What changed in this filing

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Item 1. Financial Statements

2020-08-06 compared with 2020-05-11 · 468 added, 338 removed, 586 unchanged (58% of the section changed)

2 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

2020 December 31,

(In thousands)

1 unchanged sentence

Cash and cash equivalents $ 185,424 $ 236,680

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

Short-term investments (amortized cost of $ 20,016 and $ 19,967 )

20,030 19,990

Accounts receivable (net of allowance for credit losses of $ 810 and $ 609 )

46,466 127,317

Inventories 65,814 68,624

Prepaid expenses and other current assets 9,948 16,958

3 unchanged sentences

Intangibles, net 594 1,306

Goodwill 11,038 11,038

Restricted cash 4,141 4,139

Other non-current assets 2,244 4,008

Total assets $ 389,957 $ 542,712

LIABILITIES AND STOCKHOLDERS ’ EQUITY

20 unchanged sentences

shares issued and outstanding:

77,361,231 at March 29, 2020 and 75,785,952 at December 31, 2019

78,089,035 at June 28, 2020 and 75,785,952 at December 31, 2019

Additional paid-in capital 351,913 334,821

6 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended

Three Months Ended Six Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

(In thousands, except per share data)

Products $ 49,603 $ 72,445 $ 100,326 $ 119,053

Services 17,029 11,153 31,756 22,425

Total revenue 66,632 83,598 132,082 141,478

Cost of revenue:

Products 51,186 67,839 103,374 118,123

Services 9,957 6,109 19,266 11,760

Total cost of revenue 61,143 73,948 122,640 129,883

Gross profit 5,489 9,650 9,442 11,595

Operating expenses:

10 unchanged sentences

Provision for income taxes 183 349 328 569

Net loss $ ( 29,256 ) $ ( 33,692 ) $ ( 68,582 ) $ ( 74,976 )

Net loss per share:

Basic $ ( 0.38 ) $ ( 0.45 ) $ ( 0.89 ) $ ( 1.01 )

Diluted $ ( 0.38 ) $ ( 0.45 ) $ ( 0.89 ) $ ( 1.01 )

Weighted average shares used to compute net loss per share:

Basic 77,885 74,729 77,229 74,569

Diluted 77,885 74,729 77,229 74,569

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

1 unchanged sentence

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended

Three Months Ended Six Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

(In thousands)

Net loss $ ( 29,256 ) $ ( 33,692 ) $ ( 68,582 ) $ ( 74,976 )

Other comprehensive income (loss), before tax:

Unrealized gain on derivative instruments

Unrealized gain on available-for-sale securities

Unrealized gain (loss) on derivative instruments ( 28 ) ( 64 ) 25 ( 24 )

Unrealized gain (loss) on available-for-sale securities ( 75 ) 53 ( 9 ) 74

Total other comprehensive income (loss), before tax ( 103 ) ( 11 ) 16 50

5 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Additional Paid-In Capital

Accumulated Other Comprehensive Income (Loss)

Accumulated Deficit

Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total

(In thousands)

Balance as of March 29, 2020 77,361 $ 77 $ 349,212 $ 117 $ ( 170,845 ) $ 178,561

Net loss — — — — ( 29,256 ) ( 29,256 )

Stock-based compensation expense — — 3,772 — — 3,772

Settlement of liability classified RSUs — — 57 — — 57

Issuance of common stock under stock-based compensation plans 1,150 1 — — — 1

Restricted stock unit withholdings ( 422 ) — ( 1,128 ) — — ( 1,128 )

Change in unrealized gains and losses on available-for-sale securities, net of tax — — — ( 75 ) — ( 75 )

Change in unrealized gains and losses on derivatives, net of tax — — — ( 28 ) — ( 28 )

Balance as of June 28, 2020 78,089 $ 78 $ 351,913 $ 14 $ ( 200,101 ) $ 151,904

Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total

(In thousands)

Balance as of March 31, 2019 74,552 $ 75 $ 318,862 $ 56 $ ( 86,852 ) $ 232,141

Net loss — — — — ( 33,692 ) ( 33,692 )

Stock-based compensation expense — — 5,389 — — 5,389

Issuance of common stock under stock-based compensation plans 472 — 11 — — 11

Restricted stock unit withholdings ( 155 ) ( 614 ) — — ( 614 )

Change in unrealized gains and losses on available-for-sale securities, net of tax — — — 53 — 53

Change in unrealized gains and losses on derivatives, net of tax — — — ( 58 ) — ( 58 )

Balance as of June 30, 2019 74,869 $ 75 $ 323,648 $ 51 $ ( 120,544 ) $ 203,230

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 — — — — ( 68,582 ) ( 68,582 )

Stock-based compensation expense — — 15,757 — — 15,757

5 unchanged sentences

Change in unrealized gains and losses on derivatives, net of tax — — — 25 — 25

Balance as of March 29, 2020

Additional Paid-In Capital

Accumulated Other Comprehensive Income (Loss)

Accumulated Deficit

Balance as of June 28, 2020 78,089 $ 78 $ 351,913 $ 14 $ ( 200,101 ) $ 151,904

Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total

(In thousands)

1 unchanged sentence

Cumulative-effect adjustment from adoption of ASC 842, net of tax — — — — 281 281

Net loss — — — — ( 74,976 ) ( 74,976 )

Stock-based compensation expense — — 10,042 — — 10,042

3 unchanged sentences

Change in unrealized gains and losses on derivatives, net of tax — — — ( 23 ) — ( 23 )

