What changed in this filing

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Item 1. Financial Statements

2020-11-05 compared with 2020-08-06 · 269 added, 228 removed, 826 unchanged (38% of the section changed)

2 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

September 27,

2020 December 31,

(In thousands)

(In thousands, except share and per share data)

Current assets:

36 unchanged sentences

shares issued and outstanding:

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

79,026,508 at September 27, 2020 and 75,785,952 at December 31, 2019

Additional paid-in capital 359,297 334,821

6 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended Six Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

Three Months Ended Nine Months Ended

September 27,

2020 September 29,

2019 September 27,

2020 September 29,

(In thousands, except per share data)

16 unchanged sentences

Interest income 74 596 760 2,170

Other income (expense), net 1,111 31 2,294 ( 16 )

Other income, net 543 154 2,837 138

Loss before income taxes ( 17,344 ) ( 30,304 ) ( 85,598 ) ( 104,711 )

10 unchanged sentences

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended Six Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

Three Months Ended Nine Months Ended

September 27,

2020 September 29,

2019 September 27,

2020 September 29,

(In thousands)

12 unchanged sentences

(In thousands)

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

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

Net loss — — — — ( 17,459 ) ( 17,459 )

2 unchanged sentences

Issuance of common stock under stock-based compensation plans 859 1 24 — — 25

Issuance of common stock under Employee Stock Purchase Plan 378 — 1,171 — — 1,171

Restricted stock unit withholdings ( 299 ) — ( 1,483 ) — — ( 1,483 )

1 unchanged sentence

Change in unrealized gains and losses on derivatives, net of tax — — — ( 9 ) — ( 9 )

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

Balance as of September 27, 2020 79,027 $ 79 $ 359,297 $ ( 9 ) $ ( 217,560 ) $ 141,807

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

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

Net loss — — — — ( 30,590 ) ( 30,590 )

1 unchanged sentence

Issuance of common stock under stock-based compensation plans 88 — — — — —

Issuance of common stock under Employee Stock Purchase Plan 767 1 1,824 — — 1,825

Restricted stock unit withholdings ( 18 ) — ( 73 ) — — ( 73 )

1 unchanged sentence

Change in unrealized gains and losses on derivatives, net of tax — — — 22 — 22

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

Balance as of September 29, 2019 75,706 $ 76 $ 330,618 $ 46 $ ( 151,134 ) $ 179,606

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

9 unchanged sentences

Change in unrealized gains and losses on derivatives, net of tax — — — 16 — 16

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

Balance as of September 27, 2020 79,027 $ 79 $ 359,297 $ ( 9 ) $ ( 217,560 ) $ 141,807

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

5 unchanged sentences

Issuance of common stock under stock-based compensation plans 1,041 1 11 — — 12

Issuance of common stock under Employee Stock Purchase Plan 767 1 1,824 — — 1,825

Restricted stock unit withholdings ( 349 ) — ( 1,755 ) — — ( 1,755 )

1 unchanged sentence

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

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

Balance as of September 29, 2019 75,706 $ 76 $ 330,618 $ 46 $ ( 151,134 ) $ 179,606

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

1 unchanged sentence

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended

2020 June 30,

Nine Months Ended

September 27,

2020 September 29,

(In thousands)

3 unchanged sentences

Depreciation and amortization 8,024 7,757

Loss on disposal of fixed assets 19 —

Premium amortization (discount accretion) on investments, net 60 ( 391 )

15 unchanged sentences

Proceeds from maturities of short-term investments 45,000 40,000

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

Net cash provided by (used in) investing activities ( 2,155 ) 5,209

Cash flows from financing activities:

1 unchanged sentence

Restricted stock unit withholdings ( 4,632 ) ( 1,755 )

Net cash used in financing activities ( 1,293 ) ( 1,670 )

Net cash provided by (used in) financing activities ( 1,581 ) 82

Net decrease in cash and cash equivalents and restricted cash

11 unchanged sentences

The Company and Basis of Presentation

The Company combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle.

Arlo Technologies, Inc ("the Company") combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle.

The Company's cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection.

1 unchanged sentence

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.

and Asia Pacific (“APAC”) and primarily generates revenue by selling devices through retail channels, wholesale distribution, wireless carrier channels, security channels, Arlo online store 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.

