
$
46

 
$

 
$

 
$
46

Wells Fargo Bank
 
179

 

 
179

 
(106
)
 

 
73

Total
 
$
225

 
$

 
$
225

 
$
(106
)
 
$

 
$
119




19



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

December 31, 2019
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets
 
Net Amounts Of Liabilities Presented in the Unaudited Condensed Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
 
 
(In thousands)
HSBC
 
83

 

 
83

 
(6
)
 

 
77

Wells Fargo Bank
 
292

 

 
292

 
(21
)
 

 
271

Total
 
$
375

 
$

 
$
375

 
$
(27
)
 
$

 
$
348



Cash flow hedges

The Company typically hedges portions of its anticipated foreign currency exposure which generally are less than six months. The Company enters into about eight forward contracts per quarter with an average size of $2.0 million USD equivalent related to its cash flow hedging program.

The Company did not enter into any forward contracts related to its cash flow hedging program for the three months ended March 29, 2020. The effects of the Company's cash flow hedges from the previous quarter on the unaudited condensed consolidated statements of operations for the three months ended March 29, 2020 are summarized as follows:

 
 
Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges
 
 
Revenue
 
Cost of revenue
 
Research and development
 
Sales and marketing
 
General and administrative
 
 
(In thousands)
Statements of operations
 
$
65,450

 
$
61,497

 
$
15,243

 
$
11,038

 
$
18,784

Gains (losses) on cash flow hedge
 
$
(4
)
 
$

 
$

 
$

 
$


The effects of the Company’s cash flow hedges on the unaudited condensed consolidated statements of operations for the three months ended March 31, 2019 are summarized as follows:
 
 
Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges
 
 
Revenue
 
Cost of revenue
 
Research and development
 
Sales and marketing
 
General and administrative
 
 
(In thousands)
Statements of operations
 
$
57,880

 
$
55,935

 
$
18,161

 
$
14,221

 
$
10,536

Gains (losses) on cash flow hedge
 
$
120

 
$
(1
)
 
$
(18
)
 
$
(11
)
 
$
(5
)

The Company expects to reclassify to earnings all of the amounts recorded in AOCI (as defined below) associated with its cash flow hedges over the next twelve months. For information on the unrealized gains or losses on derivatives reclassified out of AOCI into the unaudited condensed consolidated statements of operations, refer to Note 8, Accumulated Other Comprehensive Income (Loss).

Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur within the designated hedge period or if not recognized within 60 days following the end of the hedge period. The Company did not recognize any material net gains or losses related to the loss

20



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

of hedge designation as there were no discontinued cash flow hedges during the three months ended March 29, 2020 and March 31, 2019.

Non-designated hedges

The Company adjusts its non-designated hedges monthly and enters into about nine non-designated derivatives per quarter with an average size of $1.7 million. The hedges range typically from one to three months in duration. The effects of the Company’s non-designated hedge included in Other income (expense), net on the unaudited condensed consolidated statements of operations for the three months ended March 29, 2020 and March 31, 2019 were as follows:
Derivatives Not Designated as Hedging Instruments
 
Location of Gains (Losses)
Recognized in Income on Derivative
 
Three Months Ended
 
March 29, 2020
 
March 31, 2019
 
 
 
 
(In thousands)
Foreign currency forward contracts
 
Other income (expense), net
 
$
1,079

 
$
(121
)



21



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

Note 8.    Accumulated Other Comprehensive Income (Loss)

The following table sets forth the changes in accumulated other comprehensive income (loss) (“AOCI”) by component for the three months ended March 29, 2020 and March 31, 2019.
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized gains (losses) on derivatives
 
Estimated tax benefit (provision)
 
Total
 
(In thousands)
Balance as of December 31, 2019
$
23

 
$
(25
)
 
$

 
$
(2
)
Other comprehensive income (loss) before reclassifications
66

 
49

 

 
115

Less: Amount reclassified from accumulated other comprehensive income (loss)

 
(4
)
 

 
(4
)
Net current period other comprehensive income (loss)
66

 
53

 