Balance as of March 31, 2019

Balance as of June 30, 2019 74,869 $ 75 $ 323,648 $ 51 $ ( 120,544 ) $ 203,230

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

1 unchanged sentence

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended

Six Months Ended

2020 June 30,

(In thousands)

Cash flows from operating activities:

Net loss $ ( 68,582 ) $ ( 74,976 )

Adjustments to reconcile net loss to net cash used in operating activities:

2 unchanged sentences

Stock-based compensation expense 17,337 10,042

Allowance for credit losses and inventory reserves

Allowance for (release of) credit losses and inventory reserves 1,182 ( 51 )

Gain on sale of business ( 292 ) —

2 unchanged sentences

Accounts receivable, net 80,650 85,916

Inventories 1,827 28,042

Prepaid expenses and other assets 8,745 1,784

7 unchanged sentences

Proceeds from maturities of short-term investments 25,000 30,000

Net cash provided (cash used) by investing activities

Net cash used in investing activities ( 1,278 ) ( 1,909 )

Cash flows from financing activities:

3 unchanged sentences

Net decrease in cash and cash equivalents and restricted cash

( 51,254 ) ( 58,240 )

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

$ 189,565 $ 97,184

Non-cash investing and financing activities:

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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.

and Asia Pacific (“APAC”) and primarily generates revenue by selling devices through retail channels, wholesale distribution and wireless carrier channels and paid subscription services.

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.

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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.

The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S.

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.

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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

Actual results could differ materially from those estimates and operating results for the six months ended June 28, 2020

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.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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.

There have been no significant changes during the six months ended June 28, 2020, other than the accounting policies discussed below and the recent accounting pronouncements adopted and discussed below under Accounting Pronouncements Recently Adopted.

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.

The Company's allowance for current estimated credit losses 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 estimated 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.

The Company’s monitoring activities include timely and regular account reconciliations, dispute resolution, payment confirmation, review of customers' financial condition and macroeconomic conditions.

Balances are written off when determined to be uncollectible.

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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.

In June 2016, the Financial Accounting Standards Board ("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.

1 unchanged sentence

The cumulative-effect adjustment recorded on January 1, 2020 is immaterial.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ASU 2019-12 - Income Taxes (Topic 740):

6 unchanged sentences

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.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The impact of the adoption of ASU 2019-12 on the Company's financial statements is immaterial.

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.

The accounting standards update 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.

5 unchanged sentences

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.

Deferred revenue consists of prepaid services and customer billings in advance of revenues being recognized from the Company's subscription contracts.

Advance payments include prepayments for products and Non-Recurring Engineering ("NRE") services under the Supply Agreement with Verisure S.à.r.l.

(“Verisure”).

Refer to Note 4, Disposal of Business, for a complete discussion of Verisure transaction.

Transaction Price Allocated to the Remaining Performance Obligations

2 unchanged sentences

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 :

Greater than 2 years

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of June 28, 2020:

1 year 2 years Greater than 2 years Total

(In thousands)

Performance obligations $ 57,380 $ 8,266 $ 2,066 $ 67,712

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

For the six months ended June 28, 2020 and June 30, 2019, $ 21.4 million and $ 20.2 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $ 29.0 million and $ 22.8 million of revenue was recognized for the satisfaction of performance obligations over time, respectively.

$ 15.4 million and $ 16.1 million of this recognized revenue was included in the contract liability balance at the beginning of the periods.

There were no significant changes in estimates during the period that would affect the contract balances.

Disaggregation of Revenue

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company conducts business across three geographic regions:

3 unchanged sentences

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”).

On November 4, 2019, the Company and 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.

3 unchanged sentences

Further, t he 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 transaction closed on December 30, 2019 pursuant to which the Company received $ 52.7 million including working capital adjustments and resulted in a pretax gain of $ 54.9 million in the fourth fiscal quarter of 2019.

In the first fiscal 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.

1 unchanged sentence

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.

The Company also assessed whether a loss 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.

As of the closing date of December 30, 2019, the Company concluded that no impairment existed 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 had not changed 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 .

The Supply Agreement provides that Verisure is the exclusive distributor of the Company's products in Europe for all channels, and will non-exclusively distribute the Company's products through its direct channels globally for an

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 $ 20.0 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.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Supply Agreement also includes certain 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.

In the second fiscal quarter of 2020, an additional $ 3.5 million was added to the contract price as a result of a modification to Verisure's specification for the Outdoor Custom Camera.

As of June 28, 2020, Verisure has paid $ 5.0 million for this NRE service.

For the three and six months ended June 28, 2020, the Company recognized service revenue of $ 2.3 million and $ 3.2 million, respectively, for this NRE service.

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.

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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.

For the three and six months ended June 28, 2020, the Company charged Verisure $ 1.0 million and $ 2.1 million, respectively, for Verisure TSA services which were 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.

5 unchanged sentences

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:

2020 December 31,

(In thousands)

2 unchanged sentences

Total as presented on the unaudited condensed consolidated statements of cash flows $ 189,565 $ 240,819

2019 December 31,

(In thousands)

2 unchanged sentences

Total as presented on the unaudited condensed consolidated statements of cash flows $ 97,184 $ 155,424

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Available-for-sale short-term investments

As of March 29, 2020

As of December 31, 2019

Unrealized Gains

Unrealized Losses

Estimated Fair Value

Unrealized Gains

Unrealized Losses

Estimated Fair Value

As of June 28, 2020 As of December 31, 2019

Cost Unrealized Gains Unrealized Losses Estimated Fair Value Cost Unrealized Gains Unrealized Losses Estimated Fair Value

(In thousands)

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 .

