Arlo Technologies, Inc. 10-Q

Item 1. Financial Statements ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS As of September 27, 2020 December 31, 2019 (In thousands, except share and per share data) ASSETS Current assets: Cash and cash equivalents $ 173,619 $ 236,680 Short-term investments (amortized cost of $ 19,992 and $ 19,967 ) 19,992 19,990 Accounts receivable (net of allowance for credit losses of $ 509 and $ 609 ) 56,431 127,317 Inventories 69,038 68,624 Prepaid expenses and other current assets 10,317 16,958 Total current assets 329,397 469,569 Property and equipment, net 16,832 21,352 Operating lease right-of-use assets, net 25,031 31,300 Intangibles, net 238 1,306 Goodwill 11,038 11,038 Restricted cash 4,147 4,139 Other non-current assets 2,216 4,008 Total assets $ 388,899 $ 542,712 LIABILITIES AND STOCKHOLDERS ’ EQUITY Current liabilities: Accounts payable $ 74,727 $ 111,650 Deferred revenue 30,567 50,362 Accrued liabilities 106,027 127,400 Income tax payable 431 4,489 Total current liabilities 211,752 293,901 Non-current deferred revenue 7,963 15,736 Non-current operating lease liabilities 26,024 29,001 Non-current income taxes payable 92 92 Other non-current liabilities 1,261 606 Total liabilities 247,092 339,336 Commitments and contingencies (Note 10) Stockholders’ Equity: Preferred stock: $ 0.001 par value; 50,000,000 shares authorized; none issued or outstanding — — Common stock: $ 0.001 par value; 500,000,000 shares authorized; shares issued and outstanding: 79,026,508 at September 27, 2020 and 75,785,952 at December 31, 2019 79 76 Additional paid-in capital 359,297 334,821 Accumulated other comprehensive income ( 9 ) ( 2 ) Accumulated deficit ( 217,560 ) ( 131,519 ) Total stockholders’ equity 141,807 203,376 Total liabilities and stockholders’ equity $ 388,899 $ 542,712 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Table of Contents ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended Nine Months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 (In thousands, except per share data) Revenue: Products $ 91,271 $ 94,306 $ 191,597 $ 213,359 Services 18,965 11,810 50,721 34,235 Total revenue 110,236 106,116 242,318 247,594 Cost of revenue: Products 79,107 88,755 182,481 206,878 Services 9,720 6,858 28,986 18,618 Total cost of revenue 88,827 95,613 211,467 225,496 Gross profit 21,409 10,503 30,851 22,098 Operating expenses: Research and development 15,436 16,701 44,871 52,456 Sales and marketing 12,720 13,657 35,471 42,389 General and administrative 11,137 11,062 39,758 32,512 Separation expense 77 137 238 1,760 Gain on sale of business — — ( 292 ) — Total operating expenses 39,370 41,557 120,046 129,117 Loss from operations ( 17,961 ) ( 31,054 ) ( 89,195 ) ( 107,019 ) Interest income 74 596 760 2,170 Other income, net 543 154 2,837 138 Loss before income taxes ( 17,344 ) ( 30,304 ) ( 85,598 ) ( 104,711 ) Provision for income taxes 115 286 443 855 Net loss $ ( 17,459 ) $ ( 30,590 ) $ ( 86,041 ) $ ( 105,566 ) Net loss per share: Basic $ ( 0.22 ) $ ( 0.41 ) $ ( 1.11 ) $ ( 1.41 ) Diluted $ ( 0.22 ) $ ( 0.41 ) $ ( 1.11 ) $ ( 1.41 ) Weighted average shares used to compute net loss per share: Basic 78,662 75,337 77,705 74,831 Diluted 78,662 75,337 77,705 74,831 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Three Months Ended Nine Months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 (In thousands) Net loss $ ( 17,459 ) $ ( 30,590 ) $ ( 86,041 ) $ ( 105,566 ) Other comprehensive income (loss), before tax: Unrealized gain (loss) on derivative instruments ( 9 ) 22 16 — Unrealized gain (loss) on available-for-sale securities ( 14 ) ( 27 ) ( 23 ) 46 Total other comprehensive income (loss), before tax ( 23 ) ( 5 ) ( 7 ) 46 Tax benefit (provision) related to derivative instruments — — — — Total other comprehensive income (loss), net of tax ( 23 ) ( 5 ) ( 7 ) 46 Comprehensive loss $ ( 17,482 ) $ ( 30,595 ) $ ( 86,048 ) $ ( 105,520 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Common Stock Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total (In thousands) Balance as of June 28, 2020 78,089 $ 78 $ 351,913 $ 14 $ ( 200,101 ) $ 151,904 Net loss — — — — ( 17,459 ) ( 17,459 ) Stock-based compensation expense — — 6,083 — — 6,083 Settlement of liability classified RSUs — — 1,589 — — 1,589 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 ) Change in unrealized gains and losses on available-for-sale securities, net of tax — — — ( 14 ) — ( 14 ) Change in unrealized gains and losses on derivatives, net of tax — — — ( 9 ) — ( 9 ) Balance as of September 27, 2020 79,027 $ 79 $ 359,297 $ ( 9 ) $ ( 217,560 ) $ 141,807 Common Stock Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total (In thousands) Balance as of June 30, 2019 74,869 $ 75 $ 323,648 $ 51 $ ( 120,544 ) $ 203,230 Net loss — — — — ( 30,590 ) ( 30,590 ) Stock-based compensation expense — — 5,219 — — 5,219 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 ) Change in unrealized gains and losses on available-for-sale securities, net of tax — — — ( 27 ) — ( 27 ) Change in unrealized gains and losses on derivatives, net of tax — — — 22 — 22 Balance as of September 29, 2019 75,706 $ 76 $ 330,618 $ 46 $ ( 151,134 ) $ 179,606 6 Table of Contents Common Stock Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total (In thousands) Balance as of December 31, 2019 75,786 $ 76 $ 334,821 $ ( 2 ) $ ( 131,519 ) $ 203,376 Net loss — — — — ( 86,041 ) ( 86,041 ) Stock-based compensation expense — — 21,840 — — 21,840 Settlement of liability classified RSUs — — 4,219 — — 4,219 Issuance of common stock under stock-based compensation plans 3,384 3 24 — — 27 Issuance of common stock under Employee Stock Purchase Plan 1,110 1 3,024 — — 3,025 Restricted stock unit withholdings ( 1,253 ) ( 1 ) ( 4,631 ) — — ( 4,632 ) Change in unrealized gains and losses on available-for-sale securities, net of tax — — — ( 23 ) — ( 23 ) Change in unrealized gains and losses on derivatives, net of tax — — — 16 — 16 Balance as of September 27, 2020 79,027 $ 79 $ 359,297 $ ( 9 ) $ ( 217,560 ) $ 141,807 Common Stock Shares Amount Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total (In thousands) Balance as of December 31, 2018 74,247 $ 74 $ 315,277 $ — $ ( 45,849 ) $ 269,502 Cumulative-effect adjustment from adoption of ASC 842, net of tax — — — — 281 281 Net loss — — — — ( 105,566 ) ( 105,566 ) Stock-based compensation expense — — 15,261 — — 15,261 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 ) Change in unrealized gains and losses on available-for-sale securities, net of tax — — — 46 — 46 Change in unrealized gains and losses on derivatives, net of tax — — — — — — 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. 