 
119

Balance as of March 29, 2020
$
89

 
$
28

 
$

 
$
117

 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized gains (losses) on derivatives
 
Estimated tax benefit (provision)
 
Total
 
(In thousands)
Balance as of December 31, 2018
$
(2
)
 
$
2

 
$

 
$

Other comprehensive income (loss) before reclassifications
21

 
125

 
(5
)
 
141

Less: Amount reclassified from accumulated other comprehensive income (loss)

 
85

 

 
85

Net current period other comprehensive income (loss)
21

 
40

 
(5
)
 
56

Balance as of March 31, 2019
$
19

 
$
42

 
$
(5
)
 
$
56



The following tables provide details about significant amounts reclassified out of each component of AOCI for the three months ended March 29, 2020 and March 31, 2019:
 
 
Three Months Ended
March 29, 2020
 
Three Months Ended
March 31, 2019

 
 
 
Gains (Losses) Recognized in OCI - Effective Portion
 
Gains (Losses) Reclassified from OCI to Income - Effective Portion
 
Gains (Losses) Recognized in OCI - Effective Portion
 
Gains (Losses) Reclassified from OCI to Income - Effective Portion
 
Affected Line Item in the Statements of Operations
 
 
(In thousands)
 
 
Gains (losses) on cash flow hedge:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
(4
)
 
$
(4
)
 
$
125

 
$
120

 
Revenue
Foreign currency contracts
 

 

 

 
(1
)
 
Cost of revenue
Foreign currency contracts
 

 

 

 
(18
)
 
Research and development
Foreign currency contracts
 

 

 

 
(11
)
 
Sales and marketing
Foreign currency contracts
 

 

 

 
(5
)
 
General and administrative
 
 
$
(4
)
 
$
(4
)
 
$
125

 
$
85

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


22



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

Note 9.    Debt

Revolving Credit Facility

On November 5, 2019, the Company entered into a Business Financing Agreement (the “Credit Agreement”) with Western Alliance Bank, an Arizona corporation, as lender (the “Lender”).

The Credit Agreement provides for a two-year revolving credit facility (the “Credit Facility”) that matures on November 5, 2021 and that may, by its terms, be extended by mutual written agreement between the Company and the Lender. Borrowings under the Credit Facility are limited to the lesser of (x) $40.0 million, and (y) an amount equal to the borrowing base. The borrowing base will be 60% of the Company’s eligible receivables and eligible accounts receivable, less such reserves as the Lender may deem proper and necessary from time to time. The Lender is not required to make any advance under the Credit Facility during the period beginning on January 1st and continuing through June 30th, except for advances made against eligible receivables first invoiced between July 1 and December 31, 2019. The Credit Agreement also includes sublimits for the issuance by the Lender of letters of credit, credit card indebtedness and foreign exchange forward contract. Repayment of the borrowings under the Credit Facility are due upon collection of the eligible receivables. The proceeds of the borrowings under the Credit Facility may be used for working capital and general corporate purposes.

The obligations of the Company under the Credit Agreement are secured by substantially all of the Company’s domestic personal property, excluding intellectual property assets and more than 65% of the shares of voting capital stock of any of the Company’s foreign subsidiaries.

Borrowings under the Credit Agreement generally bear interest at floating rates based upon the prime rate plus two and one-quarter percentage points (2.25%), plus an additional five percentage points (5%) during any period that an event of default has occurred and is continuing. Among other fees, the Company is required to pay an annual facility fee equal to 0.25% of the limit under the Credit Facility due upon entry into the Credit Agreement and on each anniversary thereof. The annual facility fee is capitalized and being amortized as interest expense over a 12-month period. The Company incurred debt issuance costs for the Credit Agreement, which are recorded in prepaid expenses and other current assets in the Company's unaudited condensed consolidated balance sheets and are being amortized as interest expense over the contractual term of the Credit Agreement.