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

treasuries $ 20,016 $ 14 $ — $ 20,030 $ 19,967 $ 23 $ — $ 19,990

Accordingly, none of the available-for-sale securities have unrealized losses greater than 12 months.

The Company did not recognize any allowance for credit losses related to available for sale short-term investment for the three and six months ended June 28, 2020.

Accounts receivable, net

2020 December 31,

(In thousands)

3 unchanged sentences

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

Three Months Ended Six Months Ended

June 28, 2020 June 28, 2020

(In thousands)

Balance at the beginning of the period $ 863 $ 609

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

Provision for expected credit losses ( 53 ) 201

1 unchanged sentence

Balance at the end of the period $ 810 $ 810

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 .

Inventories consist of finished goods which are valued at the lower of cost or net realizable value, with cost being determined using the first-in, first-out method as of June 28, 2020.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Property and equipment, net

The components of property and equipment are as follows:

2020 December 31,

(In thousands)

Machinery and equipment $ 14,762 $ 13,402

Software 12,254 11,945

Computer equipment 4,095 4,047

4 unchanged sentences

Total property and equipment, net $ 18,210 $ 21,352

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.

Depreciation and amortization expense pertaining to property and equipment was $ 2.3 million and $ 4.8 million for the three and six months ended June 28, 2020, respectively, and $ 2.2 million and $ 4.2 million for the three and six months ended June 30, 2019, respectively.

Intangibles, net

As of March 29, 2020

As of December 31, 2019

Accumulated Amortization

As of June 28, 2020 As of December 31, 2019

Gross Accumulated Amortization Net Gross Accumulated Amortization Net

(In thousands)

Technology $ 9,800 $ ( 9,227 ) $ 573 $ 9,800 $ ( 8,540 ) $ 1,260

Other 500 ( 479 ) 21 500 ( 454 ) 46

Total intangibles, net $ 10,300 $ ( 9,706 ) $ 594 $ 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 .

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 .

As of June 28, 2020, the remaining weighted-average estimated useful life of intangibles was 0.4 years.

Amortization of intangibles was $ 356 thousand and $ 712 thousand for the three and six months ended June 28, 2020, respectively, and $ 381 thousand and $ 763 thousand for the three and six months ended June 30, 2019, respectively.

There was no impairment recorded for the three and six months ended June 28, 2020 and June 30, 2019.

As of June 28, 2020, estimated amortization expense related to finite-lived intangibles for the remaining year was $ 594 thousand.

There was no change in the carrying amount of goodwill during the six months ended June 28, 2020 and the goodwill as of December 31, 2019 and June 28, 2020 was $ 11.0 million.

Goodwill Impairment

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 Company operates as one operating and reportable segment.

In the first fiscal quarter 2020, the uncertainty brought about by the COVID-19 pandemic 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.

As a result, in the first fiscal quarter of 2020, the Company performed a quantitative assessment using the discounted cash flow model ("DCF model") as of March 29, 2020.

The Company estimated the fair value of the business using the 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.

Based on the results of the quantitative assessment using the DCF model, as of March 29, 2020, the respective fair value was substantially in excess of the carrying amount by $ 94.1 million, or 53 %.

The Company determined that no events occurred or circumstances changed during the three months ended June 28, 2020 that would more likely than not reduce the fair value of the Company below its carrying amount.

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.

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

2 unchanged sentences

Non-current deferred income taxes $ 1,292 $ 1,318

Deposits 122 764

Other 830 1,926

Total other non-current assets $ 2,244 $ 4,008

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accrued liabilities

2020 December 31,

(In thousands)

1 unchanged sentence

Sales returns

23,256 28,817

Accrued employee compensation 9,675 11,795

1 unchanged sentence

Warranty obligation 3,023 3,169

Freight 2,500 2,690

Other 21,990 23,043

Total accrued liabilities $ 99,423 $ 127,400

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Quoted market

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of June 28, 2020 and December 31, 2019:

As of June 28, 2020 As of December 31, 2019

Total Quoted market

prices in active

Quoted market

(Level 1) Significant

(Level 2) Total Quoted market

prices in active

(Level 1) Significant

(In thousands)

1 unchanged sentence

money-market funds (<90 days)

$ 11,726 $ 11,726 $ — $ 31,472 $ 31,472 $ —

Available-for-sale securities:

treasuries (1)

20,030 20,030 — 19,990 19,990 —

Foreign currency forward contracts (2)

— — — 27 — 27

Total assets measured at fair value $ 31,756 $ 31,756 $ — $ 51,489 $ 51,462 $ 27

Foreign currency forward contracts (3)

$ 27 $ — $ 27 $ 375 $ — $ 375

Total liabilities measured at fair value $ 27 $ — $ 27 $ 375 $ — $ 375

6 unchanged sentences

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.

The Company verifies the reasonableness of these pricing models using observable market data for related

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

As of June 28, 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.

As of June 28, 2020 and December 31, 2019, the Company has no Level 3 fair value assets or liabilities.

Derivative Financial Instruments

5 unchanged sentences

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.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

T he Company’s foreign currency forward contracts do not contain any credit risk-related contingent features.