7 Table of Contents ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 27, 2020 September 29, 2019 (In thousands) Cash flows from operating activities: Net loss $ ( 86,041 ) $ ( 105,566 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 8,024 7,757 Loss on disposal of fixed assets 19 — Premium amortization (discount accretion) on investments, net 60 ( 391 ) Stock-based compensation expense 26,338 15,261 Allowance for (release of) credit losses and inventory reserves 1,322 ( 3,232 ) Gain on sale of business ( 292 ) — Deferred income taxes 63 ( 109 ) Changes in assets and liabilities: Accounts receivable, net 70,985 65,920 Inventories ( 1,838 ) 54,335 Prepaid expenses and other assets 8,369 ( 1,729 ) Accounts payable ( 37,554 ) ( 24,381 ) Deferred revenue ( 27,569 ) ( 1,996 ) Accrued and other liabilities ( 21,203 ) ( 48,584 ) Net cash used in operating activities ( 59,317 ) ( 42,715 ) Cash flows from investing activities: Purchases of property and equipment ( 2,070 ) ( 5,023 ) Purchases of short-term investments ( 45,085 ) ( 29,768 ) Proceeds from maturities of short-term investments 45,000 40,000 Net cash provided by (used in) investing activities ( 2,155 ) 5,209 Cash flows from financing activities: Proceeds related to employee benefit plans 3,051 1,837 Restricted stock unit withholdings ( 4,632 ) ( 1,755 ) Net cash provided by (used in) financing activities ( 1,581 ) 82 Net decrease in cash and cash equivalents and restricted cash ( 63,053 ) ( 37,424 ) 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 $ 177,766 $ 118,000 Non-cash investing and financing activities: Purchases of property and equipment included in accounts payable and accrued liabilities $ 1,470 $ 1,578 De-recognition of build-to-suit assets and liabilities $ — $ ( 21,610 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. The Company and Basis of Presentation The Company 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. The Company conducts business across three geographic regions - Americas; Europe, Middle-East and Africa (“EMEA”); and Asia Pacific (“APAC”) and primarily generates revenue by selling devices through retail channels, wholesale distribution, 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. Basis of Presentation The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All periods presented have been accounted for in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair statement of the unaudited condensed consolidated financial statements for interim periods. Reclassification Certain reclassifications have been made to the prior year’s condensed consolidated statements of cash flows to conform to the current year’s presentation. The reclassifications had no effect on the net cash used (provided by) in operating activities, investing activities or financing activities on the prior year’s statement of cash flows. Fiscal periods The Company’s fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. The Company reports its results on a fiscal quarter basis rather than on a calendar quarter basis. Under the fiscal quarter basis, each of the first three fiscal quarters ends on the Sunday closest to the calendar quarter end, with the fourth quarter ending on December 31. Use of estimates The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Management bases its estimates on various assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates and operating results for the nine months ended September 27, 9 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any future period. Note 2. Significant Accounting Policies and Recent Accounting Pronouncements The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes during the 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 The Company is exposed to credit losses primarily through sales of products and services. 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 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. The Company considered the current and expected future economic and market conditions surrounding the novel coronavirus ("COVID-19") pandemic and determined that the estimate of credit losses was not significantly impacted. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables. Recent accounting pronouncements Emerging Growth Company Status As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act 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. Accounting Pronouncements Recently Adopted ASU 2016-13 - Measurement of Credit Losses on Financial Instruments 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. The Company adopted Topic 326 on January 1, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. The cumulative-effect adjustment recorded on January 1, 2020 is immaterial. 10 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning January 1, 2022 (or January 1, 2021 should the Company cease to be classified as an EGC), with early adoption permitted. The Company early adopted ASU 2019-12 in the first quarter of 2020. The impact of the adoption of ASU 2019-12 on the Company's financial statements is immaterial. Accounting Pronouncements Not Yet Effective 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 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. With the exception of the new standards discussed above, there have been no other new accounting pronouncements that have significance, or potential significance, to the Company’s financial position, results of operations, or cash flows. Note 3. Deferred Revenue Deferred Revenue Deferred revenue consists of advance payments and deferred revenue, where the Company has unsatisfied performance obligations. Deferred revenue 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 Remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities, in-transit orders with destination terms, and non-cancellable backlog. Non-cancellable backlog includes goods and services for which customer purchase orders have been accepted and that are scheduled or in the process of being scheduled for shipment. The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 27, 2020: 1 year 2 years Greater than 2 years Total (In thousands) 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. 