The Credit Agreement contains customary events of default and other restrictions, including a financial covenant that requires the Company to maintain certain amount of domestic cash and certain restrictions on the Company’s ability to incur additional indebtedness, consolidate or merge, enter into acquisitions, pay any dividend or distribution on the Company’s capital stock, redeem, retire or purchase shares of the Company’s capital stock, make investments or pledge or transfer assets, in each case subject to limited exceptions. If an event of default under the Credit Agreement occurs, then the Lender may cease making advances under the Credit Agreement and declare any outstanding obligations under the Credit Agreement to be immediately due and payable. In addition, if the Company files a bankruptcy petition, a bankruptcy petition is filed against the Company and is not dismissed or stayed within forty-five days, or the Company makes a general assignment for the benefit of creditors, then any outstanding obligations under the Credit Agreement will automatically and without notice or demand become immediately due and payable. As of March 29, 2020, the Company is in compliance with all the covenants of the Credit Agreement.

No amounts had been drawn under the Credit Facility as of March 29, 2020.

Note 10.     Commitments and Contingencies

Operating Leases

The Company primarily leases office space, with various expiration dates through June 2029. Some of the leases include options to extend such leases for up to five years, and some include options to terminate such leases within

23



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

one year. The terms of certain of the Company's leases provide for rental payments on a graduated scale. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, accrued liabilities, and non-current operating lease liabilities in the unaudited condensed consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Fixed lease expense for lease payments are recognized in the unaudited condensed consolidated statements of operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

The operating lease expense for the three months ended March 29, 2020 and March 31, 2019 was as follows:
 
 
Statements of Operations Location
 
March 29, 2020
 
March 31, 2019
 
 
 
 
(In thousands)
Operating lease cost (1)
 
General and administrative
 
$
1,837

 
$
863

________________________
(1)  
Included short-term leases and variable lease costs which were immaterial.

Supplemental cash flow information related to operating leases for the three months ended March 29, 2020 and was as follows:
 
 
March 29, 2020
 
March 31, 2019
 
 
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
 
    Operating cash flows from operating leases
 
$
1,486

 
$
756

Right-of-use assets obtained in exchange for lease liabilities
 
 
 
 
    Operating leases
 
$

 
$
14,559


Weighted average remaining lease term and weighted average discount rate related to operating leases as of March 29, 2020 were as follows:

Weighted average remaining lease term
 
7.5 years

Weighted average discount rate
 
5.67
%



24



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

The maturity of lease liabilities related to operating leases for each of the next five years and thereafter as of March 29, 2020 was as follows (in thousands):

2020 (Remaining nine months)
$
4,318

2021
5,698

2022
5,551

2023
4,874

2024
4,439

Thereafter
14,655

Total lease payments
39,535

Less: interest (1)
(7,621
)
Total
$
31,914

 
 
Accrued liabilities
$
4,138

Non-current operating lease liabilities
27,776

Total
$
31,914

________________________
(1)  
Calculated using the Company’s incremental borrowing rate on a collateralized basis plus LIBOR rate that closely matches contractual term of most leases.
The maturity of lease liabilities related to operating leases for each of the next five years and thereafter as of December 31, 2019 was as follows (in thousands):
2020
$
5,660

2021
5,735

2022
5,589

2023
4,908

2024
4,450

Thereafter
14,669

Total lease payments
$
41,011

Less: interest (1)
(8,098
)
Total
$
32,913

 
 
Accrued liabilities
$
3,912

Non-current operating lease liabilities
29,001

Total
$
32,913


________________________
(1)  
Calculated using the Company’s incremental borrowing rate on a collateralized basis plus LIBOR rate that closely matches contractual term of most leases.


25



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

Letters of Credit

In connection with the lease agreement for the headquarters located in San Jose, California, the Company executed a letter of credit with the landlord as the beneficiary. As of March 29, 2020 the Company had approximately $3.6 million of unused letters of credit outstanding, of which $3.1 million pertains to the lease arrangement in San Jose, California.

Purchase Obligations

The Company has entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. Orders are non-cancelable within 30 days prior to the expected shipment date. As of March 29, 2020, the Company had approximately $51.4 million in non-cancelable purchase commitments with suppliers. The Company establishes a loss liability for all products it does not expect to sell for which it has committed purchases from suppliers. As of March 29, 2020, the loss liability from committed purchases was $1.9 million. From time to time the Company’s suppliers procure unique complex components on the Company’s behalf. If these components do not meet specified technical criteria or are defective, the Company should not be obligated to purchase the materials.