9 unchanged sentences

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.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

March 29, 2020

December 31, 2019

Balance Sheet

March 29, 2020

December 31, 2019

(In thousands)

Derivative assets not designated as hedging instruments

Prepaid expenses and other current assets

Accrued liabilities

Derivative assets designated as hedging instruments

Prepaid expenses and other current assets

Accrued liabilities

The fair values of the Company’s derivative instruments and the line items on the unaudited condensed consolidated balance sheets to which they were recorded as of June 28, 2020 and December 31, 2019 are summarized as follows:

Derivative Assets Balance Sheet

Location June 28, 2020 December 31, 2019 Balance Sheet

Location June 28, 2020 December 31, 2019

(In thousands) (In thousands)

Derivative assets not designated as hedging instruments Prepaid expenses and other current assets $ — $ 27 Accrued liabilities $ 27 $ 347

Derivative assets designated as hedging instruments Prepaid expenses and other current assets — — Accrued liabilities — 28

Total $ — $ 27 $ 27 $ 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.

2 unchanged sentences

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 :

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

The following tables set forth the offsetting of derivative assets as of June 28, 2020 and December 31, 2019:

As of June 28, 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 — — — — — —

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

Total $ — $ — $ — $ — $ — $ —

December 31, 2019 Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets

(In thousands)

HSBC $ 6 $ — $ 6 $ ( 6 ) $ — $ —

Wells Fargo Bank 21 — 21 ( 21 ) — —

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

Total $ 27 $ — $ 27 $ ( 27 ) $ — $ —

The following tables set forth the offsetting of derivative liabilities as of June 28, 2020 and December 31, 2019

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of June 28, 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 $ — $ — $ — $ — $ — $ —

Wells Fargo Bank 27 — 27 — — 27

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

Total $ 27 $ — $ 27 $ — $ — $ 27

December 31, 2019 Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets

(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:

The Company did not enter into any forward contracts related to its cash flow hedging program for the six months ended June 28, 2020.

The effects of the Company's cash flow hedges from the contracts placed in the fourth quarter of 2019 on the unaudited condensed consolidated statements of operations for the three and six months ended June 28, 2020 are summarized as follows:

Three Months Ended June 28, 2020

Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges

Cost of revenue

Research and development

Sales and marketing

General and administrative

Revenue Cost of revenue Research and development Sales and marketing General and administrative

(In thousands)

1 unchanged sentence

Gains (losses) on cash flow hedge $ 28 $ — $ — $ — $ —

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:

Six Months Ended June 28, 2020

Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges

Cost of revenue

Research and development

Sales and marketing

General and administrative

Revenue Cost of revenue Research and development Sales and marketing General and administrative

(In thousands)

1 unchanged sentence

Gains (losses) on cash flow hedge $ 23 $ — $ — $ — $ —

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.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The effects of the Company’s cash flow hedges on the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2019 are summarized as follows:

Three Months Ended June 30, 2019

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 $ 83,598 $ 73,948 $ 17,594 $ 14,511 $ 10,914

Gains (losses) on cash flow hedge $ 127 $ ( 1 ) $ ( 3 ) $ ( 24 ) $ ( 4 )

Six Months Ended June 30, 2019

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 $ 141,478 $ 129,883 $ 35,755 $ 28,732 $ 21,450

Gains (losses) on cash flow hedge $ 247 $ ( 2 ) $ ( 21 ) $ ( 35 ) $ ( 9 )

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 12 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

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 .

The Company did not recognize any material net gains or losses related to the loss of hedge designation as there were no discontinued cash flow hedges during the six months ended June 28, 2020 and June 30, 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 Company adjusts its non-designated hedges monthly and enters into about ten non-designated derivatives per quarter with an average size of $ 2.0 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

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 and six months ended June 28, 2020 and June 30, 2019 were as follows:

Derivatives Not Designated as Hedging Instruments Location of Gains (Losses)

Recognized in Income on Derivative Three Months Ended Six Months Ended

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

(In thousands)

Foreign currency forward contracts

Other income (expense), net

Foreign currency forward contracts Other income (expense), net $ ( 417 ) $ ( 23 ) $ 661 $ ( 144 )

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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)

The following table sets forth the changes in accumulated other comprehensive income (loss) (“AOCI”) by component for the three and six months ended June 28, 2020 and June 30, 2019.

Unrealized gains (losses) on available-for-sale securities Unrealized gains (losses) on derivatives Estimated tax benefit (provision) Total

(In thousands)

Balance as of March 29, 2020 $ 89 $ 28 $ — $ 117

Other comprehensive income (loss) before reclassifications ( 75 ) — — ( 75 )

Amount reclassified from accumulated other comprehensive income (loss) — 28 — 28

Net current period other comprehensive income (loss) ( 75 ) ( 28 ) — ( 103 )

Balance as of June 28, 2020 $ 14 $ — $ — $ 14

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 )

2 unchanged sentences

Net current period other comprehensive income (loss) ( 9 ) 25 — 16

Balance as of June 28, 2020 $ 14 $ — $ — $ 14

Unrealized gains (losses) on available-for-sale securities Unrealized gains (losses) on derivatives Estimated tax benefit (provision) Total

(In thousands)

Balance as of March 31, 2019 $ 19 $ 42 $ ( 5 ) $ 56

Unrealized gains (losses) on available-for-sale securities

Unrealized gains (losses) on derivatives

Estimated tax benefit (provision)