11 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. There were no significant changes in estimates during the period that would affect the contract balances. Disaggregation of Revenue The Company conducts business across three geographic regions: Americas, EMEA, and APAC. Sales and usage-based taxes are excluded from revenue. Refer to Note 14, Segment and Geographic Information , for revenue by geography. Note 4. Disposal of Business On November 4, 2019, the Company and Verisure concurrently entered into an Asset Purchase Agreement (the “Purchase Agreement”) and Supply Agreement (the “Supply Agreement” and together with the Purchase Agreement, the “Verisure Agreements”). The Verisure Agreements created a strategic partnership that leverages both the Company and Verisure’s capabilities to create incremental scale to address the ever-growing demand for residential and commercial security. The strategic partnership combines the Company’s innovative connected cameras and cloud services platform with Verisure’s professionally monitored security solutions to provide a new level of smart security for European customers. The Purchase Agreement provided that, upon the terms and subject to the conditions set forth in the Purchase Agreement, the Company transferred, sold and assigned to Verisure certain assets (the "Assets") related to the Company’s commercial operations in Europe (the "Business") to Verisure for $ 50.0 million in cash plus additional cash for certain inventory. The Purchase Agreement contained customary representations and warranties regarding Verisure, the Business and the Assets, indemnification provisions, termination rights and other customary provisions. Further, 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, 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. The assets and liabilities sold and assigned to Verisure were determined to have met the criteria to be classified as held for sale as of November 4, 2019, the execution date of the Purchase Agreement. The transaction contemplated by the Purchase Agreement did not meet the criteria for discontinued operations as the Company is expected to have continued involvement in Europe through manufacturing and shipping of products to the region through sales to Verisure as part of the Supply Agreement and therefore no significant change in revenue from the region is expected; it was determined the transaction did not represent a strategic shift. The Company also assessed whether a loss 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 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 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 initial term of five years . During the five-year period commencing January 1, 2020, Verisure has an aggregate minimum 12 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. 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 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. These transition services primarily include IT support for 12 months, and other services for three to six months , including sales and marketing, operations and supply chain, finance, legal, and human resources which may be extended as mutually agreed upon by the parties. As compensation for these transition services, the Company will be reimbursed by Verisure based on actual direct costs plus allocation of overhead. For the three 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. Note 5. Balance Sheet Components Cash and Cash Equivalents and Restricted cash The Company maintains certain cash balances restricted as to withdrawal or use. The restricted cash is comprised primarily of cash used as a collateral for a letter of credit associated with the Company’s lease agreement for its headquarters in San Jose, California. The Company deposits restricted cash with high credit quality financial institutions. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same amounts shown on the statements of cash flows: As of September 27, 2020 December 31, 2019 (In thousands) Cash and cash equivalents $ 173,619 $ 236,680 Restricted cash 4,147 4,139 Total as presented on the unaudited condensed consolidated statements of cash flows $ 177,766 $ 240,819 As of September 29, 2019 December 31, 2018 (In thousands) Cash and cash equivalents $ 113,870 $ 151,290 Restricted cash 4,130 4,134 Total as presented on the unaudited condensed consolidated statements of cash flows $ 118,000 $ 155,424 13 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Available-for-sale short-term investments 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 (In thousands) U.S. treasuries $ 19,992 $ — $ — $ 19,992 $ 19,967 $ 23 $ — $ 19,990 The Company’s short-term investments are classified as available-for-sale and consist of government securities with an original maturity or remaining maturity at the time of purchase of greater than three months and no more than 12 months. 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 nine months ended September 27, 2020. Accounts receivable, net As of September 27, 2020 December 31, 2019 (In thousands) Gross accounts receivable $ 56,940 $ 127,926 Allowance for credit losses ( 509 ) ( 609 ) Total accounts receivable, net $ 56,431 $ 127,317 The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected. Three Months Ended Nine Months Ended September 27, 2020 September 27, 2020 (In thousands) Balance at the beginning of the period $ 810 $ 609 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 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. 14 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Property and equipment, net The components of property and equipment are as follows: As of September 27, 2020 December 31, 2019 (In thousands) Machinery and equipment $ 14,699 $ 13,402 Software 12,657 11,945 Computer equipment 4,094 4,047 Furniture and fixtures 4,045 4,075 Leasehold improvements 8,023 8,087 Total property and equipment, gross 43,518 41,556 Accumulated depreciation and amortization ( 26,686 ) ( 20,204 ) Total property and equipment, net $ 16,832 $ 21,352 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 September 27, 2020 As of December 31, 2019 Gross Accumulated Amortization Net Gross Accumulated Amortization Net (In thousands) Technology $ 9,800 $ ( 9,571 ) $ 229 $ 9,800 $ ( 8,540 ) $ 1,260 Other 500 ( 491 ) 9 500 ( 454 ) 46 Total intangibles, net $ 10,300 $ ( 10,062 ) $ 238 $ 10,300 $ ( 8,994 ) $ 1,306 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. Goodwill 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 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 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 15 Table of Contents 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. 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 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 September 27, 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 associated goodwill impairment of up to $ 11.0 million. Other non-current assets As of September 27, 2020 December 31, 2019 (In thousands) Non-current deferred income taxes $ 1,255 $ 1,318 Deposits 122 764 Other 839 1,926 Total other non-current assets $ 2,216 $ 4,008 Accrued liabilities As of September 27, 2020 December 31, 2019 (In thousands) Sales and marketing $ 37,767 $ 53,974 Sales returns 25,193 28,817 Accrued employee compensation 9,751 11,795 Current operating lease liabilities 4,376 3,912 Warranty obligation 2,568 3,169 Freight 2,675 2,690 Other 23,697 23,043 Total accrued liabilities $ 106,027 $ 127,400 16 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 6. Fair Value Measurements 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 prices in active markets (Level 1) Significant other observable inputs (Level 2) Total Quoted market prices in active markets (Level 1) Significant other observable inputs (Level 2) (In thousands) Assets: Cash equivalents: money-market funds (<90 days) $ 1,933 $ 1,933 $ — $ 31,472 $ 31,472 $ — Available-for-sale securities: U.S. treasuries (1) 19,992 19,992 — 19,990 19,990 — Foreign currency forward contracts (2) 110 — 110 27 — 27 Total assets measured at fair value $ 22,035 $ 21,925 $ 110 $ 51,489 $ 51,462 $ 27 Liabilities: Foreign currency forward contracts (3) $ 5 $ — $ 5 $ 375 $ — $ 375 Total liabilities measured at fair value $ 5 $ — $ 5 $ 375 $ — $ 375 _________________________ (1) Included in Short-term investments on the Company’s unaudited condensed consolidated balance sheets. (2) Included in Prepaid expenses and other current assets on the Company’s unaudited condensed consolidated balance sheets. (3) Included in Accrued liabilities on the Company’s unaudited condensed consolidated balance sheets. The Company’s investments in cash equivalents and available-for-sale securities are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company enters into foreign currency forward contracts with only those counterparties that have long-term credit ratings of A-/A3 or higher. The Company’s foreign currency forward contracts are classified within Level 2 of the fair value hierarchy as they are valued using pricing models that take into account the contract terms as well as currency rates and counterparty credit rates. The Company verifies the reasonableness of these pricing models using observable market data for related inputs into such models. Additionally, the Company includes an adjustment for non-performance risk in the recognized measure of fair value of derivative instruments. As of 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 September 27, 2020 and December 31, 2019, the Company has no Level 3 fair value assets or liabilities. Note 7. Derivative Financial Instruments The Company’s subsidiaries have had, and will continue to have material future cash flows, including revenue and expenses, which are denominated in currencies other than the Company’s functional currency. The Company and all its subsidiaries designate the U.S. dollar as the functional currency. Changes in exchange rates between the Company’s functional currency and other currencies in which the Company transacts business will cause fluctuations in cash flow expectations and cash flow realized or settled. Accordingly, the Company uses derivatives to mitigate its business exposure to foreign exchange risk. The Company enters into foreign currency forward contracts in Australian dollars, 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. 17 Table of Contents 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. In addition, the derivative contracts typically mature in less than six months and the Company continuously evaluates the credit standing of its counter-party financial institutions. The counter-parties to these arrangements are large, highly rated financial institutions and the Company does not consider non-performance a material risk. The Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, materiality, accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign exchange rates. The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with the authoritative guidance for derivatives and hedging. The Company records all derivatives on the balance sheets at fair value. Cash flow hedge gains and losses are recorded in other comprehensive income (“OCI”) until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in Other income (expense), net in the unaudited condensed consolidated statements of operations. Fair value of derivative instruments The fair values of the Company’s derivative instruments and the line items on the unaudited condensed consolidated balance sheets to which they were recorded as of September 27, 2020 and December 31, 2019 are summarized as follows: Derivative Assets Balance Sheet Location September 27, 2020 December 31, 2019 Balance Sheet Location September 27, 2020 December 31, 2019 (In thousands) (In thousands) Derivative assets not designated as hedging instruments Prepaid expenses and other current assets $ 108 $ 27 Accrued liabilities $ 5 $ 347 Derivative assets designated as hedging instruments Prepaid expenses and other current assets 2 — Accrued liabilities — 28 Total $ 110 $ 27 $ 5 $ 375 Refer to Note 6, Fair Value Measurements, for detailed disclosures regarding fair value measurements in accordance with the authoritative guidance for fair value measurements and disclosures. Gross amounts offsetting of derivative instruments The Company has entered into master netting arrangements which allow net settlements under certain conditions. Although netting is permitted, it is currently the Company’s policy and practice to record all derivative assets and liabilities on a gross basis in the unaudited condensed consolidated balance sheets. The following tables set forth the offsetting of derivative assets as of September 27, 2020 and December 31, 2019: 18 Table of Contents 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 (In thousands) HSBC $ 29 $ — $ 29 $ ( 5 ) $ — $ 24 Wells Fargo Bank 81 — 81 — — 81 Total $ 110 $ — $ 110 $ ( 5 ) $ — $ 105 As of December 31, 2019 Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets Gross Amounts of Recognized Assets Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets Net Amounts Of Assets Presented in the Unaudited Condensed Consolidated Balance Sheets Financial Instruments Cash Collateral Pledged Net Amount (In thousands) HSBC $ 6 $ — $ 6 $ ( 6 ) $ — $ — Wells Fargo Bank 21 — 21 ( 21 ) — — Total $ 27 $ — $ 27 $ ( 27 ) $ — $ — The following tables set forth the offsetting of derivative liabilities as of 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 (In thousands) HSBC $ 5 $ — $ 5 $ ( 5 ) $ — $ — Wells Fargo Bank — — — — — — Total $ 5 $ — $ 5 $ ( 5 ) $ — $ — As of December 31, 2019 Gross Amounts Not Offset in the Unaudited Condensed Consolidated Balance Sheets Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Unaudited Condensed Consolidated Balance Sheets Net Amounts Of Liabilities Presented in the Unaudited Condensed Consolidated Balance Sheets Financial Instruments Cash Collateral Pledged Net Amount (In thousands) HSBC $ 83 $ — $ 83 $ ( 6 ) $ — $ 77 Wells Fargo Bank 292 — 292 ( 21 ) — 271 Total $ 375 $ — $ 375 $ ( 27 ) $ — $ 348 19 Table of Contents 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 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 Revenue Cost of revenue Research and development Sales and marketing General and administrative (In thousands) Statements of operations $ 110,236 $ 88,827 $ 15,436 $ 12,720 $ 11,137 Gains (losses) on cash flow hedge $ ( 37 ) $ — $ 5 $ 2 $ — Nine Months Ended September 27, 2020 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 $ 242,318 $ 211,467 $ 44,871 $ 35,471 $ 39,758 Gains (losses) on cash flow hedge $ ( 14 ) $ — $ 5 $ 3 $ — 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 Revenue Cost of revenue Research and development Sales and marketing General and administrative (In thousands) Statements of operations $ 106,116 $ 95,613 $ 16,701 $ 13,657 $ 11,062 Gains (losses) on cash flow hedge $ 86 $ — $ ( 3 ) $ ( 3 ) $ ( 2 ) Nine Months Ended September 29, 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 $ 247,594 $ 225,496 $ 52,456 $ 42,389 $ 32,512 Gains (losses) on cash flow hedge $ 333 $ ( 2 ) $ ( 24 ) $ ( 38 ) $ ( 11 ) 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 of hedge designation as there were no discontinued cash flow hedges during the nine months ended September 27, 2020 and September 29, 2019. 