Warranty Obligations

Changes in the Company’s warranty liability, which is included in Accrued liabilities in the unaudited condensed consolidated balance sheets, were as follows:
 
Three Months Ended
 
March 29,
2020
 
March 31,
2019
 
(In thousands)
Balance at the beginning of the period
$
3,169

 
$
3,712

Provision for warranty obligation made during the period
207

 

Settlements made during the period
(188
)
 
(511
)
Balance at the end of the period
$
3,188

 
$
3,201




26



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

Litigation and Other Legal Matters

The Company is involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below. In all cases, at each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. In such cases, the Company accrues for the amount, or if a range, the Company accrues the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within litigation reserves, net. The Company monitors developments in these legal matters that could affect the estimate the Company had previously accrued. In relation to such matters, the Company currently believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its financial position within the next twelve months, or the outcome of these matters is currently not determinable. There are many uncertainties associated with any litigation, and these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any intellectual property litigation may require the Company to make royalty payments, which could have an adverse effect in future periods. If any of those events were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from the Company's estimates, which could result in the need to adjust the liability and record additional expenses.

Beginning on December 11, 2018, purported stockholders of Arlo Technologies, Inc. filed six putative securities class action complaints in the Superior Court of California, County of Santa Clara, and one complaint in the U.S. District Court for the Northern District of California against the Company and certain of its executives and directors. Some of these actions also name as defendants the underwriters in the Company’s IPO and NETGEAR, Inc. The actions pending in state court are Aversa v. Arlo Technologies, Inc., et al., No. 18CV339231, filed Dec. 11, 2018; Pham v. Arlo Technologies, Inc. et al., No. 19CV340741, filed January 9, 2019; Patel v. Arlo Technologies, Inc., No. 19CV340758, filed January 10, 2019; Perros v. NetGear, Inc., No. 19CV342071, filed February 1, 2019; Vardanian v. Arlo Technologies, Inc., No. 19CV342318, filed February 8, 2019; and Hill v. Arlo Technologies, Inc. et al., No. 19CV343033, filed February 22, 2019. On April 26, 2019, the state court consolidated these actions as In re Arlo Technologies, Inc. Shareholder Litigation, No. 18CV339231 (the “State Action"). The action pending in federal court is Wong v. Arlo Technologies, Inc. et al., No. 19-CV-00372 (the “Federal Action”).
    
The plaintiffs in the State Action filed a consolidated complaint on May 1, 2019. The consolidated complaint generally alleges that the Company failed to adequately disclose quality control problems and adverse sales trends ahead of its IPO, violating the Securities Act of 1933, as amended. The complaint seeks unspecified monetary damages and other relief on behalf of investors who purchased Arlo common stock issued pursuant and/or traceable to the IPO offering documents.

On June 21, 2019, the court stayed the State Action pending resolution of the Federal Action, given the substantial overlap between the claims. The court has set a case management conference for June 19, 2020, so the parties can provide an update regarding the status of the Federal Action.

In the Federal Action, the court appointed a shareholder named Matis Nayman to serve as lead plaintiff and the law firm of Keller Lenkner LLC as lead counsel. On June 7, 2019, plaintiff filed an amended complaint, which alleged that defendants violated the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, by failing to adequately disclose quality control problems and adverse sales trends surrounding the Company’s IPO. The amended complaint also named as defendants the underwriters in the IPO and NETGEAR, Inc. Defendants filed a motion to dismiss the amended complaint on August 6, 2019, and the court granted that motion on December 19, 2019, while giving plaintiff leave to amend. On February 13, 2020, plaintiff filed a second amended complaint. On the same day, the parties asked the court to stay the case to allow for plaintiff to file a motion for preliminary approval of a class-wide settlement. On February 14, 2020, the court stayed the case.