Other comprehensive income (loss) before reclassifications 53 31 6 90

Amount reclassified from accumulated other comprehensive income (loss) — 95 — 95

Net current period other comprehensive income (loss) 53 ( 64 ) 6 ( 5 )

Balance as of June 30, 2019 $ 72 $ ( 22 ) $ 1 $ 51

Unrealized gains (losses) on available-for-sale securities Unrealized gains (losses) on derivatives Estimated tax benefit (provision) Total

(In thousands)

3 unchanged sentences

Net current period other comprehensive income (loss) 74 ( 24 ) 1 51

Balance as of March 31, 2019

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

Balance as of June 30, 2019 $ 72 $ ( 22 ) $ 1 $ 51

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following tables provide details about significant amounts reclassified out of each component of AOCI for the three and six months ended June 28, 2020 and June 30, 2019:

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

June 28, 2020 June 30, 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

Cost of revenue

Foreign currency contracts

Research and development

Foreign currency contracts

Sales and marketing

Foreign currency contracts

General and administrative

Foreign currency contracts $ — $ 28 $ 31 $ 127 Revenue

Foreign currency contracts — — — ( 1 ) Cost of revenue

Foreign currency contracts — — — ( 3 ) Research and development

Foreign currency contracts — — — ( 24 ) Sales and marketing

Foreign currency contracts — — — ( 4 ) General and administrative

$ — $ 28 $ 31 $ 95 Total *

Six Months Ended

June 28, 2020 June 30, 2019

(In thousands)

Gains (losses) on cash flow hedge:

Foreign currency contracts $ 48 $ 23 $ 156 $ 247 Revenue

Foreign currency contracts — — — ( 2 ) Cost of revenue

Foreign currency contracts — — — ( 21 ) Research and development

Foreign currency contracts — — — ( 35 ) Sales and marketing

Foreign currency contracts — — — ( 9 ) General and administrative

$ 48 $ 23 $ 156 $ 180 Total *

_________________________

1 unchanged sentence

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Revolving Credit Facility

8 unchanged sentences

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.

Borrowings under the Credit Agreement generally bear interest at floating rates based upon the prime rate subject to a floor rate of five percent ( 5 %) 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.

4 unchanged sentences

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 .

As of June 28, 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 June 28, 2020.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Commitments and Contingencies

1 unchanged sentence

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

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Some of the leases include options to extend such leases for up to five years , and some include options to terminate such leases within one year .

The terms of certain of the Company's leases provide for rental payments on a graduated scale.

3 unchanged sentences

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:

In connection with the leases for the Company's offices in San Jose, California and Richmond, Canada, the Company received tenant improvement allowances ("TIA") of $ 3.5 million and $ 450 thousand, respectively, in the second quarter of 2020 from lessors for certain improvements the Company made to the leased properties.

The improvement made to the leased property in San Jose, California is considered as lessee-owned, and the Company recorded the improvement as a leasehold improvement within property and equipment, net and the TIA as a reduction to the ROU asset with the impact of the decrease recognized prospectively over the remaining lease term.

The improvement made to the leased property in Richmond, Canada is considered as lessor-owned, and the Company recorded the improvement as a prepaid rent within prepaid expenses and other current assets and the TIA as a reduction to prepaid rent.

The operating lease expense for the three and six months ended June 28, 2020 and June 30, 2019 was as follows:

Three Months Ended Six Months Ended

Statements of Operations Location

March 29, 2020

March 31, 2019

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

(In thousands)

2 unchanged sentences

________________________

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

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

Supplemental cash flow information related to operating leases for the three and six months ended June 28, 2020 and June 30, 2019 was as follows:

Three Months Ended Six Months Ended

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

(in thousands)

3 unchanged sentences

Operating leases $ 461 $ 7,174 $ 461 $ 21,733

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

Weighted average remaining lease term and weighted average discount rate related to operating leases as of June 28, 2020 were as follows:

Weighted average remaining lease term 7.3 years

Weighted average discount rate 5.69 %

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)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The maturity of lease liabilities related to operating leases for each of the next five years and thereafter as of June 28, 2020 was as follows (in thousands):

2020 (Remaining six months) $ 2,988

Thereafter 14,660

Total lease payments 38,619

Total $ 31,393

Accrued liabilities $ 4,367

Non-current operating lease liabilities 27,026

Total $ 31,393

________________________

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

(1) Leases that commenced before November 5, 2019 were calculated using the Company’s incremental borrowing rate on a collateralized basis plus LIBOR rate that closely matches contractual term of most leases.

Leases that commenced after November 5, 2019 were calculated using the Company's borrowing rate defined in the Credit Agreement with Western Alliance Bank.

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):

Thereafter 14,669

Total lease payments 41,011

Total $ 32,913

Accrued liabilities $ 3,912

Non-current operating lease liabilities 29,001

Total $ 32,913

________________________

1 unchanged sentence

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

As of June 28, 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.

Generally, under these agreements, 50 % of orders are cancellable by giving notice 46 to 60 days prior to the expected shipment date and 25 % of orders are cancellable 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.

As of June 28, 2020, the Company had approximately $ 51.5 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 .

As of June 28, 2020, the loss liability from committed purchases was $ 2.6 million.

From time to time the Company’s suppliers procure unique complex components on the Company’s behalf.

2 unchanged sentences

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

Three Months Ended Six Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

(In thousands)

4 unchanged sentences

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Litigation and Other Legal Matters

3 unchanged sentences

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.

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 12 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.

5 unchanged sentences

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.