19 unchanged sentences

Management bases its estimates on various assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

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

Actual results could differ materially from those estimates and operating results for the nine months ended September 27,

ARLO TECHNOLOGIES, INC.

3 unchanged sentences

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 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.

There have been no significant changes during the nine months ended September 27, 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

9 unchanged sentences

Emerging Growth Company Status

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

As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless the Company otherwise irrevocably elects not to avail itself of this exemption.

The Company did not make such an irrevocable election and has not delayed the adoption of any applicable accounting standards.

17 unchanged sentences

Accounting Pronouncements Not Yet Effective

In March 2020, FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

In March 2020, the FASB issued ASU 2020-04, "Facilitation of the Effects of Reference Rate Reform on Financial Reporting".

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.

This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022.

This guidance may be applied prospectively through December 31, 2022.

The Company is currently evaluating the impact this guidance may have on its financial statements and related disclosures.

11 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 June 28, 2020:

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 September 27, 2020:

1 year 2 years Greater than 2 years Total

1 unchanged sentence

Performance obligations $ 50,987 $ 6,766 $ 1,517 $ 59,270

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

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 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.

For the nine months ended September 27, 2020 and September 29, 2019, $ 33.5 million and $ 32.6 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $ 46.9 million and $ 34.6 million of revenue was recognized for the satisfaction of performance obligations over time, respectively.

$ 21.2 million and $ 22.1 million of this recognized revenue was included in the contract liability balance at the beginning of the periods.

12 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 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.

The transaction closed on December 30, 2019 pursuant to which the Company received $ 52.7 million including working capital adjustments, which 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.

7 unchanged sentences

Given such, no loss adjustment was necessary.

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

During the five-year period commencing January 1, 2020, Verisure has an aggregate minimum

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.

purchase commitment of $ 500.0 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.

1 unchanged sentence

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 of September 27, 2020, Verisure has paid $ 5.0 million for this NRE service.

For the three and nine months ended September 27, 2020, the Company recognized service revenue of $ 2.3 million and $ 5.5 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.

1 unchanged sentence

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 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.

For the three and nine months ended September 27, 2020, the Company charged Verisure $ 0.9 million and $ 3.0 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:

September 27,

2020 December 31,

3 unchanged sentences

Total as presented on the unaudited condensed consolidated statements of cash flows $ 177,766 $ 240,819

September 29,

2019 December 31,

6 unchanged sentences

Available-for-sale short-term investments

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

As of September 27, 2020 As of December 31, 2019

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

3 unchanged sentences

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.

The Company did not recognize any allowance for credit losses related to available for sale short-term investment for the three and nine months ended September 27, 2020.

Accounts receivable, net

September 27,

2020 December 31,

4 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 Six Months Ended

June 28, 2020 June 28, 2020

Three Months Ended Nine Months Ended

September 27, 2020 September 27, 2020

(In thousands)

Balance at the beginning of the period $ 810 $ 609

Provision for expected credit losses ( 53 ) 201

Provision for (recovery of) expected credit losses ( 301 ) ( 100 )

Amounts written off charged against the allowance — —

Balance at the end of the period $ 509 $ 509

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.

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 September 27, 2020.

ARLO TECHNOLOGIES, INC.

2 unchanged sentences

The components of property and equipment are as follows:

September 27,

2020 December 31,

8 unchanged sentences

Total property and equipment, net $ 16,832 $ 21,352

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.

Depreciation and amortization expense pertaining to property and equipment was $ 2.2 million and $ 7.0 million for the three and nine months ended September 27, 2020, respectively, and $ 2.4 million and $ 6.6 million for the three and nine months ended September 29, 2019, respectively.

Intangibles, net

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

As of September 27, 2020 As of December 31, 2019

Gross Accumulated Amortization Net Gross Accumulated Amortization Net

3 unchanged sentences

Total intangibles, net $ 10,300 $ ( 10,062 ) $ 238 $ 10,300 $ ( 8,994 ) $ 1,306

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.

As of September 27, 2020, the remaining weighted-average estimated useful life of intangibles was 0.2 years.

Amortization of intangibles was $ 0.4 million and $ 1.1 million for the three and nine months ended September 27, 2020, respectively, and $ 0.4 million and $ 1.2 million for the three and nine months ended September 29, 2019, respectively.

There was no impairment recorded for the three and nine months ended September 27, 2020 and September 29, 2019.