20 Table of Contents 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 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 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 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 Note 8. Accumulated Other Comprehensive Income (Loss) The following table sets forth the changes in accumulated other comprehensive income (loss) (“AOCI”) by component for the three 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 June 28, 2020 $ 14 $ — $ — $ 14 Other comprehensive income (loss) before reclassifications ( 14 ) ( 39 ) — ( 53 ) Less: Amount reclassified from accumulated other comprehensive income (loss) — ( 30 ) — ( 30 ) Net current period other comprehensive income (loss) ( 14 ) ( 9 ) — ( 23 ) 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 (In thousands) Balance as of December 31, 2019 $ 23 $ ( 25 ) $ — $ ( 2 ) Other comprehensive income (loss) before reclassifications ( 23 ) 10 — ( 13 ) Less: Amount reclassified from accumulated other comprehensive income (loss) — ( 6 ) — ( 6 ) Net current period other comprehensive income (loss) ( 23 ) 16 — ( 7 ) Balance as of September 27, 2020 $ — $ ( 9 ) $ — $ ( 9 ) 21 Table of Contents 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 June 30, 2019 $ 72 $ ( 22 ) $ 1 $ 51 Other comprehensive income (loss) before reclassifications ( 27 ) 100 — 73 Less: Amount reclassified from accumulated other comprehensive income (loss) — 78 — 78 Net current period other comprehensive income (loss) ( 27 ) 22 — ( 5 ) 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 (In thousands) Balance as of December 31, 2018 $ ( 2 ) $ 2 $ — $ — Other comprehensive income (loss) before reclassifications 47 256 1 304 Less: Amount reclassified from accumulated other comprehensive income (loss) — 258 — 258 Net current period other comprehensive income (loss) 47 ( 2 ) 1 46 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: 22 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended 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 (In thousands) Gains (losses) on cash flow hedge: Foreign currency contracts $ ( 39 ) $ ( 37 ) $ 100 $ 86 Revenue Foreign currency contracts — — — — Cost of revenue Foreign currency contracts — 5 — ( 3 ) Research and development Foreign currency contracts — 2 — ( 3 ) Sales and marketing Foreign currency contracts — — — ( 2 ) General and administrative $ ( 39 ) $ ( 30 ) $ 100 $ 78 Total * Nine Months Ended 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 (In thousands) Gains (losses) on cash flow hedge: Foreign currency contracts $ 10 $ ( 14 ) $ 257 $ 333 Revenue Foreign currency contracts — — — ( 2 ) Cost of revenue Foreign currency contracts — 5 — ( 24 ) Research and development Foreign currency contracts — 3 — ( 38 ) Sales and marketing Foreign currency contracts — — — ( 11 ) General and administrative $ 10 $ ( 6 ) $ 257 $ 258 Total * _________________________ * Tax impact to hedging gains and losses from derivative contracts was immaterial. Note 9. Debt Revolving Credit Facility On November 5, 2019, the Company entered into a Business Financing Agreement (the “Credit Agreement”) with Western Alliance Bank, an Arizona corporation, as lender (the “Lender”). The Credit Agreement provides for a two-year revolving credit facility (the “Credit Facility”) that matures on November 5, 2021 and that may, by its terms, be extended by mutual written agreement between the Company and the Lender. Borrowings under the Credit Facility are limited to the lesser of (x) $ 40.0 million, and (y) an amount equal to the borrowing base. The borrowing base will be 60 % of the Company’s eligible receivables and eligible accounts receivable, less such reserves as the Lender may deem proper and necessary from time to time. The Lender is not required to make any advance under the Credit Facility during the period beginning on January 1st and continuing through June 30th, except for advances made against eligible receivables first invoiced between July 1 and December 31, 2019. The Credit Agreement also includes sublimits for the issuance by the Lender of letters of credit, credit card indebtedness and foreign exchange forward contract. Repayment of the borrowings under the Credit Facility are due upon collection of the eligible receivables. The proceeds of the borrowings under the Credit Facility may be used for working capital and general corporate purposes. 23 Table of Contents 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. 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. The annual facility fee is capitalized and being amortized as interest expense over a 12-month period. The Company incurred debt issuance costs for the Credit Agreement, which are recorded in prepaid expenses and other current assets in the Company's unaudited condensed consolidated balance sheets and are being amortized as interest expense over the contractual term of the Credit Agreement. The Credit Agreement contains customary events of default and other restrictions, including a financial covenant that requires the Company to maintain certain amount of domestic cash and certain restrictions on the Company’s ability to incur additional indebtedness, consolidate or merge, enter into acquisitions, pay any dividend or distribution on the Company’s capital stock, redeem, retire or purchase shares of the Company’s capital stock, make investments or pledge or transfer assets, in each case subject to limited exceptions. If an event of default under the Credit Agreement occurs, then the Lender may cease making advances under the Credit Agreement and declare any outstanding obligations under the Credit Agreement to be immediately due and payable. In addition, if the Company files a bankruptcy petition, a bankruptcy petition is filed against the Company and is not dismissed or stayed within forty-five days, or the Company makes a general assignment for the benefit of creditors, then any outstanding obligations under the Credit Agreement will automatically and without notice or demand become immediately due and payable. As of 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. Note 10. Commitments and Contingencies Operating Leases The Company primarily leases office space, with various expiration dates through June 2029. Some of the leases include options to extend such leases for up to five years , and some include options to terminate such leases within one year . The terms of certain of the Company's leases provide for rental payments on a graduated scale. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, accrued liabilities, and non-current operating lease liabilities in the unaudited condensed consolidated balance sheets. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Fixed lease expense for lease payments are recognized in the unaudited condensed consolidated statements of operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. 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. 24 Table of Contents 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 September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 (In thousands) Operating lease cost (1) General and administrative $ 1,728 $ 1,726 $ 5,319 $ 5,068 ________________________ (1) Includes short-term leases and variable lease costs which were immaterial. 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) Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 1,493 $ 1,470 $ 4,452 $ 2,882 Right-of-use assets obtained in exchange for lease liabilities Operating leases $ — $ 439 $ 461 $ 22,172 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 % 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 2021 5,893 2022 5,735 2023 4,946 2024 4,449 Thereafter 14,672 Total lease payments 37,200 Less: interest (1) ( 6,800 ) Total $ 30,400 Accrued liabilities $ 4,376 Non-current operating lease liabilities 26,024 Total $ 30,400 ________________________ (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. 25 Table of Contents 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): 2020 $ 5,660 2021 5,735 2022 5,589 2023 4,908 2024 4,450 Thereafter 14,669 Total lease payments 41,011 Less: interest (1) ( 8,098 ) Total $ 32,913 Accrued liabilities $ 3,912 Non-current operating lease liabilities 29,001 Total $ 32,913 ________________________ (1) Calculated using the Company’s incremental borrowing rate on a collateralized basis plus LIBOR rate that closely matches contractual term of most leases. 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 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 The Company has entered into various inventory-related purchase agreements with suppliers. 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 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 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. 26 Table of Contents 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 Nine Months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 (In thousands) Balance at the beginning of the period $ 3,023 $ 3,232 $ 3,169 $ 3,712 Provision for warranty obligation made during the period — 364 — 292 Settlements made during the period ( 455 ) ( 193 ) ( 601 ) ( 601 ) Balance at the end of the period $ 2,568 $ 3,403 $ 2,568 $ 3,403 Litigation and Other Legal Matters The Company is involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below. In all cases, at each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. In such cases, the Company accrues for the amount, or if a range, the Company accrues the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within litigation reserves, net. The Company monitors developments in these legal matters that could affect the estimate the Company had previously accrued. In relation to such matters, the Company currently believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its financial position within the next 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. In addition, the resolution of any intellectual property litigation may require the Company to make royalty payments, which could have an adverse effect in future periods. If any of those events were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from the Company's estimates, which could result in the need to adjust the liability and record additional expenses. Beginning on December 11, 2018, purported stockholders of Arlo Technologies, Inc. filed six putative securities class action complaints in the Superior Court of California, County of Santa Clara, and one complaint in the U.S. District Court for the Northern District of California against the Company and certain of its executives and directors. Some of these actions also name as defendants the underwriters in the Company’s initial public offering ("IPO") and NETGEAR, Inc. ("NETGEAR"). The actions pending in state court are Aversa v. Arlo Technologies, Inc., et al. , No. 18CV339231, filed Dec. 11, 2018; Pham v. Arlo Technologies, Inc. et al. , No. 19CV340741, filed January 9, 2019; Patel v. Arlo Technologies, Inc. , No. 19CV340758, filed January 10, 2019; Perros v. NetGear, Inc. , No. 19CV342071, filed February 1, 2019; Vardanian v. Arlo Technologies, Inc. , No. 19CV342318, filed February 8, 2019; and Hill v. Arlo Technologies, Inc. et al. , No. 19CV343033, filed February 22, 2019. On April 26, 2019, the state court consolidated these actions as In re Arlo Technologies, Inc. Shareholder Litigation , No. 18CV339231 (the “State Action"). The action pending in federal court is Wong v. Arlo Technologies, Inc. et al. , No. 19-CV-00372 (the “Federal Action”). The plaintiffs in the State Action filed a consolidated complaint on May 1, 2019. The 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. 27 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. District Court for the Northern District of California. The action is brought on behalf of the Company against the majority of the Company’s current directors. The complaint is based on the same alleged misconduct as the securities class actions but asserts claims for breach of fiduciary duty, waste of corporate assets, and violation of the Securities Exchange Act of 1934, as amended. On August 20, 2019, the court stayed the Derivative Action in deference to the Federal Action. On April 15, 2020, a purported stockholder named David W. Foster filed a lawsuit under 8 Del. C. § 220 in the Delaware Court of Chancery. Plaintiff seeks inspection of corporate books and records to investigate the allegations underlying the State Actions and Federal Action. Plaintiff also seeks an order directing the Company to pay his costs and expenses. 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. 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 The Company, as permitted under Delaware law and in accordance with its bylaws, has agreed to indemnify its officers and directors for certain events or occurrences, subject to certain conditions, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that will enable it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the fair value of each indemnification agreement will be minimal. The Company had no liabilities recorded for these agreements as of September 27, 2020 and December 31, 2019. 28 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Indemnifications Prior to the completion of the IPO, the Company historically participated in NETGEAR’s sales agreements. In its sales agreements, NETGEAR typically agrees to indemnify its direct customers, distributors and resellers (the “Indemnified Parties”) for any expenses or liability resulting from claimed infringements by NETGEAR’s products of patents, trademarks or copyrights of third parties that are asserted against the Indemnified Parties, subject to customary carve-outs. The terms of these indemnification agreements are generally perpetual after execution of the agreement. The maximum amount of potential future indemnification is generally unlimited. From time to time, the Company receives requests for indemnity and may choose to assume the defense of such litigation asserted against the Indemnified Parties. The Company had no liabilities recorded for these agreements as of 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. 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 matters agreement. In addition, the Company has agreed in the tax matters agreement that each party will generally be responsible for any taxes and related amounts imposed on it or NETGEAR as a result of the failure of the Distribution, together with certain related transactions, to qualify as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) and certain other relevant provisions of the Code, to the extent that the failure to so qualify is attributable to actions, events or transactions relating to such party’s respective stock, assets or business, or a breach of the relevant representations or covenants made by that party in the tax matters agreement. The transition services agreement generally provides that the applicable service recipient indemnifies the applicable service provider for liabilities that such service provider incurs arising from the provision of services other than liabilities arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement, and that the applicable service provider indemnifies the applicable service recipient for liabilities that such service recipient incurs arising from such service provider’s gross negligence, bad faith or willful misconduct or material breach of the transition services agreement. Pursuant to the registration rights agreement, the Company has agreed to indemnify NETGEAR and its subsidiaries that hold registrable securities (and their directors, officers, agents and, if applicable, each other person who controls such holder under Section 15 of the Securities Act) registering shares pursuant to the registration rights agreement against certain losses, expenses and liabilities under the Securities Act, common law or otherwise. NETGEAR and its subsidiaries that hold registrable securities similarly indemnify the Company but such indemnification will be limited to an amount equal to the net proceeds received by such holder under the sale of registrable securities giving rise to the indemnification obligation. Change in Control and Severance Agreements The Company has entered into change in control and severance agreements with certain of its 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 29 Table of Contents 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 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. 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. Mattingly. Pursuant to the Employment Agreement, Mr. 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. Mr. 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. Collins III, the Company’s Senior Vice President of Products, entered into a Separation and Release Agreement (the “Separation Agreement”) regarding Mr. Collins’ separation from the Company, effective May 1, 2019. Pursuant to the Separation Agreement, Mr. Collins received cash severance equal to his annual base salary, 12 months of health benefits continuation and accelerated vesting of any of his unvested equity awards that would have vested during the 12 months following the termination date. Environmental Regulation The Company is required to comply and is currently in compliance with the European Union (“EU”) and other Directives on the Restrictions of the use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”), Waste Electrical and Electronic Equipment (“WEEE”) requirements, Energy Using Product (“EuP”) requirements, the REACH Regulation, Packaging Directive and the Battery Directive. The Company is subject to various federal, state, local, and foreign environmental laws and regulations, including those governing the use, discharge, and disposal of hazardous substances in the ordinary course of its manufacturing process. The Company believes that its current manufacturing and other operations comply in all material respects with applicable environmental laws and regulations; however, it is possible that future environmental legislation may be enacted or current environmental legislation may be interpreted to create an environmental liability with respect to its facilities, operations, or products. 30 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 11. Employee Benefit Plans The Company grants options and restricted stock units ("RSUs") under the 2018 Equity Incentive Plan (the “2018 Plan”), under which awards may be granted to all employees. Award vesting periods for this plan are generally three to four years . Options may be granted for periods of up to 10 years or such shorter term as may be provided in the applicable option agreement and at prices no less than 100% of the fair market value of the Company’s common stock on the date of grant. Options granted under the 2018 Plan generally vest over four years , the first tranche at the end of 12 months and the remaining shares underlying the option vesting monthly over the remaining three years . The following table sets forth the available shares for grant under the 2018 Plan as of September 27, 2020 and December 31, 2019: Number of Shares (In thousands) Shares available for grant as of December 31, 2019 2,630 Additional authorized shares 3,031 Granted (1) ( 7,331 ) Forfeited / cancelled (2) 3,345 Shares traded for taxes 1,252 Shares available for grant as of September 27, 2020 2,927 _________________________ (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 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. The terms of the plan include a look-back feature that enables employees to purchase stock semi-annually at a price equal to 85 % of the lesser of the fair market value at the beginning of the offering period or the purchase date. The duration of each offering period is generally six months , with the first offering period having commenced on February 16, 2019 and ended on August 15, 2019. As of September 27, 2020, approximately 1.1 million shares were available for issuance under the ESPP. On March 3, 2020, the Company registered an aggregate of up to 3,788,756 shares of the Company’s common stock on Registration Statement on Form S-8, including 3,031,005 shares issuable pursuant to the Company's 2018 Plan that were automatically added to the shares authorized for issuance under the 2018 Plan on January 1, 2020 pursuant to an “evergreen” provision contained in the 2018 Plan and 757,751 shares issuable pursuant to the Company’s 2018 ESPP that were automatically added to the shares authorized for issuance under the 2018 ESPP on January 1, 2020 pursuant to an “evergreen” provision contained in the 2018 ESPP. 31 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Option Activity 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 (In thousands) (In dollars) Outstanding as of December 31, 2019 (1) 6,040 $ 11.56 Granted — $ — Exercised ( 4 ) $ 5.65 Forfeited / cancelled (2) ( 2,234 ) $ 14.95 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) 3,268 $ 8.88 _________________________ (1) Includes IPO Options of 2.8 million shares. Tranches 1 to 5 granted to Mr. Collins were cancelled in connection with his separation from the Company in May 2019. Tranches 4 and 5 granted to the CEO were voluntarily forfeited in 2019 as the performance milestones for those tranches were not achieved, Tranches 1, 2 and 3 granted to the CEO were voluntarily forfeited in January 2020 with no replacement award. The performance milestones for Tranches 4 and 5 that were granted to 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 nine months ended September 27, 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 ( 139 ) $ 22.69 Forfeited / cancelled ( 47 ) $ 36.73 Expired — $ — 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) 13 $ 20.39 _________________________ (1) Includes 3 thousand options that were accelerated in connection with Ms. Gorjanc's separation from the Company. 32 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RSU Activity 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 (In thousands) (In dollars) Outstanding as of December 31, 2019 (1) 7,851 $ 6.50 Granted (2) 7,331 $ 3.01 Vested (3) ( 3,380 ) $ 6.29 Forfeited (4) ( 1,111 ) $ 4.66 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 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 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. 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. 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. As of September 27, 2020, 100 % of the outstanding PSUs are expected to vest. The MPSUs will vest at the end of the three-year period that begins on the MPSU grant date based on performance of the Company's common stock relative to the Benchmark during the three-year period from the grant date. A positive 3.3 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. 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. 33 Table of Contents 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 (In thousands) (In dollars) Outstanding as of December 31, 2019 278 $ 36.14 Vested (1) ( 116 ) $ 34.86 Forfeited ( 21 ) $ 36.27 Outstanding as of September 27, 2020 141 $ 37.18 _________________________ (1) Includes 15 thousand shares subject to the RSUs that were accelerated in connection with Ms. Gorjanc's separation from the Company. 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, 2019 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, 2019 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 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 Company 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 Company employees participated. The stock- 34 Table of Contents 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 Nine Months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 (In thousands) Cost of revenue $ 942 $ 467 $ 2,007 $ 1,286 Research and development 2,870 1,569 6,259 4,501 Sales and marketing 1,160 791 2,895 2,722 General and administrative 4,029 2,392 15,177 6,752 Total stock-based compensation $ 9,001 $ 5,219 $ 26,338 $ 15,261 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 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 expense for the three months ended March 29, 2020. 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 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 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. Note 12. Income Taxes 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 nine months ended September 27, 2020, compared to the prior year periods was primarily due to lower foreign earnings in fiscal 2020. Note 13. Net Income (Loss) Per Share 35 Table of Contents 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. Potentially dilutive common shares, such as common shares issuable upon exercise of stock options and vesting of restricted stock awards are typically reflected in the computation of diluted net income (loss) per share by application of the treasury stock method. 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 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) Numerator: Net loss $ ( 17,459 ) $ ( 30,590 ) $ ( 86,041 ) $ ( 105,566 ) Denominator: Weighted average common shares - basic 78,662 75,337 77,705 74,831 Potentially dilutive common share equivalent — — — — Weighted average common shares - dilutive 78,662 75,337 77,705 74,831 Basic net loss per share $ ( 0.22 ) $ ( 0.41 ) $ ( 1.11 ) $ ( 1.41 ) Diluted net loss per share $ ( 0.22 ) $ ( 0.41 ) $ ( 1.11 ) $ ( 1.41 ) Anti-dilutive employee stock-based awards, excluded 5,958 10,287 7,526 10,114 Note 14. Segment and Geographic Information Segment Information The Company operates as one operating and reportable segment. The Company has identified its CEO as the Chief Operating Decision Maker (“CODM”). The CODM reviews financial information presented on a combined basis for purposes of allocating resources and evaluating financial performance. Geographic Information The Company conducts business across three geographic regions: Americas, EMEA and APAC. Revenue consists of gross product shipments and service revenue, less allowances for estimated sales returns, price protection, end-user customer rebates and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, net changes in deferred revenue, and gains or losses from hedging. 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. 36 Table of Contents ARLO TECHNOLOGIES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table shows revenue by geography for the periods indicated: Three Months Ended Nine Months Ended September 27, 2020 September 29, 2019 September 27, 2020 September 29, 2019 (In thousands) Americas United States (“U.S.”) $ 73,826 $ 81,441 $ 166,273 $ 184,733 Americas (excluding U.S.) 2,035 4,121 10,717 9,759 EMEA 28,010 13,002 46,846 37,370 APAC 6,365 7,552 18,482 15,732 Total revenue $ 110,236 $ 106,116 $ 242,318 $ 247,594 The Company’s Property and equipment, net are located in the following geographic locations: As of September 27, 2020 December 31, 2019 (In thousands) United States (“U.S.”) $ 13,097 $ 17,100 Americas (excluding U.S.) 691 904 EMEA 250 316 China 2,095 2,089 APAC (excluding China) 699 943 Total property and equipment, net $ 16,832 $ 21,352 37 Table of Contents