Some of these actions also name as defendants the underwriters in the Company’s initial public offering ("IPO") and NETGEAR, Inc.

The actions pending in state court are Aversa v.

19 unchanged sentences

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.

The complaint seeks unspecified monetary damages and other relief on behalf of investors who purchased Company 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.

The court has set a case management conference for December 18, 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.

3 unchanged sentences

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.

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-

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

wide settlement.

On February 14, 2020, the court stayed the case.

On June 12, 2020, plaintiff filed an unopposed motion for preliminary approval of a class action settlement.

A hearing on the motion is scheduled for September 17, 2020.

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.

8 unchanged sentences

Plaintiff also seeks an order directing the Company to pay his costs and expenses.

On June 30, 2020, the parties filed a stipulation to stay the case so that they could attempt to reach a negotiated resolution.

On July 1, 2020, the court approved the stipulation and directed the parties to provide a status report in 60 days.

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.

As of June 28, 2020, the Company had accrued a loss contingency of $ 1.25 million for the Federal Action.

Indemnification of Directors and Officers

4 unchanged sentences

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 .

The Company had no liabilities recorded for these agreements as of June 28, 2020 and December 31, 2019.

Indemnifications

4 unchanged sentences

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.

The Company had no liabilities recorded for these agreements as of June 28, 2020 and December 31, 2019.

In connection with the separation of the Company’s business from NETGEAR (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

Under the intellectual property rights cross-license

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

matters agreement.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

4 unchanged sentences

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.

The Company has entered into change in control and severance agreements with certain of its executive officers (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) or (b) the individual’s annual base salary (for other executive officers), (2) 12 months of health benefits continuation, and (3) accelerated vesting of any unvested time-based 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 times for other executive officers) of the sum of the individual’s annual base salary, (2) a number of months of health benefits continuation ( 24 months for the Chief Executive Officer and 12 months for other executive officers) and (3) vesting of all outstanding, unvested equity awards (for the Chief Executive Officer) and the vesting of all outstanding, unvested time-based equity awards (for other executive officers).

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 .

The Company had no liabilities recorded for these agreements as of June 28, 2020.

On June 15, 2020 (the “Retirement Date”), Christine Gorjanc retired as the Chief Financial Officer, principal financial officer and principal accounting officer of the Company.

In connection with her retirement, the Company, NETGEAR and Ms.

Gorjanc entered into a Separation Agreement and Release (the “Separation Agreement”) pursuant to which Ms.

Gorjanc received a $ 15,000 cash payment and accelerated vesting of (i) 8,749 shares subject to Company stock options, (ii) 43,216 shares subject to Company restricted stock units, (iii) 2,897 shares subject to NETGEAR stock options and (iv) 15,000 shares subject to NETGEAR restricted stock units.

The Board of Directors of the Company appointed Gordon Mattingly as the Company's Chief Financial Officer, principal financial officer and principal accounting officer, effective as of the Retirement Date.

In connection with his appointment as the Company’s Chief Financial Officer, the Company entered into a confirmatory employment letter (the “Employment Agreement”) with Mr.

Pursuant to the Employment Agreement, Mr.

Mattingly will receive an annual base salary of $ 383,000 and is

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

eligible to receive an annual target bonus of 70 % of his annual base salary.

Mattingly will also continue to be eligible to participate in the Company’s equity compensation plans and employee benefit plans available to other employees of the Company.

The Company also entered into an updated change in control and severance agreement consistent with Mr.

Mattingly’s new role of Chief Financial Officer.

On May 2, 2019, the Company and Patrick J.

5 unchanged sentences

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.

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.

1 unchanged sentence

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.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Employee Benefit Plans

3 unchanged sentences

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 :

The following table sets forth the available shares for grant under the 2018 Plan as of June 28, 2020 and December 31, 2019:

Number of Shares

4 unchanged sentences

Shares traded for taxes 954

Shares available for grant as of March 29, 2020

Shares available for grant as of June 28, 2020 3,586

_________________________

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;

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.

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.

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.

(1) Includes 2.8 million shares subject to option granted to certain of the Company’s named executive officers (“NEOs”) with performance-based vesting criteria in connection with the IPO (the "IPO Options") (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 Company common stock on the date of grant.

At June 28, 2020, none of these IPO Options were outstanding due to voluntary forfeiture or cancellation for not achieving the milestones or termination of employment.

(2) Includes 2.0 million shares consisting of RSUs ( 50 % of the grant), performance RSUs ("PSUs") ( 25 % of the grant), and market-based performance RSUs ("MPSUs") ( 25 % of the grant) granted to the NEOs during the fiscal quarter ended June 28, 2020.

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 cash balance milestone as of December 31, 2020 is achieved.

The MPSUs have the same service vesting requirement and performance goal as the MPSUs granted in the fiscal quarter ended September 29, 2019, as measured from the applicable grant date.

(3) Includes (a) 1.4 million IPO Options that were voluntarily cancelled by the Company's Chief Executive Officer ("CEO") in January 2020 with no replacement award, (b) 0.1 million IPO Options granted to Ms.

Gorjanc that were cancelled for not achieving performance milestones, (c) 0.2 million shares subject to the PSUs granted to the Company's NEOs that were cancelled as the performance milestone was not achieved, and (d) awards that were cancelled in connection with Ms.

Gorjanc's separation from the Company ( 0.3 million IPO Options, 54 thousand shares subject to the MPSUs, and 7 thousand shares subject to the RSUs).

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.