As of September 27, 2020, estimated amortization expense related to finite-lived intangibles for the remaining year was $ 0.2 million.

There was no change in the carrying amount of goodwill during the nine months ended September 27, 2020 and the goodwill as of December 31, 2019 and September 27, 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.

1 unchanged sentence

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.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

4 unchanged sentences

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.

The Company determined that no events occurred or circumstances changed during the three months ended September 27, 2020 that would more likely than not reduce the fair value of the Company below its carrying amount.

Other non-current assets

September 27,

2020 December 31,

4 unchanged sentences

Total other non-current assets $ 2,216 $ 4,008

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accrued liabilities

September 27,

2020 December 31,

9 unchanged sentences

Total accrued liabilities $ 106,027 $ 127,400

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements

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

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of September 27, 2020 and December 31, 2019:

As of September 27, 2020 As of December 31, 2019

Total Quoted market

7 unchanged sentences

money-market funds (<90 days) $ 1,933 $ 1,933 $ — $ 31,472 $ 31,472 $ —

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

Available-for-sale securities:

14 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

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

inputs into such models.

The Company verifies the reasonableness of these pricing models using observable market data for related inputs into such models.

Additionally, the Company includes an adjustment for non-performance risk in the recognized measure of fair value of derivative instruments.

As of June 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.

As of September 27, 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 June 28, 2020 and December 31, 2019, the Company has no Level 3 fair value assets or liabilities.

As of September 27, 2020 and December 31, 2019, the Company has no Level 3 fair value assets or liabilities.

Derivative Financial Instruments

4 unchanged sentences

Accordingly, the Company uses derivatives to mitigate its business exposure to foreign exchange risk.

The Company enters into foreign currency forward contracts in Australian dollars, British pounds, euros, and Canadian dollars to manage its exposure to foreign exchange risk related to expected future cash flows on certain forecasted revenue, costs of revenue, operating expenses and existing assets and liabilities.

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

The Company enters into foreign currency forward contracts in Australian dollars, 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.

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

The Company is exposed to credit losses in the event of nonperformance by the counter-parties of its forward contracts.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any one counter-party.

7 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 June 28, 2020 and December 31, 2019 are summarized as follows:

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 September 27, 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

Location September 27, 2020 December 31, 2019 Balance Sheet

Location September 27, 2020 December 31, 2019

(In thousands) (In thousands)

6 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 June 28, 2020 and December 31, 2019:

As of June 28, 2020 Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets

The following tables set forth the offsetting of derivative assets as of September 27, 2020 and December 31, 2019:

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 27, 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

3 unchanged sentences

Total $ 110 $ — $ 110 $ ( 5 ) $ — $ 105

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

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

3 unchanged sentences

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

The following tables set forth the offsetting of derivative liabilities as of September 27, 2020 and December 31, 2019:

As of September 27, 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

3 unchanged sentences

Total $ 5 $ — $ 5 $ ( 5 ) $ — $ —

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

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

3 unchanged sentences

Total $ 375 $ — $ 375 $ ( 27 ) $ — $ 348

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Cash flow hedges

The Company typically hedges portions of its anticipated foreign currency exposure which generally are less than six months .

The Company did not enter into any forward contracts related to its cash flow hedging program for the 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

The Company entered into four forward contracts related to its cash flow hedging program for the three months ended September 27, 2020.

The effects of the Company's cash flow hedges from the contracts placed in the third quarter of 2020 on the unaudited condensed consolidated statements of operations for the three and nine months ended September 27, 2020 are summarized as follows:

Three Months Ended September 27, 2020

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

3 unchanged sentences

Gains (losses) on cash flow hedge $ ( 37 ) $ — $ 5 $ 2 $ —

Six Months Ended June 28, 2020

Nine Months Ended September 27, 2020

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

3 unchanged sentences

Gains (losses) on cash flow hedge $ ( 14 ) $ — $ 5 $ 3 $ —

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

The effects of the Company’s cash flow hedges on the unaudited condensed consolidated statements of operations for the three and nine months ended September 29, 2019 are summarized as follows:

Three Months Ended September 29, 2019

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

3 unchanged sentences

Gains (losses) on cash flow hedge $ 86 $ — $ ( 3 ) $ ( 3 ) $ ( 2 )