27



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

In addition, to the State Action and the Federal Action, a purported stockholder named Leonard Pinto filed a tagalong derivative action on June 13, 2019 (the “Derivative Action”) in the U.S. District Court for the Northern District of California. The action is brought on behalf of the Company against the majority of the Company’s current directors. The complaint is based on the same alleged misconduct as the securities class actions but asserts claims for breach of fiduciary duty, waste of corporate assets, and violation of the Securities Exchange Act of 1934, as amended. On August 20, 2019, the court stayed the Derivative Action in deference to the Federal Action.

On April 15, 2020, a purported stockholder named David W. Foster filed a lawsuit under 8 Del. C. § 220 in the Delaware Court of Chancery. Plaintiff seeks inspection of corporate books and records to investigate the allegations underlying the State Actions and Federal Action. Plaintiff also seeks an order directing the Company to pay his costs and expenses.

Regardless of the merits or ultimate results of the above-described litigation matters, they could result in substantial costs, which would hurt the Company’s financial condition and results of operations and divert management’s attention and resources from our business. As of March 29, 2020, the Company had accrued a loss contingency of $1.25 million for the Federal Action.

Indemnification of Directors and Officers

The Company, as permitted under Delaware law and in accordance with its bylaws, has agreed to indemnify its officers and directors for certain events or occurrences, subject to certain conditions, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that will enable it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the fair value of each indemnification agreement will be minimal. The Company had no liabilities recorded for these agreements as of March 29, 2020 and December 31, 2019.

Indemnifications

Prior to the completion of the IPO, the Company historically participated in NETGEAR’s sales agreements. In its sales agreements, NETGEAR typically agrees to indemnify its direct customers, distributors and resellers (the “Indemnified Parties”) for any expenses or liability resulting from claimed infringements by NETGEAR’s products of patents, trademarks or copyrights of third parties that are asserted against the Indemnified Parties, subject to customary carve-outs. The terms of these indemnification agreements are generally perpetual after execution of the agreement. The maximum amount of potential future indemnification is generally unlimited. From time to time, the Company receives requests for indemnity and may choose to assume the defense of such litigation asserted against the Indemnified Parties. The Company had no liabilities recorded for these agreements as of March 29, 2020 and December 31, 2019. In connection with the Separation, and after July 1, 2018, certain sales agreements were transferred to the Company, and the Company has replaced certain shared contracts, which include similar indemnification terms.

In addition, pursuant to the master separation agreement and certain other agreements entered into with NETGEAR in connection with the Separation and the IPO, NETGEAR has agreed to indemnify the Company for certain liabilities. The master separation agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of its business with the Company and financial responsibility for the obligations and liabilities of NETGEAR’s business with NETGEAR. Under the intellectual property rights cross-license agreement entered into between the Company and NETGEAR, each party, in its capacity as a licensee, indemnifies the other party, in its capacity as a licensor, and its directors, officers, agents, successors and subsidiaries against any losses suffered by such indemnified party as a result of the indemnifying party’s practice of the intellectual property licensed to such indemnifying party under the intellectual property rights cross-license agreement. Also, under the tax matters agreement entered into between the Company and NETGEAR, each party is liable for, and indemnifies the other party and its subsidiaries from and against any liability for, taxes that are allocated to the indemnifying party under the tax

28



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

matters agreement. In addition, the Company has agreed in the tax matters agreement that each party will generally be responsible for any taxes and related amounts imposed on it or NETGEAR as a result of the failure of the Distribution, together with certain related transactions, to qualify as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) and certain other relevant provisions of the Code, to the extent that the failure to so qualify is attributable to actions, events or transactions relating to such party’s respective stock, assets or business, or a breach of the relevant representations or covenants made by that party in the tax matters agreement. The transition services agreement generally provides that the applicable service recipient indemnifies the applicable service provider for liabilities that such service provider incurs arising from the provision of services other than liabilities arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement, and that the applicable service provider indemnifies the applicable service recipient for liabilities that such service recipient incurs arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement. Pursuant to the registration rights agreement, the Company has agreed to indemnify NETGEAR and its subsidiaries that hold registrable securities (and their directors, officers, agents and, if applicable, each other person who controls such holder under Section 15 of the Securities Act) registering shares pursuant to the registration rights agreement against certain losses, expenses and liabilities under the Securities Act, common law or otherwise. NETGEAR and its subsidiaries that hold registrable securities similarly indemnify the Company but such indemnification will be limited to an amount equal to the net proceeds received by such holder under the sale of registrable securities giving rise to the indemnification obligation.

Change in Control and Severance Agreements

The Company has entered into change in control and severance agreements with certain of its key executives (the “Severance Agreements”). Pursuant to the Severance Agreements, upon a termination without cause or resignation with good reason, the individual would be entitled to (1) cash severance equal to (a) the individual’s annual base salary and an additional amount equal to his or her target annual bonus (for the Chief Executive Officer and Chief Financial Officer) or (b) the individual’s base salary for six months (for other key executives), (2) (a) 12 months of health benefits continuation (for the Chief Executive Officer and Chief Financial Officer) or (b) six months of health benefits continuation (for other key executives) and (3) accelerated vesting of any unvested equity awards that would have vested during the 12 months following the termination date. Upon a termination without cause or resignation with good reason that occurs during the one month prior to or 12 months following a change in control, the individual would be entitled to (1) (a) cash severance equal to a multiple (2 times for the Chief Executive Officer and 1.5 times for the Chief Financial Officer) of the sum of the individual’s annual base salary and target annual bonus (for the Chief Executive Officer and Chief Financial Officer) or (b) a cash severance equal to the individual’s annual base salary (for other key executives), (2) a number of months of health benefits continuation (24 months for the Chief Executive Officer, 18 months for the Chief Financial Officer, and 12 months for other key executives) and (3) vesting of all outstanding, unvested equity awards. Severance will be conditioned upon the execution and non-revocation of a release of claims. The Company had no liabilities recorded for these agreements as of March 29, 2020.

On May 2, 2019, the Company and Patrick J. Collins III, the Company’s Senior Vice President of Products, entered into a Separation and Release Agreement (the “Separation Agreement”) regarding Mr. Collins’ separation from the Company, effective May 1, 2019. Pursuant to the Separation Agreement, Mr. Collins received cash severance equal to his annual base salary, 12 months of health benefits continuation and accelerated vesting of any of his unvested equity awards that would have vested during the 12 months following the termination date.

Environmental Regulation

The Company is required to comply and is currently in compliance with the European Union (“EU”) and other Directives on the Restrictions of the use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”), Waste Electrical and Electronic Equipment (“WEEE”) requirements, Energy Using Product (“EuP”) requirements, the REACH Regulation, Packaging Directive and the Battery Directive.


29



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

The Company is subject to various federal, state, local, and foreign environmental laws and regulations, including those governing the use, discharge, and disposal of hazardous substances in the ordinary course of its manufacturing process. The Company believes that its current manufacturing and other operations comply in all material respects with applicable environmental laws and regulations; however, it is possible that future environmental legislation may be enacted or current environmental legislation may be interpreted to create an environmental liability with respect to its facilities, operations, or products.

Note 11.     Employee Benefit Plans

The Company grants options and restricted stock units ("RSUs") under the 2018 Equity Incentive Plan (the “2018 Plan”), under which awards may be granted to all employees. Award vesting periods for this plan are generally three to four years. Options may be granted for periods of up to 10 years or such shorter term as may be provided in the applicable option agreement and at prices no less than 100% of the fair market value of the Company’s common stock on the date of grant. Options granted under the 2018 Plan generally vest over four years, the first tranche at the end of 12 months and the remaining shares underlying the option vesting monthly over the remaining three years.

The following table sets forth the available shares for grant under the 2018 Plan as of March 29, 2020 and December 31, 2019:
 
Number of Shares
 
(In thousands)
Shares available for grant as of December 31, 2019 (1)
2,630

Additional authorized shares
3,031

Granted
(795
)
Forfeited / cancelled (2)
1,717

Shares traded for taxes
532

Shares available for grant as of March 29, 2020
7,115

_________________________
(1)
Includes Arlo IPO Options of 2.8 million shares granted to certain of the Company’s named executive officers (“NEOs”) with performance-based vesting criteria (in addition to service-based vesting criteria for any of such IPO Options that are deemed to have been earned). Each of the IPO Options has a ten-year contractual term and an exercise price equal to the fair value of a share of Arlo common stock on the date of grant and will vest as follows:

The Tranche 1 Service Option vests in equal monthly installments during the 24-month period that begins on the two-year anniversary of the option grant date;
The Tranche 2 Performance Option vests on the later of (i) the date (prior to the four-year anniversary of the grant date) of satisfaction of a cumulative registered accounts milestone and (ii) if the milestone has been satisfied prior to the applicable date, then (a) with respect to 25% of the Tranche 2 Performance Option, on the first anniversary of the option grant date, (b) with respect to 25% of the Tranche 2 Performance Option, on the second anniversary of the option grant date, and (c) with respect to the remaining 50% of the Tranche 2 Performance Option, in equal monthly installments during the 24-month period on the first day of each month beginning on September 1, 2020;
The Tranche 3 Performance Option vests on the later of (i) the date (prior to the four-year anniversary of the grant date) of satisfaction of a paid recurring revenue milestone and (ii) if the milestone has been satisfied prior to the applicable date, then (a) with respect to 25% of the Tranche 3 Performance Option, on the first anniversary of the option grant date, (b) with respect to 25% of the Tranche 3 Performance Option, on the second anniversary of the option grant date, and (c) with respect to the remaining 50% of the Tranche 3 Performance Option, in equal monthly installments during the 24-month period on the first day of each month beginning on September 1, 2020;
The Tranche 4 Performance Option vests on the one-year anniversary of the grant date based on the extent to which the revenue and non-GAAP gross profit milestones for the second half of fiscal 2018 are achieved; and
The Tranche 5 Performance Option vests on the two-year anniversary of the grant date based on the extent to which the revenue and non-GAAP gross profit milestones for the fiscal 2019 are achieved.

30



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


As of March 29, 2020, the Tranche 2 performance milestone was achieved and Tranche 3 performance milestone is probable to be achieved. However, Tranches 4 and 5 performance measurement period were completed and none of the performance milestones were achieved, hence, none of the shares vested.

Tranches 1 to 5 granted to Mr. Collins were cancelled in connection with his separation from the Company in May 2019. Tranches 4 and 5 granted to the Chief Executive Officer ("CEO") were voluntarily forfeited in 2019 as the performance milestones for those Tranches were not achieved. Tranches 1, 2 and 3 granted to the CEO were voluntarily forfeited in January 2020 by the CEO. The performance milestones for Tranches 4 and 5 that were granted to the Chief Financial Officer were not met, hence, Tranche 4 was cancelled in 2019 and Tranche 5 is pending cancellation.

(2) 
Includes 1.4 million IPO Options that were voluntarily cancelled by the Company's CEO in January 2020 with no replacement award, and 0.2 million units subject to the performance RSUs ("PSUs") granted to the Company's NEOs that were cancelled as the performance milestone was not achieved.

Additionally, the Company sponsors an Employee Stock Purchase Plan (“ESPP”), pursuant to which eligible employees may contribute up to 15% of compensation, subject to certain income limits, to purchase shares of the Company’s common stock. The terms of the plan include a look-back feature that enables employees to purchase stock semi-annually at a price equal to 85% of the lesser of the fair market value at the beginning of the offering period or the purchase date. The duration of each offering period is generally six months, with the first offering period having commenced on February 16, 2019 and ended on August 15, 2019. As of March 29, 2020, approximately 1.5 million shares were available for issuance under the ESPP.

On March 3, 2020, the Company registered an aggregate of up to 3,788,756 shares of the Company’s common stock on Registration Statement on Form S-8, including 3,031,005 shares issuable pursuant to the Company's 2018 Plan that were automatically added to the shares authorized for issuance under the 2018 Plan on January 1, 2020 pursuant to an “evergreen” provision contained in the 2018 Plan and 757,751 shares issuable pursuant to the Company’s 2018 ESPP that were automatically added to the shares authorized for issuance under the 2018 ESPP on January 1, 2020 pursuant to an “evergreen” provision contained in the 2018 ESPP.


31



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

Option Activity

Arlo’s stock option activity during the three months ended March 29, 2020 was as follows:
 
Number of shares
 
Weighted Average Exercise Price Per Share
 
(In thousands)
 
(In dollars)
Outstanding as of December 31, 2019 (1)
6,040

 
$
11.56

Granted

 
$

Exercised

 
$

Forfeited / cancelled (2)
(1,417
)
 
$
15.92

Outstanding as of March 29, 2020
4,623

 
$
10.22

Vested and expected to vest as of March 29, 2020
4,623

 
$
11.56

Exercisable Options as of March 29, 2020
3,375

 
$
8.69



(1)
Includes Arlo IPO Options of 2.8 million shares granted to certain of the Company’s NEOs with performance-based vesting criteria (in addition to service-based vesting criteria for any of such IPO Options that are deemed to have been earned). Tranches 1 to 5 granted to Mr. Collins were cancelled in connection with his separation from the Company in May 2019. Tranches 4 and 5 granted to the CEO were voluntarily forfeited in 2019 as the performance milestones for those tranches were not achieved, Tranches 1, 2 and 3 granted to the CEO were voluntarily forfeited in January 2020 with no replacement award. The performance milestones for Tranches 4 and 5 that were granted to the Chief Financial Officer were not met, hence, Tranche 4 was cancelled in 2019 and Tranche 5 was pending cancellation on the 2nd anniversary of the grant date.

(2)
Includes 1.4 million shares subject to the IPO Options that were voluntarily cancelled by the CEO in January 2020 with no replacement award.

NETGEAR’s stock option activity for Arlo employees during the three months ended March 29, 2020 was as follows:
 
Number of shares
 
Weighted Average Exercise Price Per Share
 
(In thousands)
 
(In dollars)
Outstanding as of December 31, 2019
205

 
$
25.94

Exercised
(3
)
 
$
21.83

Forfeited / cancelled

 
$

Expired

 
$

Outstanding as of March 29, 2020
202

 
$
25.99

Vested and expected to vest as of March 29, 2020
202

 
$
25.99

Exercisable Options as of March 29, 2020
168

 
$
24.39




32



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

RSU Activity

Arlo’s RSU activity during the three months ended March 29, 2020 was as follows:
 
Number of shares
 
Weighted Average Grant Date Fair Value Per Share
 
(In thousands)
 
(In dollars)
Outstanding as of December 31, 2019 (1)
7,851

 
$
6.50

Granted
794

 
$
4.06

Vested
(1,375
)
 
$
7.14

Forfeited
(300
)
 
$
4.84

Outstanding as of March 29, 2020
6,970

 
$
6.17



(1) 
Includes 0.8 million shares consisting of RSUs (50% of the grant), PSUs (25% of the grant) and market-based performance RSUs ("MPSUs") (25% of the grant) granted to the NEOs during the fiscal quarter ended September 29, 2019. The RSUs will vest in three equal annual installments during the period that begins on the RSU grant date. The PSUs will vest in three equal annual installments during the period that begins on the PSU grant date based on the extent to which a revenue milestone for the fiscal year ended December 31, 2019 is achieved. As of March 29, 2020, 0.2 million shares subject to the PSUs granted to the Company's NEOs were cancelled as the performance milestone was not achieved.

The MPSUs will vest at the end of the three-year period that begins on the MPSU grant date based on performance of the Company's common stock relative to the Benchmark during the three-year period from the grant date. A positive 3.3x or negative 2.5x multiplier will be applied to the total shareholder returns (“TSR”), such that the number of shares vested will increase by 3.3% or decrease by 2.5% of the target numbers, for each 1% of positive or negative TSR relative to the Benchmark.  In the event the Company's common stock performance is below negative 30% relative to the Benchmark, no shares will be vested. In no event will the number of shares vested exceed 200% of the target for that tranche.

NETGEAR’s RSU activity for Arlo employees during the three months ended March 29, 2020 was as follows:
 
Number of shares
 
Weighted Average Grant Date Fair Value Per Share
 
(In thousands)
 
(In dollars)
Outstanding as of December 31, 2019
278