1 unchanged sentence

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.

As of June 28, 2020, approximately 1.5 million shares were available for issuance under the ESPP.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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)

The Company’s stock option activity during the six months ended June 28, 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)

Outstanding as of March 29, 2020

Vested and expected to vest as of March 29, 2020

Exercisable Options as of March 29, 2020

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).

( 1,907 ) $ 15.86

Outstanding as of June 28, 2020 4,133 $ 9.58

Vested and expected to vest as of June 28, 2020 4,133 $ 9.58

Exercisable Options as of June 28, 2020 (3)

_________________________

(1) Includes IPO Options of 2.8 million shares.

Tranches 1 to 5 granted to Mr.

1 unchanged sentence

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.

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)

The performance milestones for Tranches 4 and 5 that were granted to Ms.

Gorjanc were not met, hence, Tranche 4 was cancelled in 2019 and Tranche 5 was cancelled in June 2020.

Tranches 1 to 3 granted to Ms.

Gorjanc were cancelled in connection with her separation from the Company in June 2020.

(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 0.1 million IPO Options granted to Ms.

Gorjanc that were cancelled as the performance milestone was not achieved, and 0.3 million IPO Options that were cancelled in connection with Ms.

Gorjanc's separation from the Company.

(3) Includes 6 thousand options that were accelerated in connection with Ms.

Gorjanc's separation from the Company.

NETGEAR stock option activity for Company employees during the six months ended June 28, 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 ( 77 ) $ 20.79

Forfeited / cancelled ( 20 ) $ 35.85

Outstanding as of March 29, 2020

Vested and expected to vest as of March 29, 2020

Exercisable Options as of March 29, 2020

Expired — $ 20.02

Outstanding as of June 28, 2020 108 $ 27.74

Vested and expected to vest as of June 28, 2020 108 $ 27.74

Exercisable Options as of June 28, 2020 (1)

_________________________

(1) Includes 3 thousand options that were accelerated in connection with Ms.

Gorjanc's separation from the Company.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s RSU activity during the six months ended June 28, 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)

Outstanding as of March 29, 2020

( 2,525 ) $ 6.47

Forfeited (4)

( 1,022 ) $ 4.67

Outstanding as of June 28, 2020 10,262 $ 4.58

_________________________

(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.

1 unchanged sentence

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.

As of June 28, 2020, the shares subject to PSUs that were granted to the Company's NEOs were cancelled as the performance milestone was not achieved.

The shares subject to the MPSUs that were granted to Ms.

Gorjanc were cancelled in connection with her separation from the Company.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

2 unchanged sentences

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)

(2) Includes 2.0 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 June 28, 2020.

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 cash balance milestone as of December 31, 2020 is achieved.

The MPSUs have the same service vesting requirement and performance goal as the MPSUs granted in the fiscal quarter ended September 29, 2019, as measured from the applicable grant date.

(3) Includes 43 thousand shares subject to the RSUs that were accelerated in connection with Ms.

Gorjanc's separation from the Company.

(4) Includes 0.2 million shares subject to the PSUs granted to the Company's NEOs that were cancelled as the performance milestone was not achieved and awards that were cancelled in connection with Ms.

Gorjanc's separation from the Company ( 54 thousand shares subject to the MPSUs and 7 thousand shares subject to the RSUs).

NETGEAR RSU activity for Company employees during the six months ended June 28, 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 $ 36.14

Outstanding as of March 29, 2020

The following table sets forth the weighted average assumptions used to estimate the fair value of purchase rights granted under Arlo’s ESPP for the three months ended March 29, 2020 and March 31, 2019 .

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Three Months Ended

Expected life (in years)

Risk-free interest rate

Expected volatility

( 111 ) $ 34.55

Forfeited ( 20 ) $ 36.27

Outstanding as of June 28, 2020 147 $ 37.33

_________________________

(1) Includes 15 thousand shares subject to the RSUs that were accelerated in connection with Ms.

Gorjanc's separation from the Company.

The following table sets forth the weighted average assumptions used to estimate the fair value of purchase rights granted under the ESPP for the six months ended June 28, 2020 and June 30, 2019.

Three Months Ended Six Months Ended

2020 June 30,

2019 June 28, 2020 June 30,

Expected life (in years) NA NA 0.5 0.5

Risk-free interest rate NA NA 1.55 % 2.49 %

Expected volatility NA NA 73.0 % 97.6 %

Dividend yield — — — —

Stock-Based Compensation Expense

The Company’s employees have historically participated in NETGEAR’s various stock-based plans, which are described below and represent the portion of NETGEAR’s stock-based plans in which Arlo employees participated.

The Company’s unaudited condensed consolidated statements of income reflect compensation expense for these stock-based plans associated with the portion of NETGEAR’s plans in which Arlo employees participated.

The following tables set forth stock-based compensation expense for Arlo employees and allocated charges deemed attributable to Arlo operations resulting from NETGEAR’s and Arlo’s RSUs, PSUs, MPSUs and stock options, and the purchase rights under the NETGEAR’s ESPP included in the Company’s unaudited condensed consolidated statements of operations during the periods indicated:

Three Months Ended

March 29, 2020

March 31, 2019

The stock-based compensation expense for Company employees consist of the Company’s RSUs, PSUs, MPSUs and stock options, NETGEAR RSUs and stock options granted to Company employees, and non-executive employees' annual bonus in

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the stock-based compensation expense included in the Company’s unaudited condensed consolidated statements of operations during the periods indicated:

Three Months Ended Six Months Ended

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

(In thousands)

5 unchanged sentences

The Company recognizes these compensation expense generally on a straight-line basis over the requisite service period of the award.