Six Months Ended June 30, 2019

Nine Months Ended September 29, 2019

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

6 unchanged sentences

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 of hedge designation as there were no discontinued cash flow hedges during the six months ended June 28, 2020 and June 30, 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 nine months ended September 27, 2020 and September 29, 2019.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Non-designated hedges

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 Company adjusts its non-designated hedges monthly and enters into about nine non-designated derivatives per quarter with an average size of $ 2.1 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 and six months ended June 28, 2020 and June 30, 2019 were as follows:

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 nine months ended September 27, 2020 and September 29, 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

Recognized in Income on Derivative Three Months Ended Nine Months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

(In thousands)

Foreign currency forward contracts Other income (expense), net $ ( 108 ) $ 665 $ 553 $ 521

ARLO TECHNOLOGIES, INC.

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 and six months ended June 28, 2020 and June 30, 2019.

The following table sets forth the changes in accumulated other comprehensive income (loss) (“AOCI”) by component for the three and nine months ended September 27, 2020 and September 29, 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

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

Other comprehensive income (loss) before reclassifications ( 14 ) ( 39 ) — ( 53 )

1 unchanged sentence

Net current period other comprehensive income (loss) ( 14 ) ( 9 ) — ( 23 )

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

Balance as of September 27, 2020 $ — $ ( 9 ) $ — $ ( 9 )

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

4 unchanged sentences

Net current period other comprehensive income (loss) ( 23 ) 16 — ( 7 )

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

Balance as of September 27, 2020 $ — $ ( 9 ) $ — $ ( 9 )

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Other comprehensive income (loss) before reclassifications ( 27 ) 100 — 73

1 unchanged sentence

Net current period other comprehensive income (loss) ( 27 ) 22 — ( 5 )

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

Balance as of September 29, 2019 $ 45 $ — $ 1 $ 46

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

4 unchanged sentences

Net current period other comprehensive income (loss) 47 ( 2 ) 1 46

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

Balance as of September 29, 2019 $ 45 $ — $ 1 $ 46

The following tables provide details about significant amounts reclassified out of each component of AOCI for the three and nine months ended September 27, 2020 and September 29, 2019:

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

June 28, 2020 June 30, 2019

September 27, 2020 September 29, 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

7 unchanged sentences

$ ( 39 ) $ ( 30 ) $ 100 $ 78 Total *

Six Months Ended

June 28, 2020 June 30, 2019

Nine Months Ended

September 27, 2020 September 29, 2019

9 unchanged sentences

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

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Revolving Credit Facility

7 unchanged sentences

The proceeds of the borrowings under the Credit Facility may be used for working capital and general corporate purposes.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

6 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 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

As of September 27, 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 September 27, 2020.

Commitments and Contingencies

10 unchanged sentences

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

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The operating lease expense for the three and nine months ended September 27, 2020 and September 29, 2019 was as follows:

Three Months Ended Nine Months Ended

Statements of Operations Location

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

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

(In thousands)

3 unchanged sentences

(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

Supplemental cash flow information related to operating leases for the three and nine months ended September 27, 2020 and September 29, 2019 was as follows:

Three Months Ended Nine Months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

(in thousands)

3 unchanged sentences

Operating leases $ — $ 439 $ 461 $ 22,172

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 and weighted average discount rate related to operating leases as of September 27, 2020 were as follows:

Weighted average remaining lease term 7.1 years

Weighted average discount rate 5.69 %

ARLO TECHNOLOGIES, INC.

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

The maturity of lease liabilities related to operating leases for each of the next five years and thereafter as of September 27, 2020 was as follows (in thousands):

2020 (Remaining three months) $ 1,505

Thereafter 14,672

7 unchanged sentences

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

ARLO TECHNOLOGIES, INC.

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 December 31, 2019 was as follows (in thousands):

7 unchanged sentences

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

ARLO TECHNOLOGIES, INC.

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 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.

As of September 27, 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

2 unchanged sentences

Orders are non-cancelable within 30 days prior to the expected shipment date.

As of June 28, 2020, the Company had approximately $ 51.5 million in non-cancelable purchase commitments with suppliers.

As of September 27, 2020, the Company had approximately $ 38.1 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 June 28, 2020, the loss liability from committed purchases was $ 2.6 million.

As of September 27, 2020, the loss liability from committed purchases was $ 3.0 million.

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

If these components do not meet specified technical criteria or are defective, the Company should not be obligated to purchase the materials.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Warranty Obligations

Changes in the Company’s warranty liability, which is included in Accrued liabilities in the unaudited condensed consolidated balance sheets, were as follows:

Three Months Ended Six Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

Three Months Ended Nine Months Ended

September 27,

2020 September 29,

2019 September 27,

2020 September 29,

(In thousands)

3 unchanged sentences

Balance at the end of the period $ 2,568 $ 3,403 $ 2,568 $ 3,403

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Litigation and Other Legal Matters

32 unchanged sentences

The plaintiffs in the State Action filed a consolidated complaint on May 1, 2019.

The consolidated complaint generally alleges that the Company failed to adequately disclose quality control problems and adverse sales trends ahead of its IPO, violating the Securities Act of 1933, as amended.

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

On June 7, 2019, plaintiff filed an amended complaint, which alleged that defendants violated the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, by failing to adequately disclose quality control problems and adverse sales trends surrounding the Company’s IPO.

The amended complaint also named as defendants the underwriters in the IPO and NETGEAR, Inc.

Defendants filed a motion to dismiss the amended complaint on August 6, 2019, and the court granted that motion on December 19, 2019, while giving plaintiff leave to amend.

On February 13, 2020, plaintiff filed a second amended complaint.

On the same day, the parties asked the court to stay the case to allow for plaintiff to file a motion for preliminary approval of a class-

The plaintiffs allege 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 Company common stock issued pursuant and/or traceable to the IPO.

ARLO TECHNOLOGIES, INC.

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.

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 December 16, 2020, so the parties can provide an update regarding the Federal Action.

In the Federal Action, the court appointed a shareholder named Matis Nayman as lead plaintiff.

On June 7, 2019, plaintiff filed an amended complaint.

Plaintiff alleges violations of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, based on alleged materially false and misleading statements about the Company’s sales trends and products.

In the amended complaint, plaintiff sought to represent a class of persons who purchased or otherwise acquired the Company’s common stock (i) during the period between August 3, 2018 through December 3, 2018 and/or (ii) pursuant to or traceable to the IPO.

Plaintiff seeks class certification, an award of unspecified damages, an award of costs and expenses, including attorneys’ fees, and other further relief as the court may deem just and proper.

On August 6, 2019, defendants filed a motion to dismiss.

The court granted that motion, and plaintiff filed a second amended complaint.

On June 12, 2020, plaintiff filed an unopposed motion for preliminary approval of a class action settlement for $ 1.25 million.

The settlement remains subject to further court approval.

On September 24, 2020, the court entered an order preliminarily approving the settlement.

The final approval hearing is scheduled for March 11, 2021.

As of September 27, 2020, the Company had accrued a loss contingency of $ 1.25 million for the Federal Action, reflecting the amounts owed under the settlement agreement.

In October 2020, the Company made a $ 1.25 million payment to an escrow account administered by the court and plaintiff’s counsel (the “Settlement Fund”).

The Settlement Fund shall be deemed to be in the custody of the court and shall remain subject to the jurisdiction of the court until such time as the Settlement Fund is distributed pursuant to the settlement agreement and/or further order of the court.

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.

9 unchanged sentences

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

On July 1, 2020, the court approved the stipulation.

The parties have reached an agreement in principle to resolve the action and are working to resolve the remaining issues.

The impact on the Company's financial statements is expected to be immaterial.

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 June 28, 2020 and December 31, 2019.

The Company had no liabilities recorded for these agreements as of September 27, 2020 and December 31, 2019.

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 June 28, 2020 and December 31, 2019.

The Company had no liabilities recorded for these agreements as of September 27, 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.

1 unchanged sentence

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

ARLO TECHNOLOGIES, INC.

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.

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 matters agreement.

6 unchanged sentences

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).

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 and target annual bonus, (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 June 28, 2020.

The Company had no liabilities recorded for these agreements as of September 27, 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.

5 unchanged sentences

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

18 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 June 28, 2020 and December 31, 2019:

The following table sets forth the available shares for grant under the 2018 Plan as of September 27, 2020 and December 31, 2019:

Number of Shares

4 unchanged sentences

Shares traded for taxes 1,252

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

Shares available for grant as of September 27, 2020 2,927

_________________________

(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.

(1) 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 Company's named executive officers ("NEOs") during the fiscal quarter ended June 28, 2020.

Also includes 1.1 million immediately vested shares granted to employees for annual bonus in RSU form.

(2) Includes (a) 1.4 million options granted in connection with the IPO ("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).

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

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 June 28, 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

As of September 27, 2020, approximately 1.1 million shares were available for issuance under the ESPP.

ARLO TECHNOLOGIES, INC.

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

The Company’s stock option activity during the six months ended June 28, 2020 was as follows:

The Company’s stock option activity during the nine months ended September 27, 2020 was as follows:

Number of shares Weighted Average Exercise Price Per Share

6 unchanged sentences

( 2,234 ) $ 14.95

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)

Outstanding as of September 27, 2020 3,802 $ 9.58

Vested and expected to vest as of September 27, 2020 3,802 $ 9.58

Exercisable Options as of September 27, 2020 (3)

_________________________

12 unchanged sentences

Gorjanc's separation from the Company.

NETGEAR stock option activity for Company employees during the six months ended June 28, 2020 was as follows:

NETGEAR stock option activity for Company employees during the nine months ended September 27, 2020 was as follows:

Number of shares Weighted Average Exercise Price Per Share

4 unchanged sentences

Expired — $ —

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)

Outstanding as of September 27, 2020 19 $ 22.95

Vested and expected to vest as of September 27, 2020 19 $ 22.95

Exercisable Options as of September 27, 2020 (1)

_________________________

3 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s RSU activity during the six months ended June 28, 2020 was as follows:

The Company’s RSU activity during the nine months ended September 27, 2020 was as follows:

Number of shares Weighted Average Grant Date Fair Value Per Share

4 unchanged sentences

( 1,111 ) $ 4.66

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

Outstanding as of September 27, 2020 10,691 $ 4.37

_________________________

(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) Includes 0.8 million shares consisting of RSUs ( 50 % of the grant), PSUs ( 25 % of the grant) and MPSUs ( 25 % of the grant) granted to the NEOs during the fiscal quarter ended September 29, 2019.

The RSUs will vest in three equal annual installments during the period that begins on the RSU grant date.

The PSUs will vest in three equal annual installments during the period that begins on the PSU grant date based on the extent to which a revenue milestone for the fiscal year ended December 31, 2019 is achieved.

As of 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

As of September 27, 2020, the shares subject to PSUs that were granted to the Company's NEOs were cancelled as the performance milestone was not achieved.

The MPSUs will vest at the end of the three-year period that begins on the MPSU grant date based on performance of the Company's common stock relative to the Benchmark during the three-year period from the grant date.

2 unchanged sentences

In no event will the number of shares vested exceed 200 % of the target for that tranche.

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

Gorjanc were cancelled in connection with her separation from the Company during the fiscal quarter ended June 28, 2020.

As of September 27, 2020, 200 % of the outstanding MPSUs are expected to vest.

(2) Includes 2.0 million shares consisting of RSUs ( 50 % of the grant), PSUs ( 25 % of the grant) and 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.

As of September 27, 2020, 100 % of the outstanding PSUs are expected to vest.

A positive 3.3 x or negative 2.5 x multiplier will be applied to the total shareholder returns (“TSR”), such that the number of shares vested will increase by 3.3 % or decrease by 2.5 % of the target numbers, for each 1 % of positive or negative TSR relative to the Benchmark.

In the event the Company's common stock performance is below negative 30 % relative to the Benchmark, no shares will be vested.

In no event will the number of shares vested exceed 200 % of the target for that tranche.

As of September 27, 2020, 200 % of the outstanding MPSUs are expected to vest.

Also includes 1.1 million immediately vested shares granted to employees for annual bonus in RSU form.

(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:

Also includes 1.1 million immediately vested shares granted to employees for annual bonus in RSU form.

(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 54 thousand shares subject to the MPSUs granted to Ms.

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

ARLO TECHNOLOGIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NETGEAR RSU activity for Company employees during the nine months ended September 27, 2020 was as follows:

Number of shares Weighted Average Grant Date Fair Value Per Share

3 unchanged sentences

Forfeited ( 21 ) $ 36.27

Outstanding as of June 28, 2020 147 $ 37.33

Outstanding as of September 27, 2020 141 $ 37.18

_________________________

1 unchanged sentence

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 %

The Company determined the fair value of stock options and the shares offered under the ESPP using the Black-Scholes option pricing model as of the grant date.

The following table sets forth the weighted average assumptions used to estimate the fair value of options granted and purchase rights granted under the ESPP for the three and nine months ended September 27, 2020 and September 29, 2019.

Three Months Ended Nine Months Ended

September 27,

2020 September 29,

2019 September 27,

2020 September 29,

2019 September 27,

2020 September 29,

2019 September 27,

2020 September 29,

Stock Options ESPP Stock Options ESPP

Expected life (in years) NA NA 0.5 0.5 NA 6.3 0.5 0.5

Risk-free interest rate NA NA 0.86 % 2.49 % NA 2.28 % 1.47 % 2.49 %

Expected volatility NA NA 99.6 % 97.6 % NA 73.0 % 85.7 % 97.6 %

Dividend yield — — — — — — — —

The Company determined the fair value of the RSUs and PSUs using the closing price of the Company's common stock as of the grant date.

For PSUs, stock-based compensation expense of performance milestone is recognized over the expected performance achievement period when the achievement becomes probable.

The Company utilized a Monte Carlo pricing model customized to the specific provisions of the 2018 Plan to value the MPSUs awards on the grant date.

The fair value of the MPSUs granted in the fiscal quarters ended June 28, 2020 and September 29, 2019 was $ 4.11 and $ 4.14 per share, respectively.

The assumptions used in this model to estimate fair value at the grant date are as follows:

Three Months Ended Nine Months Ended

September 27,

2020 September 29,

2019 September 27,

2020 September 29,

Expected life N/A 3.0 3.0 3.0

Risk-free interest rate N/A 1.52 % 0.24 % 1.52 %

Expected volatility N/A 65.1 % 69.3 % 65.1 %

Dividend yield N/A — — —

Stock Beta N/A 0.30 0.48 0.30

Stock-Based Compensation Expense

1 unchanged sentence

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 Company employees participated.

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

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 employees' annual bonus in RSU form.

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

Three Months Ended Nine Months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

(In thousands)

11 unchanged sentences

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.

As of September 27, 2020, $ 1.6 million of unrecognized compensation cost related to the Company’s stock options was expected to be recognized over a weighted-average period of 1.4 years.

$ 31.1 million of unrecognized compensation cost related to unvested Company RSUs, PSUs and MPSUs was expected to be recognized over a weighted-average period of 2.6 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.

As of September 27, 2020, $ 42 thousand of unrecognized compensation cost related to NETGEAR stock options for Company employees was expected to be recognized over a weighted-average period of 1.0 years.

$ 3.5 million of unrecognized compensation cost related to unvested NETGEAR RSUs for Company employees was expected to be recognized over a weighted-average period of 1.3 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.

federal and state deferred tax assets and did not record a tax benefit on these deferred tax assets because of uncertainty about its future profitability.

The provision for income taxes for the three and nine months ended September 27, 2020 was $ 0.1 million, or an effective tax rate of ( 0.7 )%, and $ 0.4 million, or an effective tax rate of ( 0.5 )%, respectively.

The income tax provision for the three and nine months ended September 29, 2019 was $ 0.3 million, or an effective tax rate of ( 0.9 )%, and $ 0.9 million, or an effective tax rate of ( 0.8 )%, respectively.

During the three and nine months ended September 27, 2020, the Company sustained lower domestic book losses than the same periods in the prior year.

Consistent with the prior year, the Company maintained a full valuation allowance on its domestic federal and state deferred tax assets and did not record a tax benefit on these deferred tax assets because of uncertainty about its future realizability of deferred tax assets.

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 and six months ended June 28, 2020, compared to the prior year periods was primarily due to lower foreign earnings in 2020.

The decrease in provision for income taxes for the three and nine months ended September 27, 2020, compared to the prior year periods was primarily due to lower foreign earnings in fiscal 2020.

Net Income (Loss) Per Share

4 unchanged sentences

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 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

Net loss per share for the three and nine months ended September 27, 2020 and September 29, 2019 were as follows:

Three Months Ended Nine Months Ended

September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019

(In thousands, except per share data)

19 unchanged sentences

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

Three Months Ended Six Months Ended

2020 June 30,

2019 June 28,

2020 June 30,

Three Months Ended Nine Months Ended

September 27,

2020 September 29,

2019 September 27,

2020 September 29,

(In thousands)

5 unchanged sentences

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

September 27,

2020 December 31,

6 unchanged sentences

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