In January 2020, the IPO Options (Tranches 1, 2 and 3) granted to the CEO were voluntarily forfeited with no replacement award.

The cancellation was treated as a settlement for no consideration and all remaining unrecognized compensation cost of $ 7.4 million was accelerated and recognized as stock-based compensation expenses for the three months ended March 29, 2020.

As of March 29, 2020 , $ 3.9 million of unrecognized compensation cost related to Arlo’s stock options and IPO options was expected to be recognized over a weighted-average period of 1.8 years.

$ 25.3 million of unrecognized compensation cost related to unvested Arlo’s RSUs, PSUs and MPSUs was expected to be recognized over a weighted-average period of 2.6 years.

As of March 29, 2020 , $ 0.3 million of unrecognized compensation cost related to NETGEAR’s stock options for Arlo employees was expected to be recognized over a weighted-average period of 1.6 years.

$ 6.0 million of unrecognized compensation cost related to unvested NETGEAR’s RSUs for Arlo employees was expected to be recognized over a weighted-average period of 1.6 years.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The provision for income taxes for the three months ended March 29, 2020 and March 31, 2019 , was $ 0.1 million , or an effective tax rate of ( 0.4 )% , and $ 0.2 million , or an effective tax rate of ( 0.5 )% , respectively.

During the three months ended March 29, 2020 , the Company sustained lower book losses than the same periods in the prior year.

In January 2020, the IPO Options granted to the CEO were voluntarily forfeited with no replacement award.

In the second fiscal quarter of 2020, $ 1.2 million of previously recognized compensation expense was reversed as a result of cancellation of unvested shares upon Ms.

Gorjanc's separation from the Company.

In addition, $ 0.4 million of compensation expense was recognized for Ms.

Gorjanc's accelerated vested shares upon her separation from the Company.

As of June 28, 2020, $ 1.8 million of unrecognized compensation cost related to the Company’s stock options was expected to be recognized over a weighted-average period of 1.6 years.

$ 32.8 million of unrecognized compensation cost related to unvested Company RSUs, PSUs and MPSUs was expected to be recognized over a weighted-average period of 2.8 years.

As of June 28, 2020, $ 0.1 million of unrecognized compensation cost related to NETGEAR stock options for Company employees was expected to be recognized over a weighted-average period of 1.3 years.

$ 4.3 million of unrecognized compensation cost related to unvested NETGEAR RSUs for Company employees was expected to be recognized over a weighted-average period of 1.5 years.

The provision for income taxes for the three and six months ended June 28, 2020 was $ 0.2 million, or an effective tax rate of ( 0.6 )%, and $ 0.3 million, or an effective tax rate of ( 0.5 )%, respectively.

The income tax provision for the three and six months ended June 30, 2019 was $ 0.3 million, or an effective tax rate of ( 1.0 )%, and $ 0.6 million, or an effective tax rate of ( 0.8 )%, respectively.

During the three and six months ended June 28, 2020, the Company sustained lower book losses than the same periods in the prior year.

Consistent with the prior year, the Company has a full valuation allowance on its U.S.

1 unchanged sentence

The Company's provision for income taxes was primarily attributable to income taxes on foreign earnings.

The decrease in provision for income taxes for the three months ended March 29, 2020 , compared to the prior year period was primarily due to lower foreign earnings in 2020 compared to 2019.

The decrease in provision for income taxes for the three and six months ended June 28, 2020, compared to the prior year periods was primarily due to lower foreign earnings in 2020.

Net Income (Loss) Per Share

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period.

1 unchanged sentence

For certain periods presented, due to the net losses reported, these potentially dilutive securities were excluded from the computation of diluted net loss per share, since their effect would be anti-dilutive.

Net loss per share for three months ended March 29, 2020 and March 31, 2019 were as follows:

Three Months Ended

March 29, 2020

March 31, 2019

Net loss per share for the three and six months ended June 28, 2020 and June 30, 2019 were as follows:

Three Months Ended Six Months Ended

June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019

(In thousands, except per share data)

Net loss $ ( 29,256 ) $ ( 33,692 ) $ ( 68,582 ) $ ( 74,976 )

Weighted average common shares - basic 77,885 74,729 77,229 74,569

10 unchanged sentences

Geographic Information

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company conducts business across three geographic regions:

2 unchanged sentences

For reporting purposes, revenue by geography is generally based upon the ship-to location of the customer for device sales and device location for service sales.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table shows revenue by geography for the periods indicated:

Three Months Ended

Three Months Ended Six Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

(In thousands)

1 unchanged sentence

Americas (excluding U.S.) 4,068 3,075 8,682 5,638

EMEA 11,263 15,066 18,836 24,368

APAC 4,398 3,968 12,117 8,180

Total revenue $ 66,632 $ 83,598 $ 132,082 $ 141,478

The Company’s Property and equipment, net are located in the following geographic locations:

2020 December 31,

(In thousands)

1 unchanged sentence

Americas (excluding U.S.) 746 904

China 2,385 2,089

APAC (excluding China) 704 943

Total property and equipment, net $ 18,210 $ 21,352

Subsequent Events

Tenant Allowance Reimbursement

Under the terms of our lease agreement, the Company received a Tenant Improvement Reimbursement of $ 3.5 million in May 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements