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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2019

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission file number: 001-38618
ARLO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware | 38-4061754
(State or other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)
3030 Orchard Parkway |
San Jose, | California | 95134
(Address of principal executive offices) | (Zip Code)

(408) 890-3900
(Registrant’s telephone number including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |  | Trading Symbol(s) |  | Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share |  | ARLO |  | New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer |  | ☐ |  | Accelerated filer |  | ☐
Non-Accelerated filer |  | ☒ |  | Smaller reporting company |  | ☐
|  |  |  | Emerging growth company |  | ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. |  | ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The number of outstanding shares of the registrant’s Common Stock, $0.001 par value, was 75,708,491 as of October 21, 2019.
1

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ARLO TECHNOLOGIES, INC.
TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION
|  | Page No.
Item 1. | Financial Statements | 3
| Unaudited Condensed Consolidated Balance Sheets | 3
| Unaudited Condensed Consolidated Statements of Operations | 4
| Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) | 5
| Unaudited Condensed Consolidated Statements of Stockholders’ Equity | 6
| Unaudited Condensed Consolidated Statements of Cash Flows | 9
| Notes to Unaudited Condensed Consolidated Financial Statements | 10
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 42
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 52
Item 4. | Controls and Procedures | 52
PART II: OTHER INFORMATION
Item 1. | Legal Proceedings | 53
Item 1A. | Risk Factors | 53
Item 6. | Exhibits | 86
Signatures |  | 87

2

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PART I: FINANCIAL INFORMATION

Item 1. | Financial Statements

ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

| As of
| September 29, 2019 |  | December 31, 2018
| (In thousands)
ASSETS |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 113,870 |  |  | $ | 151,290 |
Short-term investments | 39,941 |  |  | 49,737 |
Accounts receivable, net | 99,698 |  |  | 166,045 |
Inventories | 74,117 |  |  | 124,791 |
Prepaid expenses and other current assets | 16,088 |  |  | 23,611 |
Total current assets | 343,714 |  |  | 515,474 |
Property and equipment, net | 24,216 |  |  | 49,428 |
Operating lease right-of-use assets, net | 32,008 |  |  | — |
Intangibles, net | 1,679 |  |  | 2,823 |
Goodwill | 15,638 |  |  | 15,638 |
Restricted cash | 4,130 |  |  | 4,134 |
Other non-current assets | 5,610 |  |  | 8,449 |
Total assets | $ | 426,995 |  |  | $ | 595,946 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |
Current liabilities: |  |  |
Accounts payable | $ | 57,772 |  |  | $ | 82,542 |
Deferred revenue | 28,443 |  |  | 26,678 |
Accrued liabilities | 110,071 |  |  | 172,036 |
Income tax payable | 995 |  |  | 734 |
Total current liabilities | 197,281 |  |  | 281,990 |
Non-current deferred revenue | 19,552 |  |  | 23,313 |
Non-current operating lease liabilities | 30,484 |  |  | — |
Non-current financing lease obligation | — |  |  | 19,978 |
Non-current income taxes payable | 58 |  |  | 22 |
Other non-current liabilities | 14 |  |  | 1,141 |
Total liabilities | 247,389 |  |  | 326,444 |
Commitments and contingencies (Note 8) |  |  |  |  |
Stockholders’ Equity: |  |  |
Preferred stock | — |  |  | — |
Common stock | 76 |  |  | 74 |
Additional paid-in capital | 330,618 |  |  | 315,277 |
Accumulated other comprehensive income | 46 |  |  | — |
Accumulated deficit | (151,134 | ) |  | (45,849 | )
Total stockholders’ equity | 179,606 |  |  | 269,502 |
Total liabilities and stockholders’ equity | $ | 426,995 |  |  | $ | 595,946 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3

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ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
| (In thousands, except per share data)
Revenue: |  |  |  |  |  |  |
Products | $ | 94,306 |  |  | $ | 121,347 |  |  | $ | 213,359 |  |  | $ | 315,678 |
Services | 11,810 |  |  | 9,827 |  |  | 34,235 |  |  | 27,082 |
Total revenue | 106,116 |  |  | 131,174 |  |  | 247,594 |  |  | 342,760 |
Cost of revenue: |  |  |  |  |  |  |
Products | 88,755 |  |  | 96,754 |  |  | 206,878 |  |  | 241,808 |
Services | 6,858 |  |  | 4,673 |  |  | 18,618 |  |  | 13,858 |
Total cost of revenue | 95,613 |  |  | 101,427 |  |  | 225,496 |  |  | 255,666 |
Gross profit | 10,503 |  |  | 29,747 |  |  | 22,098 |  |  | 87,094 |
Operating expenses: |  |  |  |  |  |  |
Research and development | 16,701 |  |  | 16,100 |  |  | 52,456 |  |  | 41,929 |
Sales and marketing | 13,657 |  |  | 12,843 |  |  | 42,389 |  |  | 37,123 |
General and administrative | 11,062 |  |  | 8,357 |  |  | 32,512 |  |  | 19,553 |
Separation expense | 137 |  |  | 5,823 |  |  | 1,760 |  |  | 23,649 |
Total operating expenses | 41,557 |  |  | 43,123 |  |  | 129,117 |  |  | 122,254 |
Loss from operations | (31,054 | ) |  | (13,376 | ) |  | (107,019 | ) |  | (35,160 | )
Interest income | 596 |  |  | 503 |  |  | 2,170 |  |  | 503 |
Other income (expense), net | 154 |  |  | (129 | ) |  | 138 |  |  | (923 | )
Loss before income taxes | (30,304 | ) |  | (13,002 | ) |  | (104,711 | ) |  | (35,580 | )
Provision for income taxes | 286 |  |  | 223 |  |  | 855 |  |  | 830 |
Net loss | $ | (30,590 | ) |  | $ | (13,225 | ) |  | $ | (105,566 | ) |  | $ | (36,410 | )
Net loss per share: |  |  |  |  |  |  |
Basic | $ | (0.41 | ) |  | $ | (0.19 | ) |  | $ | (1.41 | ) |  | $ | (0.56 | )
Diluted | $ | (0.41 | ) |  | $ | (0.19 | ) |  | $ | (1.41 | ) |  | $ | (0.56 | )
Weighted average shares used to compute net loss per share: |  |  |  |  |  |  |
Basic | 75,337 |  |  | 69,600 |  |  | 74,831 |  |  | 64,867 |
Diluted | 75,337 |  |  | 69,600 |  |  | 74,831 |  |  | 64,867 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4

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ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
| (In thousands)
Net loss | $ | (30,590 | ) |  | $ | (13,225 | ) |  | $ | (105,566 | ) |  | $ | (36,410 | )
Other comprehensive income (loss), before tax: |  |  |  |  |  |  |
Unrealized gain (loss) on derivative instruments | 22 |  |  | 20 |  |  | — |  |  | 20 |
Unrealized gain (loss) on available-for-sale securities | (27 | ) |  | (4 | ) |  | 46 |  |  | (4 | )
Total other comprehensive income (loss), before tax | (5 | ) |  | 16 |  |  | 46 |  |  | 16 |
Tax benefit (provision) related to derivative instruments | — |  |  | (3 | ) |  | — |  |  | (3 | )
Tax benefit (provision) related to available-for-sale securities | — |  |  | 1 |  |  | — |  |  | 1 |
Total other comprehensive income (loss), net of tax | (5 | ) |  | 14 |  |  | 46 |  |  | 14 |
Comprehensive loss | $ | (30,595 | ) |  | $ | (13,211 | ) |  | $ | (105,520 | ) |  | $ | (36,396 | )

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

| Common Stock |  |  |  |  |  |  |  |  |  |
| Shares |  | Amount |  | Additional Paid-In Capital |  | Net Parent Investment |  | 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 |
| Common Stock |  |  |  |  |  |  |  |  |  |
| Shares |  | Amount |  | Additional Paid-In Capital |  | Net Parent Investment |  | Accumulated Other Comprehensive Income (Loss) |  | Accumulated Deficit |  | Total
| (In thousands)
Balance as of July 1, 2018 | — |  |  | $ | — |  |  | $ | — |  |  | $ | 111,443 |  |  | $ | — |  |  | $ | — |  |  | $ | 111,443 |
Net loss, prior to the completion of the Contribution | — |  |  | — |  |  | — |  |  | (6,449 | ) |  | — |  |  | — |  |  | (6,449 | )
Net loss, after the completion of the Contribution | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (6,776 | ) |  | (6,776 | )
Issuance of common stock from initial public offering, net of offering costs | 11,747 |  |  | 12 |  |  | 174,725 |  |  | — |  |  | — |  |  | — |  |  | 174,737 |
Initial public offering costs paid by the Company | — |  |  | — |  |  | (1,404 | ) |  | — |  |  | — |  |  | — |  |  | (1,404 | )
Initial public offering costs paid by NETGEAR | — |  |  | — |  |  | (3,148 | ) |  | — |  |  | — |  |  | — |  |  | (3,148 | )
Net transfer from Parent | — |  |  | — |  |  | — |  |  | 33,793 |  |  | — |  |  | — |  |  | 33,793 |
Conversion of Net parent investment into common stock | 62,500 |  |  | 62 |  |  | 139,645 |  |  | (139,645 | ) |  | — |  |  | — |  |  | 62 |
Stock-based compensation expense funded by NETGEAR | — |  |  | — |  |  | — |  |  | 858 |  |  | — |  |  | — |  |  | 858 |
Stock-based compensation expense post-initial public offering | — |  |  | — |  |  | 2,579 |  |  | — |  |  | — |  |  | — |  |  | 2,579 |
Change in unrealized gains and losses on available-for-sale securities, net of tax | — |  |  | — |  |  | — |  |  | — |  |  | (3 | ) |  | — |  |  | (3 | )
Change in unrealized gains and losses on derivatives, net of tax | — |  |  | — |  |  | — |  |  | — |  |  | 17 |  |  | — |  |  | 17 |
Balance as of September 30, 2018 | 74,247 |  |  | $ | 74 |  |  | $ | 312,397 |  |  | $ | — |  |  | $ | 14 |  |  | $ | (6,776 | ) |  | $ | 305,709 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6

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

| Common Stock |  |  |  |  |  |  |  |  |  |
| Shares |  | Amount |  | Additional Paid-In Capital |  | Net Parent Investment |  | 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

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ARLO TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common Stock |  |  |  |  |  |  |  |  |  |
| Shares |  | Amount |  | Additional Paid-In Capital |  | Net Parent Investment |  | Accumulated Other Comprehensive Income (Loss) |  | Accumulated Deficit |  | Total
| (In thousands)
Balance as of December 31, 2017 | — |  |  | $ | — |  |  | $ | — |  |  | $ | 125,419 |  |  | $ | — |  |  | $ | — |  |  | $ | 125,419 |
Cumulative-effect adjustment from adoption of ASC 606, net of tax | — |  |  | — |  |  | — |  |  | (3,061 | ) |  | — |  |  | — |  |  | (3,061 | )
Net loss, prior to the completion of the Contribution | — |  |  | — |  |  | — |  |  | (29,634 | ) |  | — |  |  | — |  |  | (29,634 | )
Net loss, after the completion of the Contribution | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | $ | (6,776 | ) |  | (6,776 | )
Issuance of common stock from initial public offering, net of offering costs | 11,747 |  |  | $ | 12 |  |  | 174,725 |  |  | — |  |  | — |  |  | — |  |  | 174,737 |
Initial public offering costs paid by the Company | — |  |  | — |  |  | (1,404 | ) |  | — |  |  | — |  |  | — |  |  | (1,404 | )
Initial public offering costs paid by NETGEAR | — |  |  | — |  |  | (3,148 | ) |  | — |  |  | — |  |  | — |  |  | (3,148 | )
Net transfer from Parent | — |  |  | — |  |  | — |  |  | 44,164 |  |  | — |  |  | — |  |  | 44,164 |
Conversion of Net parent investment into common stock | 62,500 |  |  | 62 |  |  | 139,645 |  |  | (139,645 | ) |  | — |  |  | — |  |  | 62 |
Stock-based compensation expense funded by NETGEAR | — |  |  | — |  |  | — |  |  | 2,757 |  |  | — |  |  | — |  |  | 2,757 |
Stock-based compensation expense post-initial public offering | — |  |  | — |  |  | 2,579 |  |  | — |  |  | — |  |  | — |  |  | 2,579 |
Change in unrealized gains and losses on available-for-sale securities, net of tax | — |  |  | — |  |  | — |  |  | — |  |  | (3 | ) |  | — |  |  | (3 | )
Change in unrealized gains and losses on derivatives, net of tax | — |  |  | — |  |  | — |  |  | — |  |  | 17 |  |  | — |  |  | 17 |
Balance as of September 30, 2018 | 74,247 |  |  | $ | 74 |  |  | $ | 312,397 |  |  | $ | — |  |  | $ | 14 |  |  | $ | (6,776 | ) |  | $ | 305,709 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

| Nine Months Ended
| September 29, 2019 |  | September 30, 2018
| (In thousands)
Cash flows from operating activities: |  |  |
Net loss | $ | (105,566 | ) |  | $ | (36,410 | )
Adjustments to reconcile net loss to net cash used in operating activities: |  |  |
Depreciation and amortization | 10,950 |  |  | 3,406 |
Premium amortization / discount accretion on investments, net | (391 | ) |  | (3 | )
Stock-based compensation expense | 15,261 |  |  | 5,336 |
Deferred income taxes | (109 | ) |  | (438 | )
Changes in assets and liabilities: |  |  |
Accounts receivable, net | 66,348 |  |  | (69,724 | )
Inventories | 50,675 |  |  | (50,009 | )
Prepaid expenses and other assets | (1,729 | ) |  | (17,319 | )
Accounts payable | (24,381 | ) |  | 53,717 |
Deferred revenue | (1,996 | ) |  | 7,169 |
Accrued and other liabilities | (51,777 | ) |  | 57,966 |
Net cash used in operating activities | (42,715 | ) |  | (46,309 | )
Cash flows from investing activities: |  |  |
Purchases of property and equipment | (5,023 | ) |  | (10,854 | )
Purchases of short-term investments | (29,768 | ) |  | (39,774 | )
Proceeds from maturities of short-term investments | 40,000 |  |  | — |
Net cash provided (cash used) by investing activities | 5,209 |  |  | (50,628 | )
Cash flows from financing activities: |  |  |
Proceeds from initial public offering, net of offering costs | — |  |  | 173,395 |
Proceeds related to employee benefit plans | 1,837 |  |  | — |
Restricted stock unit withholdings | (1,755 | ) |  | — |
Net investment from parent | — |  |  | 71,507 |
Net cash provided by financing activities | 82 |  |  | 244,902 |
Net increase (decrease) in cash and cash equivalents and restricted cash | (37,424 | ) |  | 147,965 |
Cash and cash equivalents and restricted cash, at beginning of period | 155,424 |  |  | 108 |
Cash and cash equivalents and restricted cash, at end of period | $ | 118,000 |  |  | $ | 148,073 |
Non-cash investing and financing activities: |  |  |
Purchases of property and equipment included in accounts payable and accrued liabilities | $ | 1,578 |  |  | $ | 5,279 |
De-recognition of build-to-suit assets and liabilities | $ | (21,610 | ) |  | $ | — |
Estimated fair value of a facility under build-to-suit lease | $ | — |  |  | $ | 21,858 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. | The Company and Basis of Presentation

The Company
Arlo Technologies, Inc. (“Arlo” or 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. Its cloud-based platform creates a seamless, end-to-end connected lifestyle solution that provides users visibility, insight and a powerful means to help protect and connect with the people and things that matter most to them. Arlo enables users to monitor their environments and engage in real-time with their families and businesses from any location with a Wi-Fi or a cellular network internet connection. The Company conducts business across three geographic regions - Americas; Europe, Middle-East and Africa (“EMEA”); and Asia Pacific (“APAC”) - and primarily generates revenue by selling devices through retail channels, wholesale distribution and wireless carrier channels and paid subscription services through in-app purchases.
On February 6, 2018, NETGEAR Inc. (“NETGEAR”) announced that its board of directors had unanimously approved the pursuit of a separation of its Arlo business from NETGEAR (the “Separation”) to be effected through an initial public offering (the “IPO”) of newly issued shares of the common stock of Arlo, then a wholly owned subsidiary of NETGEAR. On July 6, 2018, the Company filed a registration statement (as amended, the “IPO Registration Statement”) relating to the IPO of common stock of Arlo with the U.S. Securities and Exchange Commission (the “SEC”). Following a series of restructuring steps prior to the completion of the IPO of Arlo common stock, the Arlo business was transferred from NETGEAR to Arlo (collectively, the “Contribution”).
On August 2, 2018, NETGEAR and Arlo announced the pricing of the IPO of 10,215,000 shares of Arlo’s common stock at a price to the public of $16.00 per share. On August 3, 2018, Arlo’s shares began trading on the New York Stock Exchange under the ticker symbol “ARLO.” On August 7, 2018, the Company completed its IPO of 11,747,250 shares of common stock (including 1,532,250 shares of common stock pursuant to the underwriters’ option to purchase additional shares, which was exercised in full on August 3, 2018), at $16.00 per share, before underwriting discounts and commissions and estimated offering costs. Cash proceeds from the IPO were $173.4 million, net of the portion of the offering cost paid by Arlo, which portion was $1.4 million. The total offering cost was $4.6 million, of which $3.2 million was paid by NETGEAR. Prior to the completion of the IPO, the Company was a wholly owned subsidiary of NETGEAR and upon the closing of the IPO (including the issuance of additional shares of common stock pursuant to the underwriters’ option to purchase additional shares, which was exercised in full) on August 7, 2018, NETGEAR owned approximately 84.2% of the shares of Arlo’s outstanding common stock.
On November 29, 2018, NETGEAR announced that its board of directors had approved a special stock dividend (the “Distribution”) to NETGEAR stockholders of the 62,500,000 shares of Arlo common stock owned by NETGEAR. The Distribution was made on December 31, 2018 (the “Distribution Date”) to all NETGEAR stockholders of record as of the close of business on December 17, 2018 (the “Record Date”). In the Distribution, each NETGEAR stockholder of record on the Record Date received 1.980295 shares of Arlo common stock for every share of NETGEAR common stock held on the Record Date, subject to cash in lieu of fractional shares. The Distribution was intended to qualify as generally tax free to NETGEAR stockholders for U.S. federal income tax purposes. In connection with the Distribution, 62,500,000 shares of Arlo common stock held by NETGEAR were distributed to its stockholders and NETGEAR is no longer considered a related party to the Company.
Basis of Presentation
The unaudited condensed combined financial statements of Arlo that cover periods ending or as of dates prior to the completion of the IPO have been derived and carved out from the consolidated financial statements and accounting records of NETGEAR as if Arlo had operated on a stand-alone basis within the periods presented. In connection with the Separation and IPO, certain assets and liabilities presented have been transferred to Arlo at carry-over (historical cost) basis.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Balances contributed by NETGEAR on or before the completion of the IPO were based on the master separation agreement between the Company and NETGEAR and related documents governing the Contribution.
Following the completion of the IPO, 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, 2018. 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. The Company has evaluated all subsequent events through the date the financial statements were issued.
Reclassification
Certain reclassifications have been made to the prior year’s condensed consolidated balance sheets and statements of cash flows to conform to the current year’s presentation. The reclassifications had no effect on the prior year’s condensed consolidated statements of operations, statements of comprehensive income (loss) and statements of stockholders’ equity.
Allocated Expenses from NETGEAR
Prior to the completion of the IPO, NETGEAR provided certain corporate services to the Company, which were allocated based on revenue, headcount, or other measures the Company has determined as reasonable through July 1, 2018. The amount of these allocations from NETGEAR reflected within operating expenses in the unaudited condensed consolidated statements of operations was $30.6 million for the six months ended July 1, 2018, which included $9.4 million for research and development, $10.0 million for sales and marketing, and $11.2 million for general and administrative expense. There were no allocations from NETGEAR during the three months ended September 30, 2018. Following July 1, 2018, the Company assumed responsibility for the costs of these functions.
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 29, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any future period.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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, 2018. There have been no significant changes during the nine months ended September 29, 2019, other than the accounting policies discussed below.
Stock-based compensation
The Company’s employees have historically participated in NETGEAR’s stock-based compensation plans. Stock-based compensation expense has been allocated to the Company based on the awards and terms previously granted to the Company’s employees as well as an allocation of NETGEAR’s corporate and shared functional employee expenses. The Company measures stock-based compensation at the grant date based on the fair value of the award. The fair value of stock options and the shares offered under the employee stock purchase plan is estimated using the Black-Scholes option pricing model. Estimated compensation cost relating to restricted stock units ("RSUs") is based on the closing fair market value of NETGEAR’s common stock on the date of grant.
Equity awards granted by the Company under its own stock-based compensation plans on or after the completion of the IPO are comprised of performance-based stock options (the “PSOs”), stock options, and RSUs. The Company uses the fair value method of accounting for its equity awards granted to employees and measures the cost of employee services received in exchange for the stock-based awards. The Company recognizes these compensation expense generally on a straight-line basis over the requisite service period of the award. The fair value of stock options and PSOs is estimated on the grant or offering date using the Black-Scholes option pricing model and the forfeitures recorded as they occur. The fair value of RSUs is measured on the grant date based on the closing fair market value of the Company’s common stock.
The stock-based compensation cost is recognized ratably over the period during which an employee is required to provide service in exchange for the awards, usually the vesting period, which is generally four years for stock options and three to four years for RSUs. For PSOs, stock-based compensation expense of individual performance milestone is recognized over the expected performance achievement period when the achievement becomes probable.
The Company's 2018 Employee Stock Purchase Plan (“ESPP”) is intended to provide employees with the opportunity to purchase the Company's common stock through accumulated payroll deductions at the end of specified purchase period. 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 purchasing period is generally six months. The Company determines the fair value using the Black-Scholes Model using various inputs, including our estimate of expected volatility, term, dividend yield and risk-free interest rate. The Company recognizes compensation costs for the ESPP on a straight-line basis over the requisite service period of the award.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company issued grants consisting of 50% of time-based vesting RSUs, 25% of performance-based RSUs (“PSUs”) and 25% of market-based performance RSUs (“MPSUs”) to its named executive officers (“NEOs”) during the fiscal quarter ended September 29, 2019:
•The time-based vesting 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 ending December 31, 2019 is achieved.
•The MPSUs will vest on the three-year anniversary of the MPSU grant date based on the performance of the Company's common stock relative to the Russell 2000 Index (“the Benchmark”) during the three-year period from 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 relative 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 vest. In no event will the number of shares vested in each tranche exceed 200% of the target for that tranche.
The estimated compensation cost relating to the PSUs, is based on the closing fair market value of the Company's stock on the date of grant. The maximum number of shares that NEOs can earn is 150% of the target number of the PSUs. The minimum number of shares that NEOs can earn is 50% of the target number of the PSUs.
To estimate the compensation cost relating to the MPSUs, the Company utilized a Monte Carlo simulation model on the date of grant. The fair value determined using the Monte Carlo simulation model varies based on the assumptions used for the expected stock price volatility, the correlation coefficient between the Company and Russell 2000 Index, risk-free interest rates, and dividend yield.
Leases
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. 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.
ROU assets represent the Company’s right to use an underlying asset over the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, the incremental borrowing rate based on the information available was used at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made before the lease commencement date less any lease incentives received. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise the options. The lease agreements with lease and non-lease components are generally accounted as a single component.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recent accounting pronouncements
Emerging Growth Company Status
As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless the Company otherwise irrevocably elects not to avail itself of this exemption. The Company did not make such an irrevocable election and has not delayed the adoption of any applicable accounting standards.
Accounting Pronouncements Recently Adopted
ASU 2016-02
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases” (Topic 842), which requires lessees to recognize on the balance sheets a ROU asset, representing its right to use the underlying asset for the lease term, and a corresponding lease liability for all leases with terms greater than 12 months. The liability will be equal to the net present value of minimum lease payments while the ROU asset will be based on the liability, subject to adjustment, such as for initial direct costs. On January 1, 2019 (“adoption date”), the Company adopted the new standard utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of the first fiscal quarter of 2019. The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether an expired or existing contract as of adoption date contains a lease, (2) lease classification for any expired or existing lease as of the adoption date and (3) initial direct costs for any existing lease as of the adoption date. The Company also elected to account for each separate lease component of a contract and its associated non-lease components as a single lease component. The adoption of ASU 2016-02 resulted in the recognition of ROU assets and lease liabilities for operating leases of $14.4 million as of January 1, 2019 on its unaudited condensed consolidated balance sheets, with no material impact its unaudited consolidated statements of operations and cash flows.
In addition, the Company was deemed to be the accounting owner of its build-to-suit lease arrangement for its San Jose corporate headquarters and the construction was in progress at adoption date. As such, the Company reevaluated its build-to-suit lease arrangement under ASU 2016-02 to ascertain whether it meets the criteria as the accounting owner of the build-to-suit lease arrangement through control of the underlying leased asset. The Company concluded that it did not have control over the underlying leased asset. As a result, the Company de-recognized the build to suit asset and liability as of adoption date of $21.6 million of Property and equipment and $21.9 million of financing lease obligations. The difference of $0.3 million between the de-recognized assets and the associated financing lease obligations was recorded as an adjustment to Accumulated deficit as of adoption date as mentioned above. The Company accounted for its San Jose Corporate lease arrangement as operating lease under ASU 2016-02. Consequently, as of March 31, 2019, the construction of its leasehold improvements for its San Jose corporate headquarters was partially completed and partially occupied by the Company resulting in lease commencement for the portion that was completed and occupied by the Company. Therefore, the Company proportionally recorded ROU assets and lease liabilities of $14.3 million, representing two thirds of the total value of the ROU assets and lease liabilities. As of June 30, 2019, upon the completion of the leasehold improvements and full occupation of the entire building, the Company recognized the remaining value of ROU assets and lease liabilities of $7.2 million. Refer to Note 8. Commitments and Contingencies, for further details of the impacts on the adoption.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounting Pronouncements Not Yet Effective
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326), which replaces the incurred-loss impairment methodology and requires immediate recognition of estimated credit losses expected to occur for most financial assets, including trade receivables. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. ASU 2016-13 is effective for the Company beginning in the first fiscal quarter of 2021 (or the first fiscal quarter of 2020 should the Company cease to be classified as an EGC), with early adoption permitted. The Company continues to assess the potential impact of the new guidance, but does not expect it to have a material impact on its financial position, results of operations, or cash flows.
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. | 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 totals cash and cash equivalents and restricted cash as reported on the unaudited condensed consolidated balance sheet as of September 29, 2019 and December 31, 2018, and the sum is presented on the unaudited condensed consolidated statements of cash flows:

| 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 |

Available-for-sale short-term investments

| As of September 29, 2019 |  | As of December 31, 2018
| Cost |  | Unrealized Gains |  | Unrealized Losses |  | Estimated Fair Value |  | Cost |  | Unrealized Gains |  | Unrealized Losses |  | Estimated Fair Value
| (In thousands)
U.S. treasuries | $ | 39,897 |  |  | $ | 44 |  |  | $ | — |  |  | $ | 39,941 |  |  | $ | 49,739 |  |  | $ | 2 |  |  | $ | (4 | ) |  | $ | 49,737 |

The Company’s short-term investments are classified as available-for-sale and consist of government securities with an original maturity or remaining maturity at the time of purchase of greater than three months and no more than twelve months. Accordingly, none of the available-for-sale securities have unrealized losses greater than twelve months.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounts receivable, net

| As of
| September 29, 2019 |  | December 31, 2018
| (In thousands)
Gross accounts receivable | $ | 100,253 |  |  | $ | 166,172 |
Allowance for doubtful accounts | (555 | ) |  | (127 | )
Total accounts receivable, net | $ | 99,698 |  |  | $ | 166,045 |

Property and equipment, net
The components of property and equipment are as follows:

| As of
| September 29, 2019 |  | December 31, 2018
| (In thousands)
Machinery and equipment | $ | 13,289 |  |  | $ | 11,415 |
Software | 11,941 |  |  | 10,624 |
Computer equipment | 4,042 |  |  | 4,342 |
Furniture and fixtures | 3,795 |  |  | 2,698 |
Leasehold improvements | 8,836 |  |  | 3,007 |
Construction in progress (1) | — |  |  | 28,357 |
Total property and equipment, gross | 41,903 |  |  | 60,443 |
Accumulated depreciation and amortization | (17,687 | ) |  | (11,015 | )
Total property and equipment, net | $ | 24,216 |  |  | $ | 49,428 |

_________________________

(1) | The Company had a build-to-suit lease arrangement under its corporate headquarters lease in San Jose, California. Upon the adoption of ASU 2016-02, the Company concluded that it did not have control over the underlying leased asset and de-recognized $21.6 million of Construction of progress. Refer to Note 8, Commitments and Contingencies, for further details.

Depreciation and amortization expense pertaining to property and equipment was $2.4 million and $6.6 million for the three and nine months ended September 29, 2019, respectively, and $1.1 million and $2.3 million for the three and nine months ended September 30, 2018, respectively. Allocated depreciation expense from NETGEAR was $0.5 million and $1.2 million for the three and six months ended July 1, 2018. There was no additional allocation of depreciation expense from NETGEAR for the three months ended September 30, 2018. For the periods prior to the completion of the IPO, the unaudited condensed consolidated statements of operations include both the depreciation expense directly identifiable as Arlo’s and allocated depreciation expense from NETGEAR. Refer to Allocated Expenses from NETGEAR as discussed in Note 1, The Company and Basis of Presentation, for detailed disclosures regarding the methodology used for allocated expenses from NETGEAR.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangibles, net

| As of September 29, 2019 |  | As of December 31, 2018
| Gross |  | Accumulated Amortization |  | Net |  | Gross |  | Accumulated Amortization |  | Net
| (In thousands)
Technology | $ | 9,800 |  |  | $ | (8,196 | ) |  | $ | 1,604 |  |  | $ | 9,800 |  |  | $ | (7,165 | ) |  | $ | 2,635 |
Other | 500 |  |  | (425 | ) |  | 75 |  |  | 800 |  |  | (612 | ) |  | 188 |
Total intangibles, net | $ | 10,300 |  |  | $ | (8,621 | ) |  | $ | 1,679 |  |  | $ | 10,600 |  |  | $ | (7,777 | ) |  | $ | 2,823 |

As of September 29, 2019, the remaining weighted-average estimated useful life of intangibles was 0.9 years. Amortization of intangibles was $0.4 million and $1.2 million for the three and nine months ended September 29, 2019, respectively, and $0.4 million and $1.2 million for the three and nine months ended September 30, 2018, respectively.
As of September 29, 2019, estimated amortization expense related to finite-lived intangibles for the remaining years was as follows (in thousands):

2019 (remaining three months) | $ | 373 |
2020 | 1,306 |
Total estimated amortization expense | $ | 1,679 |

Goodwill
There was no change in the carrying amount of goodwill during the nine months ended September 29, 2019 and the goodwill as of December 31, 2018 and September 29, 2019 was as follows (in thousands):

As of December 31, 2018 | $ | 15,638 |
As of September 29, 2019 | $ | 15,638 |

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’s common stock declined after the Company announced its fourth quarter of fiscal year 2018 earnings release on February 5, 2019. The average closing price per share for the common stock for the eight trading days after such earnings release was $3.71, a 223.3% decrease compared to the average closing price for the fourth quarter of fiscal year 2018. A sustained decline in common stock and the resulting impact to the Company’s market capitalization as well as a downward revision to the Company’s business outlook for fiscal year ending December 31, 2019 are qualitative factors to consider when evaluating whether events or changes in circumstances indicate it is a more likely than not a potential goodwill impairment exists. The Company concluded that the decline in the price of its common stock in February 2019 did represent a sustained decline and therefore was an indicator that the Company’s goodwill might be impaired. As a result, the Company performed a quantitative assessment as of February 7, 2019.
The Company operates as one operating and reportable segment. To determine the fair value for the reporting unit, the Company utilized its common stock price and included a market participant acquisition premium (“MPAP”) assumption. A significant decrease in MPAP could result in a significantly lower fair value estimate. The concluded fair value exceeded the Company’s carrying amount by approximately 29.8%. Decreasing the selected MPAP of 25% by 250 basis points would result in the concluded fair value exceeding the carrying amount by approximately 27.2%.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As fair value was greater than carrying amount, goodwill was not impaired as of December 31, 2018 using the February 7, 2019 valuation. If there is a further decline in the Company’s stock price based on market conditions and deterioration of the Company’s business, the Company may have to record a charge to its earnings for the goodwill impairment of up to $15.6 million. The Company determined that no events occurred or circumstances changed during the three months ended September 29, 2019 that would more likely than not reduce the fair value of the Company below its carrying amount.
Other non-current assets

| As of
| September 29, 2019 |  | December 31, 2018
| (In thousands)
Non-current deferred income taxes | $ | 1,218 |  |  | $ | 1,108 |
Deposits | 3,644 |  |  | 4,084 |
Other | 748 |  |  | 3,257 |
Total other non-current assets | $ | 5,610 |  |  | $ | 8,449 |

Accrued liabilities

| As of
| September 29, 2019 |  | December 31, 2018
| (In thousands)
Sales and marketing | $ | 44,399 |  |  | $ | 75,863 |
Sales returns | 29,351 |  |  | 49,247 |
Accrued employee compensation | 6,707 |  |  | 11,897 |
Current operating lease liabilities | 3,814 |  |  | — |
Warranty obligation | 3,403 |  |  | 3,712 |
Freight | 2,159 |  |  | 3,913 |
Current financing lease obligation | — |  |  | 1,632 |
Other | 20,238 |  |  | 25,772 |
Total accrued liabilities | $ | 110,071 |  |  | $ | 172,036 |

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

Note 4. | Fair Value Measurements

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of September 29, 2019 and December 31, 2018:

| As of September 29, 2019 |  | As of December 31, 2018
| 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: U.S. treasuries (<90 days) | $ | 11,176 |  |  | $ | 11,176 |  |  | $ | — |  |  | $ | 438 |  |  | $ | 438 |  |  | $ | — |
Available-for-sale securities: U.S. treasuries (1) | 39,941 |  |  | 39,941 |  |  | — |  |  | 49,737 |  |  | 49,737 |  |  | — |
Foreign currency forward contracts (2) | 343 |  |  | — |  |  | 343 |  |  | 322 |  |  | — |  |  | 322 |
Total assets measured at fair value | $ | 51,460 |  |  | $ | 51,117 |  |  | $ | 343 |  |  | $ | 50,497 |  |  | $ | 50,175 |  |  | $ | 322 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |
Foreign currency forward contracts (3) | $ | 56 |  |  | $ | — |  |  | $ | 56 |  |  | $ | 71 |  |  | $ | — |  |  | $ | 71 |
Total liabilities measured at fair value | $ | 56 |  |  | $ | — |  |  | $ | 56 |  |  | $ | 71 |  |  | $ | — |  |  | $ | 71 |

_________________________

(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 29, 2019 and December 31, 2018, 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 29, 2019 and December 31, 2018, the Company has no Level 3 fair value assets or liabilities.

Note 5. | Derivative Financial Instruments

The Company’s subsidiaries have had, and will continue to have material future cash flows, including revenue and expenses, which are denominated in currencies other than the Company’s functional currency. The Company and all its subsidiaries designate the U.S. dollar as the functional currency. Changes in exchange rates between the Company’s functional currency and other currencies in which the Company transacts business will cause fluctuations in cash flow expectations and cash flow realized or settled. Accordingly, the Company uses derivatives to mitigate its business exposure to foreign exchange risk. The Company enters into foreign currency forward contracts in Australian dollars, British pounds, euros, and Canadian dollars to manage its exposure to foreign exchange risk related to expected future cash flows on certain forecasted revenue, costs of revenue, operating expenses and existing assets and liabilities.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
T he Company’s foreign currency forward contracts do not contain any credit risk-related contingent features. The Company is exposed to credit losses in the event of nonperformance by the counter-parties of its forward contracts. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any one counter-party. In addition, the derivative contracts typically mature in less than six months and the Company continuously evaluates the credit standing of its counter-party financial institutions. The counter-parties to these arrangements are large highly rated financial institutions and the Company does not consider non-performance a material risk.
The Company may choose not to hedge certain foreign exchange exposures for a variety of reasons, including, but not limited to, materiality, accounting considerations or the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign exchange rates. The Company’s accounting policies for these instruments are based on whether the instruments are designated as hedge or non-hedge instruments in accordance with the authoritative guidance for derivatives and hedging. The Company records all derivatives on the balance sheets at fair value. Cash flow hedge gains and losses are recorded in other comprehensive income (“OCI”) until the hedged item is recognized in earnings. Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in Other income (expense), net in the unaudited condensed consolidated statements of operations.
Fair value of derivative instruments
The fair values of the Company’s derivative instruments and the line items on the unaudited condensed consolidated balance sheets to which they were recorded as of September 29, 2019 and December 31, 2018 are summarized as follows:

Derivative Assets |  | Balance Sheet Location |  | September 29, 2019 |  | December 31, 2018 |  | Balance Sheet Location |  | September 29, 2019 |  | December 31, 2018
|  |  |  | (In thousands) |  |  |  | (In thousands)
Derivative assets not designated as hedging instruments |  | Prepaid expenses and other current assets |  | $ | 336 |  |  | $ | 293 |  |  | Accrued liabilities |  | $ | 46 |  |  | $ | 46 |
Derivative assets designated as hedging instruments |  | Prepaid expenses and other current assets |  | 7 |  |  | 29 |  |  | Accrued liabilities |  | 10 |  |  | 25 |
Total |  |  |  | $ | 343 |  |  | $ | 322 |  |  |  |  | $ | 56 |  |  | $ | 71 |

Refer to Note 4, 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.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables set forth the offsetting of derivative assets as of September 29, 2019 and December 31, 2018:

As of September 29, 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 |  | $ | 329 |  |  | $ | — |  |  | $ | 329 |  |  | $ | (54 | ) |  | $ | — |  |  | $ | 275 |
Wells Fargo Bank |  | 14 |  |  | — |  |  | 14 |  |  | (2 | ) |  | — |  |  | 12 |
Total |  | $ | 343 |  |  | $ | — |  |  | $ | 343 |  |  | $ | (56 | ) |  | $ | — |  |  | $ | 287 |

As of December 31, 2018 |  |  |  |  |  |  |  | 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 |  | $ | 100 |  |  | $ | — |  |  | $ | 100 |  |  | $ | — |  |  | $ | — |  |  | $ | 100 |
Wells Fargo Bank |  | 222 |  |  | — |  |  | 222 |  |  | (68 | ) |  | — |  |  | 154 |
Total |  | $ | 322 |  |  | $ | — |  |  | $ | 322 |  |  | $ | (68 | ) |  | $ | — |  |  | $ | 254 |

The following tables set forth the offsetting of derivative liabilities as of September 29, 2019 and December 31, 2018:

As of September 29, 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 |  | $ | 54 |  |  | $ | — |  |  | $ | 54 |  |  | $ | (54 | ) |  | $ | — |  |  | $ | — |
Wells Fargo Bank |  | 2 |  |  | — |  |  | 2 |  |  | (2 | ) |  | — |  |  | — |
Total |  | $ | 56 |  |  | $ | — |  |  | $ | 56 |  |  | $ | (56 | ) |  | $ | — |  |  | $ | — |

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

As of December 31, 2018 |  |  |  |  |  |  |  | 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)
JP Morgan |  | $ | 3 |  |  | $ | — |  |  | $ | 3 |  |  | $ | — |  |  | $ | — |  |  | $ | 3 |
Wells Fargo Bank |  | 68 |  |  | — |  |  | 68 |  |  | (68 | ) |  | — |  |  | — |
Total |  | $ | 71 |  |  | $ | — |  |  | $ | 71 |  |  | $ | (68 | ) |  | $ | — |  |  | $ | 3 |

Cash flow hedges
The Company typically hedges portions of its anticipated foreign currency exposure which generally are less than six months. The Company enters into about eight forward contracts per quarter with an average size of $1.4 million USD equivalent related to its cash flow hedging program.
The effects of the Company’s cash flow hedges on the unaudited condensed consolidated statements of operations for the three months ended September 29, 2019 are summarized as follows:

|  | Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges
|  | Revenue |  | Cost of revenue |  | Research and development |  | Sales and marketing |  | General and administrative
|  | (In thousands)
Statements of operations |  | $ | 106,116 |  |  | $ | 95,613 |  |  | $ | 16,701 |  |  | $ | 13,657 |  |  | $ | 11,062 |
Gains (losses) on cash flow hedge |  | $ | 86 |  |  | $ | — |  |  | $ | (3 | ) |  | $ | (3 | ) |  | $ | (2 | )

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

|  | Location and Amount of Gains (Losses) Recognized in Income on Cash Flow Hedges
|  | Revenue |  | Cost of revenue |  | Research and development |  | Sales and marketing |  | General and administrative
|  | (In thousands)
Statements of operations |  | $ | 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 associated with its cash flow hedges over the next twelve months. For information on the unrealized gains or losses on derivatives reclassified out of AOCI into the unaudited condensed consolidated statements of operations, refer to Note 6, 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 29, 2019.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Non-designated hedges
The Company adjusts its non-designated hedges monthly and enters into about five non-designated derivatives per quarter with an average size of $2.0 million. The hedges range typically from one to three months in duration. The effects of the Company’s non-designated hedge included in Other income (expense), net on the unaudited condensed consolidated statements of operations for the three and nine months ended September 29, 2019 and September 30, 2018 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 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
|  |  |  | (In thousands) |  |  |  |
Foreign currency forward contracts |  | Other income (expense), net |  | $ | 665 |  |  | $ | (57 | ) |  | $ | 521 |  |  | $ | (57 | )

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

Note 6. | 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 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 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 29, 2019:

|  | Three Months Ended September 29, 2019 |  | Nine Months Ended 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 |  | $ | 100 |  |  | $ | 86 |  |  | $ | 257 |  |  | $ | 333 |  |  | Revenue
Foreign currency contracts |  | — |  |  | — |  |  | — |  |  | (2 | ) |  | Cost of revenue
Foreign currency contracts |  | — |  |  | (3 | ) |  | — |  |  | (24 | ) |  | Research and development
Foreign currency contracts |  | — |  |  | (3 | ) |  | — |  |  | (38 | ) |  | Sales and marketing
Foreign currency contracts |  | — |  |  | (2 | ) |  | — |  |  | (11 | ) |  | General and administrative
|  | $ | 100 |  |  | $ | 78 |  |  | $ | 257 |  |  | $ | 258 |  |  | Total *

_________________________
* Tax impact to hedging gains and losses from derivative contracts was immaterial.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 7.Deferred Revenue
Deferred Revenue
Deferred revenue consists of advance payments and deferred revenue, where the Company has unsatisfied performance obligations. Deferred revenue primarily consists of prepaid services and customer billings in advance of revenues being recognized from the Company's subscription contracts.
Transaction Price Allocated to the Remaining Performance Obligations
Remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities, in-transit orders with destination terms, and non-cancellable backlog. Non-cancellable backlog includes goods and services for which customer purchase orders have been accepted and that are scheduled or in the process of being scheduled for shipment.
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 29, 2019:

|  | 1 year |  | 2 years |  | Greater than 2 years |  | Total
|  | (In thousands)
Performance obligations |  | $ | 58,575 |  |  | $ | 15,770 |  |  | $ | 5,209 |  |  | $ | 79,554 |

The majority of the performance obligation classified as greater than one year pertains to revenue deferral from prepaid services.
For the three and nine months ended September 29, 2019, $12.4 million and $32.6 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $11.9 million and $34.6 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. $22.1 million of this recognized revenue was included in the contract liability balance at the beginning of the period. There were no significant changes in estimates during the period that would affect the contract balances.
Disaggregation of Revenue
The Company conducts business across three geographic regions: Americas, EMEA, and APAC. Sales and usage-based taxes are excluded from revenue. Refer to Note 12, Segment and Geographic Information, for revenue by geography.

Note 8. | 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 recognizes lease expense on a straight-line basis over the lease term.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The operating lease expense for the three and nine months ended September 29, 2019 was as follows:

|  | Statements of Operations Location |  | Three Months Ended September 29, 2019 |  | Nine Months Ended September 29, 2019
|  |  |  | (In thousands)
Operating lease cost (1) |  | General and administrative |  | $ | 1,726 |  |  | $ | 5,068 |

________________________

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

The effect of accounting standards adoption of ASU 2016-02 on the unaudited condensed consolidated statement of balance sheets and supplemental balance sheet information related to operating leases as of September 29, 2019 were as follows:

Leases |  | Balance Sheet Location |  | September 29, 2019 |  | January 1, 2019 |  | December 31, 2018
|  |  |  | (In thousands)
Build-to-suit lease (1) |  | Property and equipment, net |  | $ | — |  |  | $ | (21,610 | ) |  | $ | 21,610 |
Build-to-suit lease (1) |  | Accrued liabilities |  | — |  |  | (281 | ) |  | 281 |
Build-to-suit lease (1) |  | Accrued liabilities |  | — |  |  | (1,632 | ) |  | 1,632 |
Build-to-suit lease (1) |  | Non-current financing lease obligation |  | — |  |  | (19,978 | ) |  | 19,978 |
Build-to-suit lease (1) |  | Retained earnings (Accumulated deficit) |  | 281 |  |  | 281 |  |  | — |
Operating leases (2) |  | Operating lease right-of-use assets, net |  | 32,008 |  |  | 14,400 |  |  | — |
Operating leases (2) |  | Accrued liabilities |  | — |  |  | (107 | ) |  | 107 |
Operating leases (2) |  | Accrued liabilities |  | 3,814 |  |  | 2,356 |  |  | — |
Operating leases (2) |  | Non-current deferred rent |  | — |  |  | (1,141 | ) |  | 1,141 |
Operating leases (2) |  | Non-current operating lease liabilities |  | 30,484 |  |  | 12,044 |  |  | — |

________________________

(1) | The Company was deemed to be the accounting owner of its build-to-suit lease arrangement for its San Jose corporate headquarters and the construction was in progress at adoption date. As such, the Company reevaluated its build-to-suit lease arrangement under ASU 2016-02 to ascertain whether it meets the criteria as the accounting owner of the build-to-suit lease arrangement through control of the underlying leased asset. The Company concluded that it did not have control over the underlying leased asset. As a result, the Company de-recognized the build to suit asset and liability as of adoption date of $21.6 million of Property and equipment and $21.9 million of financing lease obligations. The difference of $0.3 million between the de-recognized assets and the associated financing lease obligations was recorded as an adjustment to Accumulated deficit as of the adoption date.

(2) | The Company adopted ASU 2016-02 on January 1, 2019 which resulted in the recognition of ROU assets and lease liabilities for operating leases of $14.4 million on its unaudited condensed consolidated balance sheets. The ROU assets were reduced by $0.1 million current deferred rent and $1.1 million non-current deferred rent which were de-recognized along with the adoption. As of March 31, 2019, the construction of the Company’s leasehold improvements for its San Jose corporate headquarters was partially completed and partially occupied by the Company, resulting in lease commencement inception for the portion that was completed and occupied by the Company. Therefore, the Company proportionally recorded ROU assets and lease liabilities of $14.3 million, representing two thirds of the total value of the ROU assets and lease liabilities. As of June 30, 2019, upon the completion of the leasehold improvements and full occupation of the entire building, the Company recognized the remaining value of ROU assets and lease liabilities of $7.2 million. As of September 29, 2019, the Company received $3.1 million reimbursement for leasehold improvements that the Company de-recognized during the quarter.

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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Supplemental cash flow information related to operating leases for the three and nine months ended September 29, 2019 was as follows:

|  | Three Months Ended September 29, 2019 |  | Nine Months Ended September 29, 2019
|  | (in thousands)
Cash paid for amounts included in the measurement of lease liabilities |  |  |  |
Operating cash flows from operating leases |  | $ | 1,470 |  |  | $ | 2,882 |
Right-of-use assets obtained in exchange for lease liabilities |  |  |  |
Operating leases |  | $ | 439 |  |  | $ | 22,172 |

Weighted average remaining lease term and weighted average discount rate related to operating leases as of September 29, 2019 were as follows:

Weighted average remaining lease term |  | 5.9 years |
Weighted average discount rate |  | 5.67 | %

The maturity of lease liabilities related to operating leases for each of the next five years and thereafter as of September 29, 2019 was as follows (in thousands):

2019 (Remaining three months) | $ | 1,170 |
2020 | 5,950 |
2021 | 5,789 |
2022 | 5,645 |
2023 | 4,968 |
Thereafter | 19,488 |
Total lease payments | 43,010 |
Less: interest (1) | (8,712 | )
Total | $ | 34,298 |
Accrued liabilities | $ | 3,814 |
Non-current operating lease liabilities | 30,484 |
Total | $ | 34,298 |

________________________

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

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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 2018, future minimum lease payments under non-cancelable operating leases and build-to-suit lease arrangements, for each of the next five years and thereafter were as follows (in thousands):

| Leases (1)
2019 | $ | 4,634 |
2020 | 5,813 |
2021 | 5,678 |
2022 | 5,580 |
2023 | 4,903 |
Thereafter | 19,252 |
Total | $ | 45,860 |

________________________

(1) | Amounts are based on ASC 840, Leases that was superseded upon the adoption of ASC 842, Leases on January 1, 2019.

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 29, 2019 the Company had approximately $3.6 million of unused letters of credit outstanding, of which $3.1 million pertains to the lease arrangement in San Jose, California.
Purchase Obligations
The Company has entered into various inventory-related purchase agreements with suppliers. Generally, under these agreements, 50% of orders are cancelable by giving notice 46 to 60 days prior to the expected shipment date and 25% of orders are cancelable by giving notice 31 to 45 days prior to the expected shipment date. Orders are non-cancelable within 30 days prior to the expected shipment date. As of September 29, 2019, the Company had approximately $71.4 million in non-cancelable purchase commitments with suppliers. The Company establishes a loss liability for all products it does not expect to sell for which it has committed purchases from suppliers. As of September 29, 2019, the loss liability from committed purchases was $2.6 million. From time to time the Company’s suppliers procure unique complex components on the Company’s behalf. If these components do not meet specified technical criteria or are defective, the Company should not be obligated to purchase the materials.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
| (In thousands)
Balance at the beginning of the period | $ | 3,232 |  |  | $ | 3,487 |  |  | $ | 3,712 |  |  | $ | 31,756 |
Reclassified to sales returns upon adoption of ASC 606 (1) | — |  |  | — |  |  | — |  |  | (28,713 | )
Provision for warranty obligation made during the period | 364 |  |  | 344 |  |  | 292 |  |  | 1,166 |
Settlements made during the period | (193 | ) |  | (213 | ) |  | (601 | ) |  | (591 | )
Balance at the end of the period | $ | 3,403 |  |  | $ | 3,618 |  |  | $ | 3,403 |  |  | $ | 3,618 |

________________________

(1) | Upon adoption of ASC 606 on January 1, 2018, warranty reserve balances totaling $28.7 million were reclassified to sales returns as these liabilities are payable to the Company’s customers and settled in cash or by credit on account. Under ASC 606, these amounts are to be accounted for as sales with right of return.

Litigation and Other Legal Matters
The Company is involved in disputes, litigation, and other legal actions, including, but not limited to, the matters described below. In all cases, at each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. In such cases, the Company accrues for the amount, or if a range, the Company accrues the low end of the range, only if there is not a better estimate than any other amount within the range, as a component of legal expense within litigation reserves, net. The Company monitors developments in these legal matters that could affect the estimate the Company had previously accrued. In relation to such matters, the Company currently believes that there are no existing claims or proceedings that are likely to have a material adverse effect on its financial position within the next twelve months, or the outcome of these matters is currently not determinable. There are many uncertainties associated with any litigation, and these actions or other third-party claims against the Company may cause the Company to incur costly litigation and/or substantial settlement charges. In addition, the resolution of any intellectual property litigation may require the Company to make royalty payments, which could have an adverse effect in future periods. If any of those events were to occur, the Company's business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from the Company's estimates, which could result in the need to adjust the liability and record additional expenses.
Beginning on December 11, 2018, purported stockholders of Arlo Technologies, Inc. filed six putative securities class action complaints in the Superior Court of California, County of Santa Clara, and one complaint in the U.S. District Court for the Northern District of California against the Company and certain of its executives and directors. Some of these actions also name as defendants the underwriters in the Company’s IPO and NETGEAR, Inc. The actions pending in state court are Aversa v. Arlo Technologies, Inc., et al., No. 18CV339231, filed Dec. 11, 2018; Pham v. Arlo Technologies, Inc. et al., No. 19CV340741, filed January 9, 2019; Patel v. Arlo Technologies, Inc., No. 19CV340758, filed January 10, 2019; Perros v. NetGear, Inc., No. 19CV342071, filed February 1, 2019; Vardanian v. Arlo Technologies, Inc., No. 19CV342318, filed February 8, 2019; and Hill v. Arlo Technologies, Inc. et al., No. 19CV343033, filed February 22, 2019. The action pending in federal court is Wong v. Arlo Technologies, Inc. et al., No. 19-CV-00372, filed January 22, 2019 (the “Federal Action”). The complaints generally 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 complaints seek unspecified monetary damages and other relief on behalf of investors who purchased Arlo common stock issued pursuant and/or traceable to the IPO offering documents.
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In the six state court actions, the court initially issued an order deeming the cases complex and temporarily stayed discovery. The six state actions were then consolidated by the court (as consolidated, the “State Action”), and the plaintiffs filed a consolidated complaint on May 1, 2019. 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 set a case management conference for January 17, 2020 so the parties can provide an update regarding the status of the Federal Action.
In the Federal Action, four investors filed motions to be appointed lead plaintiff. On May 6, 2019, the court appointed a shareholder named Matis Nayman to serve as lead plaintiff and the law firm of Keller Lenkner LLC as lead counsel. On June 7, 2019, plaintiff filed an amended complaint, which alleges that defendants violated the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, by failing to adequately disclose quality control problems and adverse sales trends surrounding the Company’s IPO. The amended complaint also names as defendants the underwriters in the IPO and NETGEAR, Inc. Defendants filed a motion to dismiss the amended complaint on August 6, 2019. Plaintiff opposed the motion to dismiss on September 6, 2019, and defendants filed a reply on October 4, 2019. A hearing on the motion to dismiss is currently scheduled for December 5, 2019. Pursuant to the Private Securities Litigation Reform Act (“PSLRA”), discovery is stayed until the court rules on the motion to dismiss.
In addition, a shareholder named Leonard Pinto filed a tagalong derivative action on June 13, 2019 (the “Derivative Action”) in 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 pending resolution of the motion to dismiss in the Federal Action.
Regardless of the merits or ultimate results of the above-described litigation matters, they could result in substantial costs, which would hurt the Company’s financial condition and results of operations and divert management’s attention and resources from our business. At this point, however, it is too early to reasonably estimate any financial impact to the Company resulting from these litigation matters.
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 29, 2019.
Indemnifications
Prior to the completion of the IPO, the Company historically participated in NETGEAR’s sales agreements. In its sales agreements, NETGEAR typically agrees to indemnify its direct customers, distributors and resellers (the “Indemnified Parties”) for any expenses or liability resulting from claimed infringements by NETGEAR’s products of patents, trademarks or copyrights of third parties that are asserted against the Indemnified Parties, subject to customary carve-outs. The terms of these indemnification agreements are generally perpetual after execution of the agreement. The maximum amount of potential future indemnification is generally unlimited. From time to time, the Company receives requests for indemnity and may choose to assume the defense of such litigation asserted against the Indemnified Parties. The Company had no liabilities recorded for these agreements as of September 29, 2019. In connection with the Separation, and after July 1, 2018, certain sales agreements were transferred to the Company, and the Company has replaced certain shared contracts, which include similar indemnification terms.
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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. Refer to Note 1, The Company and Basis of Presentation, for details relating to the Company’s IPO and related transactions.
Change in Control and Severance Agreements
The Company has entered into change in control and severance agreements with certain of its key executives (the “Severance Agreements”). Pursuant to the Severance Agreements, upon a termination without cause or resignation with good reason, the individual would be entitled to (1) cash severance equal to (a) the individual’s annual base salary and an additional amount equal to his or her target annual bonus (for the Chief Executive Officer and Chief Financial Officer) or (b) the individual’s base salary for six months (for other key executives), (2) (a) 12 months of health benefits continuation (for the Chief Executive Officer and Chief Financial Officer) or (b) six months of health benefits continuation (for other key executives) and (3) accelerated vesting of any unvested equity awards that would have vested during the 12 months following the termination date. Upon a termination without cause or resignation with good reason that occurs during the one month prior to or 12 months following a change in control, the individual would be entitled to (1) (a) cash severance equal to a multiple (2 times for the Chief Executive Officer and 1.5 times for the Chief Financial Officer) of the sum of the individual’s annual base salary and target annual bonus (for the Chief Executive Officer and Chief Financial Officer) or (b) a cash severance equal to the individual’s annual base salary (for other key executives), (2) a number of months of health benefits continuation (24 months for the Chief Executive Officer, 18 months for the Chief Financial Officer, and 12 months for other key executives) and (3) vesting of all outstanding, unvested equity awards. Severance will be conditioned upon the execution and non-revocation of a release of claims. The Company had no liabilities recorded for these agreements as of September 29, 2019.
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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 the 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.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 9. | Employee Benefit Plans

The Company grants options and 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 agreement and at prices no less than 100% of the fair market value of Arlo’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 Company granted to its NEOs options to purchase 2,781,249 shares of Arlo common stock (“IPO Options”).
The following table sets forth the available shares for grant under the 2018 Plan as of September 29, 2019 and December 31, 2018:

| Number of Shares
| (In thousands)
Shares available for grant as of December 31, 2018 (1) | 3,969 |
Additional authorized shares | 2,970 |
Granted (3) | (6,303 | )
Forfeited / cancelled (2) | 1,464 |
Expired | 1 |
Shares traded for taxes | 349 |
Shares available for grant as of September 29, 2019 | 2,450 |

_________________________

(1) | Includes Arlo IPO Options of 2.8 million shares granted to the Company’s NEOs with performance-based vesting criteria (in addition to service-based vesting criteria for any of such IPO Options that are deemed to have been earned). As of September 29, 2019, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria had been satisfied except for Tranche 4 Performance Option. Therefore, this line item includes all such performance-based IPO Options granted during the year ended December 31, 2018, reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied. Tranche 4 Performance Option’s measurement period was completed and none of the shares vested.

(2) | Includes 0.3 million shares subject to awards that were cancelled in connection with Mr. Collins’ separation from the Company. In addition, also includes 0.5 million shares subject to the IPO Options that were voluntarily forfeited by the Chief Executive Officer as the performance metrics for Tranches 4 and 5 of the IPO Options were not expected to be achieved.

(3) | 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 Company's 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 ending December 31, 2019 is 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 Russell 2000 Index (“the Benchmark”) during the three-year period from the grant date.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 15, 2019 and ended on August 14, 2019. As of September 29, 2019, approximately 1.5 million shares were available for issuance under the ESPP.
On January 23, 2019, the Company registered an aggregate of up to 10,535,149 shares of the Company’s common stock on Registration Statement on Form S-8, including 9,792,677 shares issuable pursuant to the 2018 Plan (consisting of (i) 6,822,787 shares of the Company’s common stock issuable upon exercise or vesting of awards relating to NETGEAR common stock that converted into awards relating to the Company’s common stock upon the completion of the Distribution for issuance under the 2018 Plan plus (ii) 2,969,890 shares of the Company’s common stock that were automatically added to the shares authorized for issuance under the 2018 Plan on January 1, 2019 pursuant to an “evergreen” provision contained in the 2018 Plan) and 742,472 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, 2019 pursuant to an “evergreen” provision contained in the 2018 ESPP.
Option Activity
Arlo’s stock option activity during the nine months ended September 29, 2019 was as follows:

| Number of shares |  | Weighted Average Exercise Price Per Share
| (In thousands) |  | (In dollars)
Outstanding as of December 31, 2018 (1) | 7,209 |  |  | $ | 12.08 |
Granted | 10 |  |  | $ | 3.90 |
Exercised | (4 | ) |  | $ | 3.03 |
Forfeited / cancelled (2) | (938 | ) |  | $ | 15.88 |
Expired | (159 | ) |  | $ | 12.00 |
Outstanding as of September 29, 2019 | 6,118 |  |  | $ | 11.49 |

(1) Includes Arlo IPO Options of 2.8 million shares granted to the Company’s NEOs with performance-based vesting criteria (in addition to service-based vesting criteria for any of such IPO Options that are deemed to have been earned). As of September 29, 2019, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria had been satisfied except for Tranche 4 Performance Option. Therefore, this line item includes all such performance-based IPO Options granted during the year ended December 31, 2018, reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied. Tranche 4 Performance Option’s measurement period was completed and none of the shares vested.

(2) | Includes 0.3 million shares subject to awards that were cancelled in connection with Mr. Collins’ separation from the Company. In addition, also includes 0.5 million shares subject to the IPO Options that were voluntarily forfeited by the Chief Executive Officer as the performance metrics for Tranches 4 and 5 of the IPO Options were not expected to be achieved.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NETGEAR’s stock option activity for Arlo employees during the nine months ended September 29, 2019 was as follows:

| Number of shares |  | Weighted Average Exercise Price Per Share
| (In thousands) |  | (In dollars)
Outstanding as of December 31, 2018 | 283 |  |  | $ | 26.53 |
Exercised | (48 | ) |  | $ | 21.35 |
Forfeited / cancelled | (16 | ) |  | $ | 36.27 |
Expired | (14 | ) |  | $ | 41.67 |
Outstanding as of September 29, 2019 | 205 |  |  | $ | 25.94 |

RSU Activity
Arlo’s RSU activity during the nine months ended September 29, 2019 was as follows:

| Number of shares |  | Weighted Average Grant Date Fair Value Per Share
| (In thousands) |  | (In dollars)
Outstanding as of December 31, 2018 | 3,141 |  |  | $ | 12.22 |
Granted (3) | 6,293 |  |  | $ | 4.83 |
Vested | (1,033 | ) |  | $ | 11.30 |
Forfeited | (368 | ) |  | $ | 8.55 |
Outstanding as of September 29, 2019 | 8,033 |  |  | $ | 6.71 |

(3) | 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 a group of 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 ending December 31, 2019 is achieved.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
NETGEAR’s RSU activity for Arlo employees during the nine months ended September 29, 2019 was as follows:

| Number of shares |  | Weighted Average Grant Date Fair Value Per Share
| (In thousands) |  | (In dollars)
Outstanding as of December 31, 2018 | 522 |  |  | $ | 34.89 |
Vested | (155 | ) |  | $ | 32.44 |
Forfeited | (40 | ) |  | $ | 36.47 |
Outstanding as of September 29, 2019 | 327 |  |  | $ | 35.85 |

The following table sets forth the weighted average assumptions used to estimate the fair value of Arlo’s purchase rights granted under Arlo’s ESPP for the three and nine months ended September 29, 2019 and NETGEAR’s options granted and purchase rights granted under NETGEAR’s ESPP to Arlo employees during the three and nine months ended September 30, 2018.

| Three Months Ended |  | Nine Months Ended
| Stock Options |  | ESPP |  | Stock Options |  | ESPP
| September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
Expected life (in years) | NA |  |  | 4.4 |  |  | 0.5 |  |  | NA |  | 6.3 |  |  | 4.4 |  |  | 0.5 |  |  | 0.5 |
Risk-free interest rate | NA |  |  | 2.79 | % |  | 2.49 | % |  | NA |  | 2.28 | % |  | 2.32 | % |  | 2.49 | % |  | 1.81 | %
Expected volatility | NA |  |  | 33.5 | % |  | 97.6 | % |  | NA |  | 73.0 | % |  | 30.9 | % |  | 97.6 | % |  | 37.1 | %
Dividend yield | — |  |  | — |  |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | — |

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company determined the fair value of the 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 during the three months ended September 29, 2019 was $4.14 per share. The assumptions used in this model to estimate fair value at the grant date are as follows:

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
Expected life | 3.0 |  |  | N/A |  | 3.0 |  |  | N/A
Risk-free interest rate | 1.52 | % |  | N/A |  | 1.52 | % |  | N/A
Expected volatility | 65.1 | % |  | N/A |  | 65.1 | % |  | N/A
Dividend yield | — |  |  | N/A |  | — |  |  | N/A
Stock Beta | 0.30 |  |  | N/A |  | 0.30 |  |  | N/A

Stock-Based Compensation Expense
The Company’s employees have historically participated in NETGEAR’s various stock-based plans, which are described below and represent the portion of NETGEAR’s stock-based plans in which Arlo employees participated. The Company’s unaudited condensed consolidated statements of income reflect compensation expense for these stock-based plans associated with the portion of NETGEAR’s plans in which Arlo employees participated. The following tables set forth stock-based compensation expense for Arlo employees and allocated charges deemed attributable to Arlo operations resulting from NETGEAR’s and Arlo’s RSUs, PSUs, MPSUs and stock options, and the purchase rights under the NETGEAR’s ESPP included in the Company’s unaudited condensed consolidated statements of operations during the periods indicated:

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
| Total |  | Direct |  | Indirect |  | Total |  | Total |  | Direct |  | Indirect |  | Total
| (In thousands)
Cost of revenue | $ | 467 |  |  | $ | 236 |  |  | $ | — |  |  | $ | 236 |  |  | $ | 1,286 |  |  | $ | 336 |  |  | $ | 583 |  |  | $ | 919 |
Research and development | 1,569 |  |  | 872 |  |  | — |  |  | 872 |  |  | 4,501 |  |  | 2,186 |  |  | 396 |  |  | 2,582 |
Sales and marketing | 791 |  |  | 754 |  |  | — |  |  | 754 |  |  | 2,722 |  |  | 1,239 |  |  | 969 |  |  | 2,208 |
General and administrative | 2,392 |  |  | 1,575 |  |  | — |  |  | 1,575 |  |  | 6,752 |  |  | 1,575 |  |  | 2,100 |  |  | 3,675 |
Total stock-based compensation | $ | 5,219 |  |  | $ | 3,437 |  |  | $ | — |  |  | $ | 3,437 |  |  | $ | 15,261 |  |  | $ | 5,336 |  |  | $ | 4,048 |  |  | $ | 9,384 |

The Company recognizes these compensation expense generally on a straight-line basis over the requisite service period of the award.
As of September 29, 2019, $13.0 million of unrecognized compensation cost related to Arlo’s stock options and IPO options was expected to be recognized over a weighted-average period of 2.8 years. $33.0 million of
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unrecognized compensation cost related to unvested Arlo’s RSUs, PSUs and MPSUs was expected to be recognized over a weighted-average period of 2.9 years.
As of September 29, 2019, $0.5 million of unrecognized compensation cost related to NETGEAR’s stock options for Arlo employees was expected to be recognized over a weighted-average period of 1.9 years. $9.1 million of unrecognized compensation cost related to unvested NETGEAR’s RSUs for Arlo employees was expected to be recognized over a weighted-average period of 2.1 years.

Note 10. | Income Taxes

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. The income tax provision for the three and nine months ended September 30, 2018, was $0.2 million, or an effective tax rate of (1.7)%, and $0.8 million, or an effective tax rate of (2.3)%, respectively. During the three and nine months ended September 29, 2019, the Company sustained higher book losses than the same periods in the prior year. The Company has a full valuation allowance on its U.S. federal and state deferred tax attributes. As a result, consistent with the prior year, the Company did not record a tax benefit on these losses because of uncertainty about its future profitability. The increase in income tax provision for the three months ended September 29, 2019, compared to the prior year period was primarily due to higher foreign earnings in the 2019 period compared to 2018. The increase in income tax provision for the nine months ended September 29, 2019, compared to the prior year period resulted primarily from the increase in U.S. state tax liability in the 2019 period compared to 2018.

Note 11. | Net Income (Loss) Per Share

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. The weighted average number of shares outstanding for the basic and diluted net income (loss) per share for the periods prior to the completion of the IPO is based on the number of shares of Arlo common stock outstanding on August 2, 2018, the effective date of the registration statement relating to the IPO (the “IPO Registration Statement”). On that date, the Company issued 62,499,000 shares of common stock to the Company’s sole stockholder of record, NETGEAR (after which NETGEAR held 62,500,000 shares of common stock, which represented all of the then issued and outstanding common stock). 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.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net loss per share for the three and nine months ended September 29, 2019 and September 30, 2018 were as follows:

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
| (In thousands, except per share data)
Numerator: |  |  |  |  |  |  |
Net loss | $ | (30,590 | ) |  | $ | (13,225 | ) |  | $ | (105,566 | ) |  | $ | (36,410 | )
Denominator: |  |  |  |  |  |  |
Weighted average common shares - basic | 75,337 |  |  | 69,600 |  |  | 74,831 |  |  | 64,867 |
Potentially dilutive common share equivalent | — |  |  | — |  |  | — |  |  | — |
Weighted average common shares - dilutive | 75,337 |  |  | 69,600 |  |  | 74,831 |  |  | 64,867 |
Basic net loss per share | $ | (0.41 | ) |  | $ | (0.19 | ) |  | $ | (1.41 | ) |  | $ | (0.56 | )
Diluted net loss per share | $ | (0.41 | ) |  | $ | (0.19 | ) |  | $ | (1.41 | ) |  | $ | (0.56 | )
Anti-dilutive employee stock-based awards, excluded | 10,287 |  |  | 1,929 |  |  | 10,114 |  |  | 643 |

Note 12. | 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.
The following table shows revenue by geography for the periods indicated:

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
| (In thousands)
United States (“U.S.”) | $ | 81,441 |  |  | $ | 108,236 |  |  | $ | 184,733 |  |  | $ | 263,798 |
Americas (excluding U.S.) | 4,121 |  |  | 4,613 |  |  | 9,759 |  |  | 10,455 |
EMEA | 13,002 |  |  | 11,760 |  |  | 37,370 |  |  | 50,416 |
APAC | 7,552 |  |  | 6,565 |  |  | 15,732 |  |  | 18,091 |
Total revenue | $ | 106,116 |  |  | $ | 131,174 |  |  | $ | 247,594 |  |  | $ | 342,760 |

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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company’s Property and equipment, net are located in the following geographic locations:

| As of
| September 29, 2019 |  | December 31, 2018
| (In thousands)
United States (“U.S.”) | $ | 18,970 |  |  | $ | 45,053 |
Americas (excluding U.S.) | 1,123 |  |  | 218 |
EMEA | 545 |  |  | 567 |
China | 2,555 |  |  | 3,040 |
APAC (excluding China) | 1,023 |  |  | 550 |
Total property and equipment, net | $ | 24,216 |  |  | $ | 49,428 |

Note 13. Subsequent Events
Agreements with Verisure S.à.r.l.
On November 4, 2019, Arlo Technologies, Inc. (the “Company”) and Verisure S.à.r.l. (“Verisure”) concurrently entered into an Asset Purchase Agreement (the “Purchase Agreement”) and Supply Agreement (the “Supply Agreement” and together with the Purchase Agreement, the “Verisure Agreements”).
The Purchase Agreement provides that, upon the terms and subject to the conditions set forth in the Purchase Agreement, the Company will transfer, sell and assign 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 inventory to be transferred to Verisure as of the closing of the transactions contemplated by the Purchase Agreement and subject to a net working capital adjustment. As part of the transactions contemplated by the Purchase Agreement, Verisure will offer positions to approximately 25 Company employees who support the Business, and will also assume certain liabilities related to the Business.
The closing of the transactions contemplated by the Purchase Agreement (the “Closing”) is subject to certain customary closing conditions, including, among other conditions, regulatory approvals, the accuracy of the representations and warranties made by each of the Company and Verisure, the compliance by the parties with their respective obligations under the Purchase Agreement and that there shall have been no material adverse effect with respect to the Business. The Closing, which is expected to occur by the first quarter of 2020, may not be completed if any of the closing conditions are not satisfied or waived.
The Purchase Agreement contains customary representations and warranties regarding Verisure, the Business and the Assets, covenants regarding the Assets and the Business that apply between signing and Closing, indemnification provisions, termination rights and other customary provisions. The Company has agreed not to engage in any business that competes with the Business for a period of three years after Closing.
The Supply Agreement provides that, upon the terms and subject to the conditions set forth in the Supply Agreement, Verisure will become the exclusive distributor of Company products in Europe for all channels, and will non-exclusively distribute Company products in connection with Verisure’s security business (the “Verisure Security Business”). During the five-year period commencing January 1, 2020, Verisure has an aggregate minimum purchase commitment of $500.0 million, which includes yearly annual commitments. Verisure will pay the Company an upfront payment of $20.0 million on the date of the Closing of the Purchase Agreement and $40.0 million on the one year anniversary as prepayments.
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Supply Agreement also provides that the Company will provide certain development services to Verisure, including developing certain custom products specified by Verisure, in exchange for an aggregate of $10.0 million, payable in installments provided that the Company has met certain development milestones.
The Supply Agreement will have an initial term of five years, but may be automatically renewed for additional five-year terms if neither party provides written notice of re-negotiation at least 12 months prior to the expiration. If a party provides written notice of its intent to renegotiate, the parties will negotiate any revised terms in good faith, and if the parties fail to reach an agreement on new terms by six months prior to the expiration, Verisure will have the right to terminate the Supply Agreement or elect to renew the Supply Agreement for a five-year term with its current terms (excluding any prepayment or minimum volume provisions) and if Verisure takes no action, the Supply Agreement will automatically renew for an additional five years. Verisure may terminate the Supply Agreement if the Company (i) experiences a change of control without Verisure’s consent, (ii) assigns the Supply Agreement to a third party without Verisure’s consent, (iii) materially breaches the Supply Agreement and does not cure such breach within 45 days’ notice or (iv) ceases to operate in the ordinary course or undergoes an insolvency event. If the Purchase Agreement terminates prior to Closing, the Supply Agreement will be suspended and the parties will enter into a seven-week negotiation period to determine whether the Supply Agreement will continue and on what terms. The Company may terminate the Supply Agreement (a) if Verisure materially breaches the Supply Agreement and does not cure such breach within 45 days’ notice or (b) if Verisure ceases to operate in the ordinary course or undergoes an insolvency event.
Credit Agreement
On November 5, 2019, the Company entered into a Business Financing Agreement (the “Credit Agreement”) with Western Alliance Bank, an Arizona corporation, as lender (the “Lender”).
The Credit Agreement provides for a two-year revolving credit facility (the “Credit Facility”) that matures on November 5, 2021 and that may, by its terms, be extended by mutual written agreement between the Company and the Lender. Borrowings under the Credit Facility are limited to the lesser of (x) $40.0 million, and (y) an amount equal to the borrowing base. The borrowing base will be 60% of the Company’s eligible receivables and eligible accounts receivable, less such reserves as the Lender may deem proper and necessary from time to time. The Lender is not required to make any advance under the Credit Facility during the period beginning on January 1st and continuing through June 30th, except for advances made against eligible receivables first invoiced between July 1 and December 31, 2019. The Credit Agreement also includes sublimits for the issuance by the Lender of letters of credit, credit card indebtedness and foreign exchange forward contract. Repayment of the borrowings under the Credit Facility are due upon collection of the eligible receivables. The proceeds of the borrowings under the Credit Facility may be used for working capital and general corporate purposes.
The obligations of the Company under the Credit Agreement are secured by substantially all of the Company’s domestic personal property, excluding intellectual property assets and more than 65% of the shares of voting capital stock of any of the Company’s foreign subsidiaries.
Borrowings under the Credit Agreement generally bear interest at floating rates based upon the prime rate plus two and one-quarter percentage points (2.25%), plus an additional five percentage points (5.0%) 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 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
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ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Restructuring Plan
On November 7, 2019, the Company announced a restructuring plan that includes, but is not limited to, reducing outside services, headcount, marketing and capital expenditures to manage the Company's operating expenses. The Company expects to incur restructuring charges of $1.0 million to $2.0 million which are primarily associated with headcount-related charges under the restructuring plan.

Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “could,” “may,” “will,” and similar expressions are intended to identify forward-looking statements, including statements concerning our business and the expected performance characteristics, specifications, reliability, market acceptance, market growth, specific uses, user feedback and market position of our products and technology. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Part II—Item 1A—Risk Factors” and “Liquidity and Capital Resources” below. All forward-looking statements in this document are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes contained in this quarterly report. Unless expressly stated or the context otherwise requires, the terms “we,” “our,” “us,” “the Company,” and “Arlo” refer to Arlo Technologies, Inc. and our subsidiaries.
Business and Executive Overview
Arlo combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle. Our cloud-based platform creates a seamless, end-to-end connected lifestyle solution that provides customers with visibility, insight, and a powerful means to help them protect and connect with the people and things that matter most to them. Arlo enables users to monitor their environments and engage in real-time with their families and businesses from any location with a Wi-Fi or a cellular network internet connection. Since the launch of our first product in December 2014, we have shipped approximately 14.4 million smart connected devices, and, as of September 29, 2019, our smart platform had approximately 3.7 million cumulative registered users across more than 100 countries around the world.
On February 6, 2018, NETGEAR Inc. (“NETGEAR”) announced that its board of directors had unanimously approved the pursuit of a separation of its Arlo business from NETGEAR (the “Separation”) to be effected through an initial public offering (the “IPO”) of newly issued shares of the common stock of Arlo, then a wholly owned subsidiary of NETGEAR. On July 6, 2018, the Company filed a registration statement (as amended, the “IPO Registration Statement”) relating to the IPO of common stock of Arlo with the U.S. Securities and Exchange Commission (the “SEC”). Following a series of restructuring steps prior to the completion of the IPO of Arlo common stock, the Arlo business was transferred from NETGEAR to Arlo (collectively, the “Contribution”).
On August 2, 2018, NETGEAR and Arlo announced the pricing of the IPO of 10,215,000 shares of Arlo’s common stock at a price to the public of $16.00 per share. On August 3, 2018, Arlo’s shares began trading on the New York
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Stock Exchange under the ticker symbol “ARLO.” On August 7, 2018, the Company completed its IPO of 11,747,250 shares of common stock (including 1,532,250 shares of common stock pursuant to the underwriters’ option to purchase additional shares, which was exercised in full on August 3, 2018), at $16.00 per share, before underwriting discounts and commissions and estimated offering costs. Cash proceeds from the IPO were $173.4 million, net of the portion of the offering cost paid by Arlo, which portion was $1.4 million. The total offering cost was $4.6 million, of which $3.2 million was paid by NETGEAR. Prior to the completion of the IPO, the Company was a wholly owned subsidiary of NETGEAR and upon the closing of the IPO (including the issuance of additional shares of common stock pursuant to the underwriters’ option to purchase additional shares, which was exercised in full) on August 7, 2018, NETGEAR owned approximately 84.2% of the shares of Arlo’s outstanding common stock.
On November 29, 2018, NETGEAR announced that its board of directors had approved a special stock dividend (the “Distribution”) to NETGEAR stockholders of the 62,500,000 shares of Arlo common stock owned by NETGEAR. The Distribution was made on December 31, 2018 (the “Distribution Date”) to all NETGEAR stockholders of record as of the close of business on December 17, 2018 (the “Record Date”). In the Distribution, each NETGEAR stockholder of record on the Record Date received 1.980295 shares of Arlo common stock for every share of NETGEAR common stock held on the Record Date, subject to cash in lieu of fractional shares. The Distribution was intended to qualify as generally tax free to NETGEAR stockholders for U.S. federal income tax purposes. In connection with the Distribution, 62,500,000 shares of Arlo common stock held by NETGEAR were distributed to its stockholders and NETGEAR is no longer considered a related party to the Company.
Subsequent to the third fiscal quarter 2019, we announced several transactions, including the agreements with Verisure S.a.r.l., business financing agreement with Western Alliance Bank, and a restructuring plan. Refer to Note 13. Subsequent Events in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10 for further details of these announcements.
We conduct business across three geographic regions-the Americas; Europe, Middle-East and Africa (“EMEA”); and Asia Pacific (“APAC”) and we primarily generate revenue by selling devices through retail, wholesale distribution and wireless carrier channels and paid subscription services through online purchases. International revenue was 23.3% and 17.5% of our revenue for the three months ended September 29, 2019 and September 30, 2018, respectively, and 25.4% and 23.0% of our revenue for the nine months ended September 29, 2019 and September 30, 2018, respectively.
For the three months ended September 29, 2019 and September 30, 2018, we generated revenue of $106.1 million and $131.2 million, respectively, representing a year-over-year decline of 19.1%. Loss from operations was $31.1 million for the three months ended September 29, 2019 and $13.4 million for the three months ended September 30, 2018. Separation expense of $0.1 million and $5.8 million was included in the loss amount for the three months ended September 29, 2019 and September 30, 2018, respectively. For the nine months ended September 29, 2019 and September 30, 2018, we generated revenue of $247.6 million and $342.8 million, respectively, representing a year-over-year decline of 27.8%. Loss from operations was $107.0 million for the nine months ended September 29, 2019 and $35.2 million for the nine months ended September 30, 2018. Separation expenses of $1.8 million and $23.6 million were included in the loss amount for the nine months ended September 29, 2019 and September 30, 2018, respectively.
Our goal is to continue to develop innovative, world-class connected lifestyle solutions to expand and further monetize our current and future user and subscriber bases. We believe that the growth of our business is dependent on many factors, including our ability to innovate and launch successful new products on a timely basis and grow our installed base, to increase subscription-based recurring revenue, to invest in brand awareness and channel partnerships and to continue our global expansion. We expect to maintain our investment in research and development going forward as we continue to introduce new and innovative products and services to enhance the Arlo platform.
Key Business Metrics
In addition to the measures presented in our unaudited condensed consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic
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decisions. Our key business metrics may be calculated in a manner different from similar key business metrics used by other companies. We regularly review our processes for calculating these metrics, and from time to time we may discover inaccuracies in our metrics or make adjustments to improve their accuracy, including adjustments that may result in the recalculation of our historical metrics. We believe that any such inaccuracies or adjustments are immaterial unless otherwise stated.

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | % Change |  | September 30, 2018 |  | September 29, 2019 |  | % Change |  | September 30, 2018
| (In thousands, except percentage data)
Cumulative registered users | 3,691 |  |  | 47.8 | % |  | 2,498 |  |  | 3,691 |  |  | 47.8 | % |  | 2,498 |
Paid subscribers | 211 |  |  | 68.8 | % |  | 125 |  |  | 211 |  |  | 68.8 | % |  | 125 |
Devices shipped | 1,138 |  |  | (19.9 | )% |  | 1,421 |  |  | 2,718 |  |  | (20.1 | )% |  | 3,402 |
Service revenue | 11,810 |  |  | 20.2 | % |  | 9,827 |  |  | 34,235 |  |  | 26.4 | % |  | 27,082 |

Cumulative Registered Users. We believe that our ability to increase our user base is an indicator of our market penetration and growth of our business as we continue to expand and innovate our Arlo platform. We define our registered users at the end of a particular period as the number of unique registered accounts on the Arlo app as of the end of such particular period. The number of registered users does not necessarily reflect the number of end-users on the Arlo platform, as one registered account may be used by multiple people.
Paid Subscribers. Paid subscribers worldwide measured as subscribers to any paid service subscription plan, excluding prepaid service subscribers. During the second quarter of 2019, we factored in an adjustment to the first quarter of 2019 paid subscriber number and have subsequently revised the first quarter of 2019 paid subscriber total to 162,000.
Devices Shipped. Devices shipped represents the number of Arlo cameras, lights, and doorbells that are shipped to our customers during a period. Devices shipped does not include shipments of Arlo accessories and Arlo base stations, nor does it take into account returns of Arlo cameras, lights, and doorbells. The growth rate of our revenue is not necessarily correlated with our growth rate of devices shipped, as our revenue is affected by a number of other variables, including but not limited to returns from customers, end-user customer rebates and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, sales of accessories, and premium services, the types of Arlo products sold during the relevant period and the introduction of new product offerings that have different U.S. manufacturer’s suggested retail prices.
Service Revenue. Service revenue represents revenue recognized relating to prepaid services and paid service subscriptions. Our prepaid services pertain to devices which are sold with our Arlo prepaid services offering, providing users with the ability to store and access data for up to five cameras for a rolling seven-day period, one-year free subscription for Arlo Smart services for our Arlo Ultra products launched in early 2019, and three-months free subscription for Arlo Smart services for our Arlo Pro 3 products launched in late September 2019. Our paid subscription services relate to sales of subscription plans to our registered users.
Results of Operations
We operate as one operating and reportable segment. The following table sets forth, for the periods presented, the unaudited condensed consolidated statements of operations data, which we derived from the accompanying unaudited condensed consolidated financial statements:

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | September 30, 2018 |  | September 29, 2019 |  | September 30, 2018
| (In thousands, except percentage data)
Revenue: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Products | $ | 94,306 |  |  | 88.9 | % |  | $ | 121,347 |  |  | 92.5 | % |  | $ | 213,359 |  |  | 86.2 | % |  | $ | 315,678 |  |  | 92.1 | %
Services | 11,810 |  |  | 11.1 | % |  | 9,827 |  |  | 7.5 | % |  | 34,235 |  |  | 13.8 | % |  | 27,082 |  |  | 7.9 | %
Total revenue | 106,116 |  |  | 100.0 | % |  | 131,174 |  |  | 100.0 | % |  | 247,594 |  |  | 100.0 | % |  | 342,760 |  |  | 100.0 | %
Cost of revenue: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Products | 88,755 |  |  | 83.7 | % |  | 96,754 |  |  | 73.8 | % |  | 206,878 |  |  | 83.6 | % |  | 241,808 |  |  | 70.5 | %
Services | 6,858 |  |  | 6.5 | % |  | 4,673 |  |  | 3.6 | % |  | 18,618 |  |  | 7.5 | % |  | 13,858 |  |  | 4.0 | %
Total cost of revenue | 95,613 |  |  | 90.1 | % |  | 101,427 |  |  | 77.3 | % |  | 225,496 |  |  | 91.1 | % |  | 255,666 |  |  | 74.6 | %
Gross profit | 10,503 |  |  | 9.9 | % |  | 29,747 |  |  | 22.7 | % |  | 22,098 |  |  | 8.9 | % |  | 87,094 |  |  | 25.4 | %
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development | 16,701 |  |  | 15.7 | % |  | 16,100 |  |  | 12.3 | % |  | 52,456 |  |  | 21.2 | % |  | 41,929 |  |  | 12.2 | %
Sales and marketing | 13,657 |  |  | 12.8 | % |  | 12,843 |  |  | 9.8 | % |  | 42,389 |  |  | 17.1 | % |  | 37,123 |  |  | 10.8 | %
General and administrative | 11,062 |  |  | 10.4 | % |  | 8,357 |  |  | 6.4 | % |  | 32,512 |  |  | 13.1 | % |  | 19,553 |  |  | 5.7 | %
Separation expense | 137 |  |  | 0.1 | % |  | 5,823 |  |  | 4.4 | % |  | 1,760 |  |  | 0.7 | % |  | 23,649 |  |  | 6.9 | %
Total operating expenses | 41,557 |  |  | 39.2 | % |  | 43,123 |  |  | 32.9 | % |  | 129,117 |  |  | 52.1 | % |  | 122,254 |  |  | 35.7 | %
Loss from operations | (31,054 | ) |  | (29.3 | )% |  | (13,376 | ) |  | (10.2 | )% |  | (107,019 | ) |  | (43.2 | )% |  | (35,160 | ) |  | (10.3 | )%
Interest income | 596 |  |  | 0.6 | % |  | 503 |  |  | 0.4 | % |  | 2,170 |  |  | 0.9 | % |  | 503 |  |  | 0.1 | %
Other income (expense), net | 154 |  |  | 0.1 | % |  | (129 | ) |  | (0.1 | )% |  | 138 |  |  | 0.1 | % |  | (923 | ) |  | (0.3 | )%
Loss before income taxes | (30,304 | ) |  | (28.6 | )% |  | (13,002 | ) |  | (9.9 | )% |  | (104,711 | ) |  | (42.3 | )% |  | (35,580 | ) |  | (10.4 | )%
Provision for income taxes | 286 |  |  | 0.3 | % |  | 223 |  |  | 0.2 | % |  | 855 |  |  | 0.3 | % |  | 830 |  |  | 0.2 | %
Net loss | $ | (30,590 | ) |  | (28.8 | )% |  | $ | (13,225 | ) |  | (10.1 | )% |  | $ | (105,566 | ) |  | (42.6 | )% |  | $ | (36,410 | ) |  | (10.6 | )%

Revenue
Our gross revenue consists primarily of sales of devices and prepaid and paid subscription service revenue. We generally recognize revenue from product sales at the time the product is shipped and transfer of control from us to the customer occurs. Our prepaid services primarily pertain to devices which are sold with our Arlo prepaid services offering, providing users with the ability to store and access data for up to five cameras for a rolling seven-day period, one-year free subscription for Arlo Smart services for our Arlo Ultra products launched in early 2019, and three-months free subscription for Arlo Smart services for our Arlo Pro 3 products launched in late September 2019. Upon device shipment, we attribute a portion of the sales price to the prepaid service, deferring this revenue at the outset and subsequently recognizing it ratably over the estimated useful life of the device or free trial period, as applicable. Our paid subscription services relate to sales of subscription plans to our registered users.
Our revenue consists of gross revenue, less end-user customer rebates and other channel sales incentives deemed to be a reduction of revenue per the authoritative guidance for revenue recognition, allowances for estimated sales returns,
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price protection, and net changes in deferred revenue. A significant portion of our marketing expenditure is with customers and is deemed to be a reduction of revenue under authoritative guidance for revenue recognition.
We conduct business across three geographic regions: Americas, EMEA, and APAC. We generally base revenue by geography on the ship-to location of the customer for device sales and device location for service sales.

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | % Change |  | September 30, 2018 |  | September 29, 2019 |  | % Change |  | September 30, 2018
| (In thousands, except percentage data)
Americas | $ | 85,562 |  |  | (24.2 | )% |  | $ | 112,849 |  |  | $ | 194,492 |  |  | (29.1 | )% |  | $ | 274,253 |
Percentage of revenue | 80.6 | % |  |  |  | 86.0 | % |  | 78.6 | % |  |  |  | 80.0 | %
EMEA | 13,002 |  |  | 10.6 | % |  | 11,760 |  |  | 37,370 |  |  | (25.9 | )% |  | 50,416 |
Percentage of revenue | 12.3 | % |  |  |  | 9.0 | % |  | 15.1 | % |  |  |  | 14.7 | %
APAC | 7,552 |  |  | 15.0 | % |  | 6,565 |  |  | 15,732 |  |  | (13.0 | )% |  | 18,091 |
Percentage of revenue | 7.1 | % |  |  |  | 5.0 | % |  | 6.4 | % |  |  |  | 5.3 | %
Total revenue | $ | 106,116 |  |  | (19.1 | )% |  | $ | 131,174 |  |  | $ | 247,594 |  |  | (27.8 | )% |  | $ | 342,760 |

Revenue for the three months ended September 29, 2019 decreased 19.1%, compared to the prior year period. The decrease was primarily driven by a slowdown in our customer demand for connected cameras, increased competition, a significant reduction in sales of Arlo Lights, partially offset by higher service revenue, less provisions for sales returns and marketing expenditures that are deemed to be a reduction of revenue. During the latter part of the third quarter of fiscal 2019, we launched our new product Arlo Pro 3, which features 2K video resolution capability late in September 2019.
Revenue for the nine months ended September 29, 2019 decreased 27.8%, compared to the prior year period. The decrease was primarily driven by a slowdown in our customer demand for connected cameras, increased competition, a significant reduction in sales of Arlo Lights, higher provisions for price protection and marketing expenditures that are deemed to be a reduction of revenue, partially offset by less provisions for sales returns. During the nine-months ended September 30, 2019, we launched Arlo Ultra, with 4K video resolution capability, in the first quarter of fiscal 2019 and our new product Arlo Pro 3, with 2K video resolution capability late in September 2019.
Service revenue increased by $2.0 million, or 20.2%, and $7.2 million, or 26.4%, for the three and nine months ended September 29, 2019 compared to the prior year periods, respectively, as our paid subscribers increased compared to the prior year periods.
Cost of Revenue
Cost of revenue consists of both product costs and costs of service. Product costs primarily consist of: the cost of finished products from our third-party manufacturers; overhead costs, including purchasing, product planning, inventory control, warehousing and distribution logistics, third-party software licensing fees, inbound freight, warranty costs associated with returned goods, write-downs for excess and obsolete inventory, royalties to third parties; and amortization expense of certain acquired intangibles. Cost of service consists of costs attributable to the provision and maintenance of our cloud-based platform, including personnel, storage, security and computing.
Our cost of revenue as a percentage of revenue can vary based upon a number of factors, including those that may affect our revenue set forth above and factors that may affect our cost of revenue, including, without limitation: product mix, sales channel mix, registered user acceptance of paid subscription service offerings, fluctuation in foreign exchange rates and changes in our cost of goods sold due to fluctuations in prices paid for components, net of vendor rebates, cloud platform costs, warranty and overhead costs, inbound freight and duty product conversion costs, charges for excess or obsolete inventory, and amortization of acquired intangibles. We outsource our manufacturing, warehousing, and distribution logistics. We also outsource certain components of the required infrastructure to support our cloud-based back-
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end IT infrastructure. We believe this outsourcing strategy allows us to better manage our product and services costs and gross margin.
The following table presents cost of revenue and gross margin for the periods indicated:

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | % Change |  | September 30, 2018 |  | September 29, 2019 |  | % Change |  | September 30, 2018
| (In thousands, except percentage data)
Cost of revenue: |  |  |  |  |  |  |  |  |  |  |
Products | $ | 88,755 |  |  | (8.3 | )% |  | $ | 96,754 |  |  | $ | 206,878 |  |  | (14.4 | )% |  | $ | 241,808 |
Services | 6,858 |  |  | 46.8 | % |  | 4,673 |  |  | 18,618 |  |  | 34.3 | % |  | 13,858 |
Total cost of revenue | $ | 95,613 |  |  | (5.7 | )% |  | $ | 101,427 |  |  | $ | 225,496 |  |  | (11.8 | )% |  | $ | 255,666 |
Gross margin | 9.9 | % |  |  |  | 22.7 | % |  | 8.9 | % |  |  |  | 25.4 | %

Cost of revenue decreased for the three and nine months ended September 29, 2019, primarily due to the product revenue decline compared to the prior year periods. Service cost of revenue increased for the three and nine months ended September 29, 2019, in line with the service revenue growth and due to our continued investment in our cloud service offerings to improve our customer experience and to enhance our security profile.
Gross margin decreased significantly for the three months ended September 29, 2019 compared to the prior year period, due to the product and service margin decline, which are primarily due to increased warranty costs, unfavorable product overhead and freight-related efficiencies, partially offset by less charges for excess or obsolete inventory and less provisions for sales returns.
Gross margin decreased significantly for the nine months ended September 29, 2019 compared to the prior year period, due to the product and service margin decline, which are primarily due to increased channel promotion activities that are deemed to be reductions of revenue and increased provisions for price protection, increased warranty costs, unfavorable product overhead and freight-related efficiencies, partially offset by less charges for excess or obsolete inventory, and less provisions for sales returns.
Our service margin increased for the three and nine months ended September 29, 2019 compared to prior year periods, primarily due to service revenue growth as a result of an increase in paid subscribers compared to the prior year periods.
Operating Expenses
The first and second quarter of 2018 are based on carve-out financials and reflect the transactions which are directly attributable to Arlo and certain allocated costs, whereas third quarter and fourth quarter of 2018 are based on standalone financials which represent our actual results for the period as a standalone public company. For the fiscal year ending December 31, 2019, our operating expenses, which reflects a full year as a standalone public company, are expected to increase compared to historical periods.
Research and Development
Research and development expense consists primarily of personnel-related expense, safety, security, regulatory testing, other consulting fees, and corporate IT and facility overhead. We recognize research and development expense as it is incurred. We have invested in and expanded our research and development organization to enhance our ability to introduce innovative products and services. We believe that innovation and technological leadership are critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies, products, and services, including our hardware devices, cloud-based software, AI-based algorithms, and machine learning capabilities. We expect research and development expense to stay relatively flat in absolute dollars as we
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manage our expense and while continuing to develop new product and service offerings to support the connected lifestyle market. For the fourth fiscal quarter 2019, we expect research and development expense to remain flat compared to the third fiscal quarter 2019. We expect research and development expense to fluctuate depending on the timing and number of development activities in any given period, and such expense could vary significantly as a percentage of revenue, depending on actual revenue achieved in any given period.
The following table presents research and development expense for the periods indicated:

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | % Change |  | September 30, 2018 |  | September 29, 2019 |  | % Change |  | September 30, 2018
| (In thousands, except percentage data)
Research and development expense | $ | 16,701 |  |  | 3.7 | % |  | $ | 16,100 |  |  | $ | 52,456 |  |  | 25.1 | % |  | $ | 41,929 |

Research and development expense increased slightly for the three months ended September 29, 2019, compared to the prior year period, due to increases of $1.3 million in corporate IT and facility overhead, partially offset by decrease of $0.4 million in outside professional services expenses and $0.3 million of transition services agreement ("TSA") related expenses. TSA-related expenses are expected to be completed by the calendar year ending December 31, 2019.
Research and development expense increased for the nine months ended September 29, 2019, compared to the prior year period, as expected, primarily due to increases of $8.1 million in corporate IT and facility overhead and $2.3 million in personnel-related expenses. The increased expenditures on personnel-related expense and engineering projects were due to continuous investment in strategic focus areas, principally the expansion of our Arlo product and service offerings and the growth of our cloud platform capabilities.
Sales and Marketing
Sales and marketing expense consists primarily of personnel expense for sales and marketing staff; technical support expense; advertising; trade shows; corporate communications and other marketing expense; product marketing expense; IT and facilities overhead; outbound freight costs; and amortization of certain intangibles. We expect our sales and marketing expense to fluctuate based on the seasonality of our business for the foreseeable future.
The following table presents sales and marketing expense for the periods indicated:

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | % Change |  | September 30, 2018 |  | September 29, 2019 |  | % Change |  | September 30, 2018
| (In thousands, except percentage data)
Sales and marketing expense | $ | 13,657 |  |  | 6.3 | % |  | $ | 12,843 |  |  | $ | 42,389 |  |  | 14.2 | % |  | $ | 37,123 |

Sales and marketing expense increased for the three months ended September 29, 2019, compared to the prior year period, primarily due to an increase in corporate IT and facility overhead of $0.7 million, marketing expenditures of $0.4 million, personnel-related expenses of $0.3 million, and other expenses of $0.3 million specifically for our credit card fees for our service subscription business and direct to consumer online store. The increases were partially offset by a decrease of $0.9 million in TSA-related expenses.
Sales and marketing expense increased for the nine months ended September 29, 2019, compared to the prior year period, as expected, primarily due to an increase in outside professional services of $2.9 million, corporate IT and facility overhead of $2.2 million, personnel-related expenses of $1.2 million, and other expenses of $0.6 million specifically for our credit card fees for our service subscription business and direct to consumer online store. The increases were partially offset by a decrease TSA-related expenses of $0.8 million and sales-related freight of $0.7 million.
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General and Administrative
General and administrative expense consists primarily of personnel-related expense for certain executives, finance and accounting, investor relations, human resources, legal, information technology, professional fees, corporate IT and facility overhead, strategic initiative expense, and other general corporate expense. For the fourth fiscal quarter 2019, we expect general and administrative expense to moderately increase compared to the third fiscal quarter 2019. However, we also expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense.
The following table presents general and administrative expense for the periods indicated:

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | % Change |  | September 30, 2018 |  | September 29, 2019 |  | % Change |  | September 30, 2018
| (In thousands, except percentage data)
General and administrative expense | $ | 11,062 |  |  | 32.4 | % |  | $ | 8,357 |  |  | $ | 32,512 |  |  | 66.3 | % |  | $ | 19,553 |

General and administrative expense increased for the three months ended September 29, 2019, compared to the prior year period, as expected, primarily due to higher corporate IT and facility overhead of $3.1 million, higher legal and professional services of $1.4 million, and higher personnel-related expenditures of $0.8 million, partially offset by $2.8 million decrease in TSA-related expenses.
General and administrative expense increased significantly for the nine months ended September 29, 2019, compared to the prior year period, as expected, primarily due to higher corporate IT and facility overhead of $6.5 million, higher personnel-related expenditures of $4.2 million, and higher legal and professional services of $3.7 million, partially offset by $2.6 million decrease in TSA-related expenses. Increased costs were also driven by our company becoming a standalone public company from August 2018.
Separation Expense
Separation expense consists primarily of costs associated with our separation from NETGEAR, including third-party advisory, consulting, legal and professional services for separation matters including IPO-related litigation, IT-related expenses directly related to our separation from NETGEAR, and other items that are incremental and one-time in nature. The significant reduction during the three and nine months ended September 29, 2019 was as a result of the substantial completion of our Separation from NETGEAR on December 31, 2018. We expect a continued reduction in our separation expense for the remaining fiscal year ending December 31, 2019 as we substantially completed our Separation from NETGEAR.
The following table presents separation expense for the periods indicated:

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | % Change |  | September 30, 2018 |  | September 29, 2019 |  | % Change |  | September 30, 2018
| (In thousands, except percentage data)
Separation expense | $ | 137 |  |  | (97.6 | )% |  | $ | 5,823 |  |  | $ | 1,760 |  |  | (92.6 | )% |  | $ | 23,649 |

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Interest Income and Other Income (Expense), Net
The following table presents other income (expense), net for the periods indicated:

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | % Change |  | September 30, 2018 |  | September 29, 2019 |  | % Change |  | September 30, 2018
| (In thousands, except percentage data)
Interest income | 596 |  |  | ** |  | 503 |  |  | 2,170 |  |  | ** |  | 503 |
Other income (expense), net | 154 |  |  | ** |  | (129 | ) |  | 138 |  |  | ** |  | (923 | )

**Percentage change not meaningful.
Our interest income was primarily earned from our short-term investments and cash and cash equivalents. We expect our interest income in absolute dollars to moderately decrease as we use up our short-term investments and cash and cash equivalents to fund our operations.
During the three and nine months ended September 29, 2019, we earned interest income of $0.6 million and $2.2 million, respectively, from our short-term investments and cash and cash equivalents.
Other income (expense), net increased for the three and nine months ended September 29, 2019, compared to the prior year periods due primarily to higher foreign currency transaction gains, mainly as a result of the U.S. dollar strengthening versus transaction currencies. We entered into foreign currency hedging program in the third quarter of fiscal 2018, which effectively reduced volatility associated with hedged currency exchange rate movements. For a detailed discussion of our hedging program and related foreign currency contracts, refer to Note 5, Derivative Financial Instruments, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Provision for Income Taxes

| Three Months Ended |  | Nine Months Ended
| September 29, 2019 |  | % Change |  | September 30, 2018 |  | September 29, 2019 |  | % Change |  | September 30, 2018
| (In thousands, except percentage data)
Provision for income taxes | $ | 286 |  |  | 28.3 | % |  | $ | 223 |  |  | $ | 855 |  |  | 3.0 | % |  | $ | 830 |
Effective tax rate | (0.9 | )% |  |  |  | (1.7 | )% |  | (0.8 | )% |  |  |  | (2.3 | )%

The increase in income tax provision for the three months ended September 29, 2019, compared to the prior year period was primarily due to higher foreign earnings in the 2019 period compared to 2018. The increase in income tax provision for the nine months ended September 29, 2019, compared to the prior year period resulted primarily from the increase in U.S state tax. Losses incurred predominantly in the U.S. continue to be subject to a full valuation allowance.
Liquidity and Capital Resources
We have a history of losses and may continue to incur operating and net losses for the foreseeable future. As of September 29, 2019, our accumulated deficit was $151.1 million.
Our principal sources of liquidity are cash, cash equivalents and short-term investments. Short-term investments are marketable government securities with an original maturity or a remaining maturity at the time of purchase of greater than three months and no more than 12 months. The marketable securities are held in our company’s name with a high quality financial institution, which acts as our custodian and investment manager. As of September 29, 2019, we had cash, cash equivalents and short-term investments totaling $153.8 million. 13.3% of our cash and cash equivalents were held outside of the U.S. Starting in 2018, as a result of the Tax Cuts and the Jumpstart Our Business Startups Act of 2017 (the
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“Tax Act”), due to the one-time transition tax on un-repatriated earnings, the tax impact is generally immaterial should we repatriate our cash from foreign earnings. The cash and cash equivalents balance outside of the U.S. is subject to fluctuation based on the settlement of intercompany balances. Subsequent to the third fiscal quarter 2019, we entered into a business financing agreement with Western Alliance Bank. Refer to Note 13. Subsequent Events in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for further details on such business financing agreement.
Based on our current plans, business financing agreement with Western Alliance Bank , and market conditions, we believe that such sources of liquidity will be sufficient to satisfy our anticipated cash requirements for at least the next 12 months. However, in the future, including sooner as may be anticipated, we may require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity or debt financings or collaborative agreements or from other sources. To preserve the tax-free treatment of our separation from NETGEAR, we have agreed in the tax matters agreement with NETGEAR to certain restrictions on our business, which generally will be effective during the two-year period following the Distribution that could limit our ability to pursue certain transactions including equity issuances.
We have no commitments to obtain such additional financing and cannot assure you that additional financing will be available at all or, if available, that such financing would be obtainable on terms favorable to us and would not be dilutive. Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products and potential acquisitions of related businesses or technology.
The following table presents our cash flows for the periods presented.

| Nine Months Ended
| September 29, 2019 |  | September 30, 2018
| (In thousands)
Net cash used in operating activities | $ | (42,715 | ) |  | $ | (46,309 | )
Net cash provided by (used in) investing activities | 5,209 |  |  | (50,628 | )
Net cash provided by financing activities | 82 |  |  | 244,902 |
Net cash increase (decrease) | $ | (37,424 | ) |  | $ | 147,965 |

Operating activities
Net cash used in operating activities decreased by $3.6 million for the nine months ended September 29, 2019 compared to the prior year period, due primarily to better working capital management. Our cash inflow from changes in assets and liabilities increased by $55.3 million year over year as a result of increased accounts receivable collections and lower inventory balance, and was offset by a $51.7 million year over year increase in net loss, plus adjustments to reconcile net loss to net cash used in operations. Changes in operating activities also reflected the movements of the balances for Unaudited Condensed Consolidated Statements of Cash Flows purposes since the balances contributed by NETGEAR on or before the initial public offering reflects the contributed balances to us as per the master separation agreement between Arlo and NETGEAR and related documents governing the Contribution.
Our days sales outstanding (“DSO”) decreased to 85 days as of September 29, 2019 as compared to 125 days as of December 31, 2018. Typically, our DSO in the fourth quarter is higher due to seasonal payment terms provided to our larger customers. Inventory decreased to $74.1 million as of September 29, 2019 from $124.8 million as of December 31, 2018, primarily due to better inventory management. As a result, our ending inventory turns were 4.8 in the three months ended September 29, 2019 up from 3.6 turns in the three months ended December 31, 2018. Our accounts payable decreased to $57.8 million as of September 29, 2019 from $82.5 million as of December 31, 2018, primarily as a result of lower inventory purchases.
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Investing activities
Net cash used in investing activities decreased by $55.8 million for the nine months ended September 29, 2019 compared to the prior year period, primarily due to the maturity of short-term investments in the amount of $40.0 million, less purchases of short-term investments of $10.0 million, and less purchases of property equipment of $5.8 million.
Financing activities
Net cash used in financing activities of $0.1 million in the nine months ended September 29, 2019 represented proceeds from ESPP contributions of $1.8 million, partially offset by $1.7 million in tax withholdings from restricted stock unit releases. Net cash provided by financing activities was $244.9 million for the nine months ended September 30, 2018, primarily due to net proceeds from IPO of $173.4 million and net investment from parent of $71.5 million. Prior to the completion of the IPO, because cash and cash equivalents were held by NETGEAR at the corporate level and were not attributable to Arlo, cash flows related to financing activities primarily reflect changes in Net parent investment.
Contractual Obligations
As of the date of this report, other than changes related to adoption of the new lease accounting standard as described in Note 8, Commitments and Contingencies, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, there were no material changes to our contractual obligations during the nine months ended September 29, 2019 from those disclosed in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Off-Balance Sheet Arrangements
As of September 29, 2019, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies and Estimates
For a complete description of what we believe to be the critical accounting policies and estimates used in the preparation of our Unaudited Condensed Consolidated Financial Statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes to our critical accounting policies and estimates during the nine months ended September 29, 2019, other than Leases as discussed in Note 2. Significant Accounting Policies and Recent Accounting Pronouncements, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q,
Recent Accounting Pronouncements
For a complete description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on financial condition and results of operations, refer to Note 2, Summary of Significant Accounting Policies and Recent Accounting Pronouncements, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk

During the nine months ended September 29, 2019, there were no material changes to our market risk disclosures as set forth in Part II Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 4. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of our management (including our Chief Executive Officer and Chief Financial Officer), our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), were effective as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (ii) accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended September 29, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION

Item 1. | Legal Proceedings

The information set forth under the heading “Litigation and Other Legal Matters” in Note 8, Commitments and Contingencies, in Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, is incorporated herein by reference. For additional discussion of certain risks associated with legal proceedings, see the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Item 1A. | Risk Factors

Investing in our common stock involves substantial risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including our financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, before deciding whether to invest in shares of our common stock. You should consider all of the factors described as well as the other information in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 22, 2019, as amended (the “Annual Report”), including our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” when evaluating our business. The risk factors set forth below that are marked with an asterisk (*) contain changes to the similarly titled risk factors included in the Annual Report. We describe below what we believe are currently the material risks and uncertainties we face, but they are not the only risks and uncertainties we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occur, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the market price of our common stock could decline and you could lose part or all of your investment.
Risks Related to Our Business
We expect our results of operations to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate or decline.
Our results of operations are difficult to predict and may fluctuate substantially from quarter-to-quarter or year-to-year for a variety of reasons, many of which are beyond our control. If our actual results were to fall below our estimates or the expectations of public market analysts or investors, our quarterly and annual results would be negatively impacted and the price of our stock could decline. Other factors that could affect our quarterly and annual operating results include, but are not limited to:

• | changes in the pricing policies of, or the introduction of new products by, us or our competitors;

• | delays in the introduction of new products by us or market acceptance of these products;

• | introductions of new technologies and changes in consumer preferences that result in either unanticipated or unexpectedly rapid product category shifts;

• | slow or negative growth in the connected lifestyle, home electronics, and related technology markets;

• | seasonal shifts in end-market demand for our products;

• | unanticipated decreases or delays in purchases of our products by our significant retailers, distributors, and other channel partners;

• | component supply constraints from our vendors;

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• | unanticipated increases in costs, including air freight, associated with shipping and delivery of our products;

• | the inability to maintain stable operations by our suppliers and other parties with whom we have commercial relationships;

• | discovery of security vulnerabilities in our products, services or systems, leading to negative publicity, decreased demand, or potential liability;

• | foreign currency exchange rate fluctuations in the jurisdictions where we transact sales and expenditures in local currency;

• | excess levels of inventory and low turns;

• | changes in or consolidation of our sales channels and wholesale distributor relationships or failure to manage our sales channel inventory and warehousing requirements;

• | delay or failure to fulfill orders for our products on a timely basis;

• | delay or failure of our retailers, distributors, and other channel partners to purchase at their historic volumes or at the volumes that they or we forecast;

• | changes in tax rates or adverse changes in tax laws that expose us to additional income tax liabilities;

• | changes in U.S. and international tax policy, including changes that adversely affect customs, tax or duty rates (such as the tariffs on products imported from China enacted by the Trump administration), as well as income tax legislation and regulations that affect the countries where we conduct business;

• | operational disruptions, such as transportation delays or failure of our order processing system, particularly if they occur at the end of a fiscal quarter;

• | disruptions or delays related to our financial and enterprise resource planning systems;

• | our inability to accurately forecast product demand, resulting in increased inventory exposure;

• | allowance for doubtful accounts exposure with our existing retailers, distributors and other channel partners and new retailers, distributors and other channel partners, particularly as we expand into new international markets;

• | geopolitical disruption, including sudden changes in immigration policies, leading to disruption in our workforce or delay or even stoppage of our operations in manufacturing, transportation, technical support, and research and development;

• | terms of our contracts with channel partners or suppliers that cause us to incur additional expenses or assume additional liabilities;

• | an increase in price protection claims, redemptions of marketing rebates, product warranty and stock rotation returns or allowance for doubtful accounts;

• | litigation involving alleged patent infringement;

• | epidemic or widespread product failure, or unanticipated safety issues, in one or more of our products;

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• | failure to effectively manage our third-party customer support partners, which may result in customer complaints and/or harm to the Arlo brand;

• | our inability to monitor and ensure compliance with our code of ethics, our anti-corruption compliance program, and domestic and international anti-corruption laws and regulations, whether in relation to our employees or with our suppliers or retailers, distributors, or other channel partners;

• | labor unrest at facilities managed by our third-party manufacturers;

• | workplace or human rights violations in certain countries in which our third-party manufacturers or suppliers operate, which may affect the Arlo brand and negatively affect our products’ acceptance by consumers;

• | unanticipated shifts or declines in profit by geographical region that would adversely impact our tax rate;

• | failure to implement and maintain the appropriate internal controls over financial reporting, which may result in restatements of our financial statements; and

• | any changes in accounting rules.

As a result, period-to-period comparisons of our results of operations may not be meaningful, and you should not rely on them as an indication of our future performance.
If we fail to continue to introduce or acquire new products or services that achieve broad market acceptance on a timely basis, or if our products or services are not adopted as expected, we will not be able to compete effectively and we will be unable to increase or maintain revenue and gross margin.
We operate in a highly competitive, quickly changing environment, and our future success depends on our ability to develop or acquire and introduce new products and services that achieve broad market acceptance. Our future success will depend in large part upon our ability to identify demand trends in the connected lifestyle market and quickly develop or acquire, and design, manufacture and sell, products and services that satisfy these demands in a cost-effective manner.
In order to differentiate our products and services from our competitors’ products, we must continue to increase our focus and capital investment in research and development, including software development. We have committed a substantial amount of resources to the manufacture, development and sale of our Arlo Smart services and our wire-free smart Wi-Fi cameras, advanced baby monitors, and smart lights, and to introducing additional and improved models in these lines. In addition, we plan to continue to introduce new categories of smart connected devices to the Arlo platform in the near future. If our existing products and services do not continue, or if our new products or services fail, to achieve widespread market acceptance, if existing customers do not subscribe to our paid subscription services such as Arlo Smart, if those services do not achieve widespread market acceptance, or if we are unsuccessful in capitalizing on opportunities in the connected lifestyle market, as well as in the related market in the small business segment, our future growth may be slowed and our business, results of operations, and financial condition could be materially adversely affected. Successfully predicting demand trends is difficult, and it is very difficult to predict the effect that introducing a new product or service will have on existing product or service sales. It is possible that Arlo may not be as successful with its new products and services, and as a result our future growth may be slowed and our business, results of operations and financial condition could be materially adversely affected. Also, we may not be able to respond effectively to new product or service announcements by our competitors by quickly introducing competitive products and services.
In addition, we may acquire companies and technologies in the future and, consistent with our vision for Arlo, introduce new product and service lines in the connected lifestyle market. In these circumstances, we may not be able to successfully manage integration of the new product and service lines with our existing suite of products and services. If we
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are unable to effectively and successfully further develop these new product and service lines, we may not be able to increase or maintain our sales, and our gross margin may be adversely affected.
We may experience delays and quality issues in releasing new products and services, which may result in lower quarterly revenue than expected. In addition, we may in the future experience product or service introductions that fall short of our projected rates of market adoption. Currently, reviews of our products and services are a significant factor in the success of our new product and service launches. If we are unable to generate a high number of positive reviews or quickly respond to negative reviews, including end-user reviews posted on various prominent online retailers, our ability to sell our products and services will be harmed. Any future delays in product and service development and introduction, or product and service introductions that do not meet broad market acceptance, or unsuccessful launches of new product and service lines could result in:

• | loss of or delay in revenue and loss of market share;

• | negative publicity and damage to our reputation and brand;

• | a decline in the average selling price of our products and services;

• | adverse reactions in our sales channels, such as reduced shelf space, reduced online product visibility, or loss of sales channels; and

• | increased levels of product returns.

Throughout the past few years, Arlo has significantly increased the rate of new product and service introductions, with the introduction of new lines of Arlo cameras, smart lights, and doorbell products, as well as the introduction of our Arlo Smart services. If we cannot sustain that pace of product and service introductions, either through rapid innovation or acquisition of new products and services or product and service lines, we may not be able to maintain or increase the market share of our products and services or expand further into the connected lifestyle market in accordance with our current plans. In addition, if we are unable to successfully introduce or acquire new products and services with higher gross margin, our revenue and overall gross margin would likely decline.
* We may need additional financing to meet our future long-term capital requirements and may be unable to raise sufficient capital on favorable terms or at all.
We have recorded a net loss of $30.6 million and $105.6 million for the three and nine months ended September 29, 2019, respectively, and we have a history of losses and may continue to incur operating and net losses for the foreseeable future. As of September 29, 2019, our accumulated deficit was $151.1 million.
As of September 29, 2019, our cash and cash equivalents and short-term investments totaled $153.8 million. While we anticipate that our current cash, cash equivalents and cash to be generated from operations will be sufficient to meet our projected operating plans through at least the next twelve months, we may require additional funds, either through equity or debt financings or collaborative agreements or from other sources. We have no commitments to obtain such additional financing, and we may not be able to obtain any such additional financing on terms favorable to us, or at all. If adequate financing is not available, we may further delay, postpone or terminate product and service expansion and curtail certain selling, general and administrative operations. The inability to raise additional financing may have a material adverse effect on our future performance.
* We are subject to financial and operating covenants in our business financing agreement with Western Alliance Bank (the “Credit Agreement”) and any failure to comply with such covenants, or obtain waivers in the event of non-compliance, could limit our borrowing availability under the Credit Agreement, resulting in our being unable to borrow under the Credit Agreement and materially adversely impact our liquidity. In addition, our operations may not provide sufficient cash to meet the repayment obligations of debt incurred under the Credit Agreement.
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The Credit Agreement contains provisions that limit our future borrowing availability to the lesser of (x) $40.0 million and (y) an amount equal to 60% of our eligible receivables and eligible accounts receivable, less such reserves as Western Alliance Bank may deem proper and necessary from time to time. The Credit Agreement also contains other customary covenants, including certain restrictions on maintaining a minimum cash balance, our ability to incur additional indebtedness, consolidate or merge, enter into acquisitions, pay any dividend or distribution on our capital stock, redeem, retire or purchase shares of our capital stock, make investments or pledge or transfer assets, in each case subject to limited exceptions.
There can be no assurance that we will be able to comply with the financial and other covenants in the Credit Agreement. Our failure to comply with these covenants could cause us to be unable to borrow under the Credit Agreement and may constitute an event of default which, if not cured or waived, could result in the acceleration of the maturity of any indebtedness then outstanding under the Credit Agreement, which would require us to pay all amounts then outstanding. If we are unable to repay those amounts, the Lender could proceed against the collateral granted to them to secure that debt, which would seriously harm our business. Such an event could materially adversely affect our financial condition and liquidity. Additionally, such events of non-compliance could impact the terms of any additional borrowings and/or any credit renewal terms. Any failure to comply with such covenants may be a disclosable event and may be perceived negatively. Such perception could adversely affect the market price for our common stock and our ability to obtain financing in the future.
* We recently entered into an asset purchase agreement (the “Asset Purchase Agreement”) and supply agreement (the “Supply Agreement”) with Verisure Sàrl (“Verisure”) that will give Verisure exclusive marketing and distribution rights for our products in Europe. We cannot provide assurance that the transactions contemplated by the Asset Purchase Agreement will close, and if they do close, that the arrangement with Verisure will be a successful collaboration.
The closing of the transactions contemplated by the Asset Purchase Agreement is subject to certain closing conditions, and there can be no assurance that such conditions will be satisfied or waived and that the closing will occur.
If the arrangement with Verisure does close, then Verisure will have the exclusive right to market and distribute our products in Europe. Our results of operations may be negatively impacted if Verisure is not successful in selling our products in Europe. Even though the Supply Agreement provides for minimum purchase commitments, the failure of Verisure to pay on a timely basis, or at all, would reduce our cash flow. We are also exposed to increased credit risk if Verisure fails or becomes insolvent.
Some of our competitors have substantially greater resources than we do, and to be competitive we may be required to lower our prices or increase our sales and marketing expenses, which could result in reduced margins and loss of market share.
We compete in a rapidly evolving and fiercely competitive market, and we expect competition to continue to be intense, including price competition. Our principal competitors include Amazon (Blink and Ring), Google (Nest), Swann, Night Owl, Foxconn Corporation (Belkin), Samsung, D-Link, and Canary. Other competitors include numerous local vendors such as Netatmo, Logitech, Bosch, Instar, and Uniden. In addition, these local vendors may target markets outside of their local regions and may increasingly compete with us in other regions worldwide. Many of our existing and potential competitors have longer operating histories, greater brand recognition, and substantially greater financial, technical, sales, marketing, and other resources. These competitors may, among other things, undertake more extensive marketing campaigns, adopt more aggressive pricing policies, obtain more favorable pricing from suppliers and manufacturers, and exert more influence on sales channels than we can. In addition, certain competitors may have different business models, such as integrated manufacturing capabilities, that may allow them to achieve cost savings and to compete on the basis of price. Other competitors may have fewer resources, but may be more nimble in developing new or disruptive technology or in entering new markets.
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We anticipate that current and potential competitors will also intensify their efforts to penetrate our target markets. For example, price competition is intense in our industry in certain geographical regions and product categories. Many of our competitors price their products significantly below our product costs. Average sales prices have declined in the past and may again decline in the future. These competitors may have more advanced technology, more extensive distribution channels, stronger brand names, greater access to shelf space in retail locations, bigger promotional budgets, and larger retailers, distributors, and other channel partners, and end-user bases than we do.
In addition, many of these competitors leverage a broader product portfolio and offer lower pricing as part of a more comprehensive end-to-end solution. These companies could devote more capital resources to develop, manufacture, and market competing products than we could.
Amazon is both a competitor and a distribution channel for our products and is also a provider of services to support our cloud-based storage. If Amazon decided to end our distribution channel relationship or ceased providing cloud storage services to us, our sales and product performance could be harmed, which could seriously harm our business, financial condition, results of operations, and cash flows.
Our competitors may also acquire other companies in the market and leverage combined resources to gain market share. If any of these companies are successful in competing against us, our sales could decline, our margins could be negatively impacted, and we could lose market share, any of which could seriously harm our business, financial condition, and results of operations.
* System security risks, data protection breaches and cyber-attacks could disrupt our products, services, internal operations, or information technology systems, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation, and cause our stock price to decline significantly.
Our products and services may contain unknown security vulnerabilities. For example, the firmware, software, and open source software that we or our manufacturing partners have installed on our products may be susceptible to hacking or misuse. In addition, we offer a comprehensive online cloud management service paired with our end products, including our cameras, baby monitors, and smart lights, and we recently launched our online store to sell our products directly to our customers. If malicious actors compromise this cloud service or our online store, or if customer confidential information is accessed without authorization, our business will be harmed. Operating an online cloud service and online store are relatively new businesses for us, and we may not have the expertise to properly manage risks related to data security and systems security. We rely on third-party providers for a number of critical aspects of our cloud services, online store and customer support, including web hosting services, billing, and payment processing, and consequently we do not maintain direct control over the security or stability of the associated systems. If we or our third-party providers are unable to successfully prevent breaches of security relating to our products, services, or user private information, including user videos and user personal identification information, or if these third-party systems fail for other reasons, our management could need to spend increasing amounts of time and effort in this area. As a result, we could incur substantial expenses, our brand and reputation could suffer and our business, results of operations, and financial condition could be materially adversely affected.
Maintaining the security of our computer information systems and communication systems is a critical issue for us and our customers. Malicious actors may develop and deploy malware that is designed to manipulate our systems, including our internal network, or those of our vendors or customers. Additionally, outside parties may attempt to fraudulently induce our employees to disclose sensitive information in order to gain access to our information technology systems, our data or our customers’ data. We have established a crisis management plan and business continuity program. While we regularly test the plan and the program, there can be no assurance that the plan and program can withstand an actual or serious disruption in our business, including cyber-attack. While we have established service-level and geographic redundancy for our critical systems, our ability to utilize these redundant systems must be tested regularly, failing over to such systems always carries risk and we cannot be assured that such systems are fully functional. For example, much of our order fulfillment process is automated and the order information is stored on our servers. A significant business interruption could result in losses or damages and harm our business. If our computer systems and servers become unavailable at the
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end of a fiscal quarter, our ability to recognize revenue may be delayed until we are able to utilize back-up systems and continue to process and ship our orders. This could cause our stock price to decline significantly.
We devote considerable internal and external resources to network security, data encryption, and other security measures to protect our systems, customers, and users, but these security measures cannot provide absolute security. Potential breaches of our security measures and the accidental loss, inadvertent disclosure, or unapproved dissemination of proprietary information or sensitive or confidential data about us, our employees, or our customers or users, including the potential loss or disclosure of such information or data as a result of employee error or other employee actions, hacking, fraud, social engineering, or other forms of deception could expose us, our customers, or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation, or otherwise materially adversely affect our business, results of operations, and financial condition. In addition, the cost and operational consequences of implementing further data protection measures could be significant.
* If we lose the services of key personnel, we may not be able to execute our business strategy effectively.
Our future success depends in large part upon the continued services of our key technical, engineering, sales, marketing, finance, and senior management personnel. The competition for qualified personnel with significant experience in the design, development, manufacturing, marketing, and sales in the markets in which we operate is intense, both where our U.S. operations are based, including Silicon Valley, and in global markets in which we operate. Our inability to attract qualified personnel, including hardware and software engineers and sales and marketing personnel, could delay the development and introduction of, and harm our ability to sell, our products and services. Decreases in our stock price may negatively affect our efforts to attract and retain qualified personnel. Changes to U.S. immigration policies that restrict our ability to attract and retain technical personnel may negatively affect our research and development efforts.
We do not maintain any key person life insurance policies. Our business model requires extremely skilled and experienced senior management who are able to withstand the rigorous requirements and expectations of our business. Our success depends on senior management being able to execute at a very high level. The loss of any of our senior management or other key engineering, research, development, sales, or marketing personnel, particularly if lost to competitors, could harm our ability to implement our business strategy and respond to the rapidly changing needs of our business. If we suffer the loss of services of any key executive or key personnel, our business, results of operations, and financial condition could be materially adversely affected. In addition, we may not be able to have the proper personnel in place to effectively execute our long-term business strategy if key personnel retire, resign or are otherwise terminated.
Interruptions with the cloud-based systems that we use in our operations provided by an affiliate of Amazon.com, Inc. (“Amazon”), which is also one of our primary competitors, may materially adversely affect our business, results of operations, and financial condition.
We host our platform using Amazon Web Services (“AWS”) data centers, a provider of cloud infrastructure services, and may in the future use other third-party cloud-based systems in our operations. All of our solutions currently reside on systems leased and operated by us in these locations. Accordingly, our operations depend on protecting the virtual cloud infrastructure hosted in AWS by maintaining its configuration, architecture, features, and interconnection specifications, as well as the information stored in these virtual data centers and which third-party internet service providers transmit. Although we have disaster recovery plans that utilize multiple AWS locations, any incident affecting their infrastructure that may be caused by human error, fire, flood, severe storm, earthquake, or other natural disasters, cyber-attacks, terrorist or other attacks, and other similar events beyond our control could negatively affect our platform. A prolonged AWS service disruption affecting our platform for any of the foregoing reasons would negatively impact our ability to serve our end-users and could damage our reputation with current and potential end-users, expose us to liability, cause us to lose customers, or otherwise harm our business. We may also incur significant costs for using alternative equipment or taking other actions in preparation for, or in reaction to, events that damage the AWS services we use. Further, if we were to make updates to our platforms that were not compatible with the configuration, architecture, features, and interconnection specifications of the third-party platform, our service could be disrupted.
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Under the terms of AWS’s agreements with us, it may terminate its agreement by providing us with 30 days’ prior written notice. In addition, Amazon also produces the Amazon Cloud Cam, which competes with our security camera products, and recently acquired two of our competitors, Blink and Ring. Amazon may choose to hamper our competitive efforts, using provision of AWS services as leverage. In the event that our AWS service agreements are terminated, or there is a lapse of service, elimination of AWS services or features that we use, interruption of internet service provider connectivity, or damage to such facilities, we could experience interruptions in access to our platform as well as significant delays and additional expense in arranging or creating new facilities and services and/or re-architecting our solutions for deployment on a different cloud infrastructure service provider, which could materially adversely affect our business, results of operations, and financial condition.
Our current and future products may experience quality problems, including defects or errors, from time to time that can result in adverse publicity, product recalls, litigation, regulatory proceedings, and warranty claims resulting in significant direct or indirect costs, decreased revenue, and operating margin, and harm to our brand.
We sell complex products that could contain design and manufacturing defects in their materials, hardware, and firmware. These defects could include defective materials or components that can unexpectedly interfere with the products’ intended operations or cause injuries to users or property damage. Although we extensively and rigorously test new and enhanced products and services before their release, we cannot assure we will be able to detect, prevent, or fix all defects. Failure to detect, prevent, or fix defects, or an increase in defects, could result in a variety of consequences, including a greater number of product returns than expected from users and retailers, increases in warranty costs, regulatory proceedings, product recalls, and litigation, each of which could materially adversely affect our business, results of operations, and financial condition. We generally provide a one-year hardware warranty on all of our products. The occurrence of real or perceived quality problems or material defects in our current and future products could expose us to warranty claims in excess of our current reserves. If we experience greater returns from retailers or users, or greater warranty claims, in excess of our reserves, our business, financial condition, and results of operations could be harmed. In addition, any negative publicity or lawsuits filed against us related to the perceived quality and safety of our products could also adversely affect our brand, decrease demand for our products and services, and materially adversely affect our business, results of operations, and financial condition.
In addition, epidemic failure clauses are found in certain of our customer contracts. If invoked, these clauses may entitle the customer to return for replacement or obtain credits for products and inventory, as well as assess liquidated damage penalties and terminate an existing contract and cancel future or then-current purchase orders. In such instances, we may also be obligated to cover significant costs incurred by the customer associated with the consequences of such epidemic failure, including freight and transportation required for product replacement and out-of-pocket costs for truck rolls to end-user sites to collect the defective products. Costs or payments we make in connection with an epidemic failure could materially adversely affect our business, results of operations, and financial condition.
If our products contain defects or errors, or are found to be noncompliant with industry standards, we could experience decreased sales and increased product returns, loss of customers and market share, and increased service, warranty, and insurance costs. In addition, defects in, or misuse of, certain of our products could cause safety concerns, including the risk of property damage or personal injury. If any of these events occurred, our reputation and brand could be damaged, and we could face product liability or other claims regarding our products, resulting in unexpected expenses and adversely impacting our operating results. For instance, if a third party were able to successfully overcome the security measures in our products, such a person or entity could misappropriate end-user data, third-party data stored by our users, and other information, including intellectual property. If that happens, affected end-users or others may file actions against us alleging product liability, tort, or breach of warranty claims.
* We rely on a limited number of traditional and online retailers and wholesale distributors for a substantial portion of our sales, and our revenue could decline if they refuse to pay our requested prices or reduce their level of purchases or if there is significant consolidation in our sales channels, which results in fewer sales channels for our products.
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We sell a substantial portion of our products through traditional and online retailers, including Best Buy Co., Inc. (“Best Buy”), and Costco Wholesale Corporation (“Costco”) and their respective affiliates. For the three and nine months ended September 29, 2019, we derived 29.0% and 34.0% of our revenue from Best Buy and its affiliates, and 15.3% and 9.8% of our revenue from Costco and its affiliates, respectively. In addition, we sell to wholesale distributors, including Also Holdings AG, Ingram Micro, Inc., D&H Distributing Company, Exertis (UK) Ltd., and Synnex Corporation. We expect that a significant portion of our revenue will continue to come from sales to a small number of such retailers, distributors, and other channel partners. In addition, because our accounts receivable are often concentrated within a small group of retailers, distributors, and other channel partners, the failure of any of them to pay on a timely basis, or at all, would reduce our cash flow. We are also exposed to increased credit risk if any one of these limited numbers of retailer and distributor channel partners fails or becomes insolvent. We generally have no minimum purchase commitments or long-term contracts with any of these retailers, distributors and other channel partners. These purchasers could decide at any time to discontinue, decrease, or delay their purchases of our products. If our retailers, distributors, and other channel partners increase the size of their product orders without sufficient lead-time for us to process the order, our ability to fulfill product orders would be compromised. These channel partners have a variety of suppliers to choose from and therefore can make substantial demands on us, including demands on product pricing and on contractual terms, which often results in the allocation of risk to us as the supplier. Accordingly, the prices that they pay for our products are subject to negotiation and could change at any time. We have historically benefitted from NETGEAR’s strong relationships with these retailers, distributors, and other channel partners, and we may not be able to maintain these relationships following our separation from NETGEAR. Our ability to maintain strong relationships with these channel partners is essential to our future performance. If any of our major channel partners reduce their level of purchases or refuse to pay the prices that we set for our products, our revenue and results of operations could be harmed. The traditional retailers that purchase from us have faced increased and significant competition from online retailers. If our key traditional retailers continue to reduce their level of purchases from us, our business, results of operations, and financial condition could be harmed.
Additionally, concentration and consolidation among our channel partner base may allow certain retailers and distributors to command increased leverage in negotiating prices and other terms of sale, which could adversely affect our profitability. In addition, if, as a result of increased leverage, channel partner pressures require us to reduce our pricing such that our gross margin is diminished, we could decide not to sell our products to a particular channel partner, which could result in a decrease in our revenue. Consolidation among our channel partner base may also lead to reduced demand for our products, elimination of sales opportunities, replacement of our products with those of our competitors, and cancellations of orders, each of which could materially adversely affect our business, results of operations, and financial condition. If consolidation among the retailers, distributors, or other channel partners who purchase our products becomes more prevalent, our business, results of operations, and financial condition could be materially adversely affected.
In particular, the retail and connected home markets in some countries, including the United States, are dominated by a few large retailers with many stores. These retailers have in the past increased their market share and may continue to do so in the future by expanding through acquisitions and construction of additional stores. These situations concentrate our credit risk with a relatively small number of retailers, and, if any of these retailers were to experience a shortage of liquidity, it could increase the risk that their outstanding payables to us may not be paid. In addition, increasing market share concentration among one or a few retailers in a particular country or region increases the risk that if any one of them substantially reduces its purchases of our devices, we may be unable to find a sufficient number of other retail outlets for our products to sustain the same level of sales. Any reduction in sales by our retailers could materially adversely affect our business, results of operations, and financial condition.
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We depend on large, recurring purchases from certain significant retailers, distributors, and other channel partners, and a loss, cancellation, or delay in purchases by these channel partners could negatively affect our revenue.
The loss of recurring orders from any of our more significant retailers, distributors, and other channel partners could cause our revenue and profitability to suffer. Our ability to attract new retailers, distributors, and other channel partners will depend on a variety of factors, including the cost-effectiveness, reliability, scalability, breadth, and depth of our products. In addition, a change in the mix of our retailers, distributors, and other channel partners, or a change in the mix of direct and indirect sales, could adversely affect our revenue and gross margin.
Although our financial performance may depend on large, recurring orders from certain retailers, distributors, and other channel partners, we do not generally have binding commitments from them. For example:

• | our channel partner agreements generally do not require minimum purchases;

• | our retailers, distributors, and other channel partners can stop purchasing and stop marketing our products at any time; and

• | our channel partner agreements generally are not exclusive.

Further, our revenue may be impacted by significant one-time purchases that are not contemplated to be repeatable. While such purchases are reflected in our financial statements, we do not rely on and do not forecast for continued significant one-time purchases. As a result, lack of repeatable one-time purchases will adversely affect our revenue. Additionally, we may from time to time grant our retailers, distributors, and other channel partners the exceptional right to return certain products, based on the best interests of our mutual businesses, and such returns, if material, could adversely affect our revenue and gross margin.
Because our expenses are based on our revenue forecasts, a substantial reduction or delay in sales of our products to, or unexpected returns from, channel partners, or the loss of any significant channel partners, could materially adversely affect our business, results of operations, and financial condition. Although our largest channel partners may vary from period to period, we anticipate that our results of operations for any given period will continue to depend on large orders from a small number of channel partners.
The average selling prices of our products typically decrease rapidly over the sales cycle of the product, which may negatively affect our revenue and gross margin.
Our products typically experience price erosion, a fairly rapid reduction in the average unit selling prices over their sales cycles. In order to sell products that have a falling average unit selling price and maintain margins at the same time, we need to continually reduce product and manufacturing costs. To manage manufacturing costs, we must partner with our third-party manufacturers to engineer the most cost-effective design for our products. In addition, we must carefully manage the price paid for components used in our products, and we must also successfully manage our freight and inventory costs to reduce overall product costs. We also need to continually introduce new products with higher sales prices and gross margin in order to maintain our overall gross margin. If we are unable to manage the cost of older products or successfully introduce new products with higher gross margin, our revenue and overall gross margin would likely decline.
The reputation of our services may be damaged, and we may face significant direct or indirect costs, decreased revenue, and operating margins if our services contain significant defects or fail to perform as intended.
Our services, including our intelligent cloud and App platform and our Arlo Smart services, are complex, and may not always perform as intended due to outages of our systems or defects affecting our services. Systems outages could be disruptive to our business and damage the reputation of our services and result in potential loss of revenue.
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Significant defects affecting our services may be found following the introduction of new software or enhancements to existing software or in software implementations in varied information technology environments. Internal quality assurance testing and end-user testing may reveal service performance issues or desirable feature enhancements that could lead us to reallocate service development resources or postpone the release of new versions of our software. The reallocation of resources or any postponement could cause delays in the development and release of future enhancements to our currently available software, damage the reputation of our services in the marketplace, and result in potential loss of revenue. Although we attempt to resolve all errors that we believe would be considered serious by our partners and customers, the software powering our services is not error-free. Undetected errors or performance problems may be discovered in the future, and known errors that we consider minor may be considered serious by our channel partners and end-users.
System disruptions and defects in our services could result in lost revenue, delays in customer deployment, or legal claims and could be detrimental to our reputation.
Because we store, process, and use data, some of which contain personal information, we are subject to complex and evolving federal, state, and foreign laws and regulations regarding privacy, data protection, and other matters, which are subject to change.
We are subject to a variety of laws and regulations in the United States and other countries that involve matters central to our business, including with respect to user privacy, rights of publicity, data protection, content, protection of minors, and consumer protection. These laws can be particularly restrictive in countries outside the United States. Both in the United States and abroad, these laws and regulations constantly evolve and remain subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate. Because we store, process, and use data, some of which contain personal information, we are subject to complex and evolving federal, state, and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation and could result in investigations, claims, changes to our business practices, increased cost of operations, and declines in user growth, retention, or engagement, any of which could materially adversely affect our business, results of operations, and financial condition.
Several proposals are pending before federal, state and foreign legislative and regulatory bodies that could significantly affect our business. For example, a revision to the 1995 European Union Data Protection Directive is currently being considered by European legislative bodies that may include more stringent operational requirements for data processors and significant penalties for non-compliance. In addition, the EU General Data Protection Regulation 2016/679 (“GDPR”), which came into effect on May 25, 2018, establishes new requirements applicable to the processing of personal data (i.e., data which identifies an individual or from which an individual is identifiable), affords new data protection rights to individuals (e.g., the right to erasure of personal data) and imposes penalties for serious data breaches. Individuals also have a right to compensation under GDPR for financial or non-financial losses. GDPR will impose additional responsibility and liability in relation to our processing of personal data. GDPR may require us to change our policies and procedures and, if we are not compliant, could materially adversely affect our business, results of operations, and financial condition.
Our stock price may be volatile and your investment in our common stock could suffer a decline in value.
There has been significant volatility in the market price and trading volume of securities of technology and other companies, which may be unrelated to the financial performance of these companies. These broad market fluctuations may negatively affect the market price of our common stock.
Some specific factors that may have a significant effect on the market price of our common stock include:

• | actual or anticipated fluctuations in our results of operations or our competitors’ operating results;

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• | actual or anticipated changes in the growth rate of the connected lifestyle market, our growth rate or our competitors’ growth rates;

• | delays in the introduction of new products by us or market acceptance of these products;

• | conditions in the financial markets in general or changes in general economic conditions;

• | changes in governmental regulation, including taxation and tariff policies;

• | interest rate or currency exchange rate fluctuations;

• | our ability to forecast or report accurate financial results; and

• | changes in stock market analyst recommendations regarding our common stock, other comparable companies, or our industry generally.

We obtain several key components from limited or sole sources, and if these sources fail to satisfy our supply requirements or we are unable to properly manage our supply requirements with our third-party manufacturers, we may lose sales and experience increased component costs.
Any shortage or delay in the supply of key product components would harm our ability to meet scheduled product deliveries. Many of the components used in our products are specifically designed for use in our products, some of which are obtained from sole source suppliers. These components include lens, lens-sensors, and passive infrared (“PIR”) sensors that have been customized for the Arlo application, as well as custom-made batteries that provide power conservation and safety features. In addition, the components used in our end products have been optimized to extend battery life. Our third-party manufacturers generally purchase these components on our behalf, and we do not have any contractual commitments or guaranteed supply arrangements with our suppliers. If demand for a specific component increases, we may not be able to obtain an adequate number of that component in a timely manner. In addition, if worldwide demand for the components increases significantly, the availability of these components could be limited. Further, our suppliers may experience financial or other difficulties as a result of uncertain and weak worldwide economic conditions. Other factors that may affect our suppliers’ ability or willingness to supply components to us include internal management or reorganizational issues, such as roll-out of new equipment which may delay or disrupt supply of previously forecasted components, or industry consolidation and divestitures, which may result in changed business and product priorities among certain suppliers. It could be difficult, costly, and time consuming to obtain alternative sources for these components, or to change product designs to make use of alternative components. In addition, difficulties in transitioning from an existing supplier to a new supplier could create delays in component availability that would have a significant impact on our ability to fulfill orders for our products.
We provide our third-party manufacturers with a rolling forecast of demand, which they use to determine our material and component requirements. Lead times for ordering materials and components vary significantly and depend on various factors, such as the specific supplier, contract terms, and demand and supply for a component at a given time. Some of our components have long lead times, such as wireless local area network chipsets, physical layer transceivers, connector jacks, and metal and plastic enclosures. If our forecasts are not timely provided or are less than our actual requirements, our third-party manufacturers may be unable to manufacture products in a timely manner. If our forecasts are too high, our third-party manufacturers will be unable to use the components they have purchased on our behalf. The cost of the components used in our products tends to drop rapidly as volumes increase and the technologies mature. Therefore, if our third-party manufacturers are unable to promptly use components purchased on our behalf, our cost of producing products may be higher than our competitors due to an oversupply of higher-priced components. Moreover, if they are unable to use components ordered at our direction, we will need to reimburse them for any losses they incur.
If we are unable to obtain a sufficient supply of components, or if we experience any interruption in the supply of components, our product shipments could be reduced or delayed or our cost of obtaining these components may
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increase. For example, in December 2018 we announced a delay in the expected timing of shipment of our Ultra product due to a battery-related issue from one of our suppliers. Component shortages and delays affect our ability to meet scheduled product deliveries, damage our brand and reputation in the market, and cause us to lose sales and market share. For example, component shortages and disruptions in supply in the past have limited our ability to supply all the worldwide demand for our products, and our revenue was affected. At times, we have elected to use more expensive transportation methods, such as air freight, to make up for manufacturing delays caused by component shortages, which reduces our margins. In addition, at times sole suppliers of highly specialized components have provided components that were either defective or did not meet the criteria required by our retailers, distributors, or other channel partners, resulting in delays, lost revenue opportunities, and potentially substantial write-offs.
*We depend on a limited number of third-party manufacturers for substantially all of our manufacturing needs. If these third-party manufacturers experience any delay, disruption, or quality control problems in their operations, we could lose market share and our brand may suffer.
All of our products are manufactured, assembled, tested and generally packaged by a limited number of third-party original design manufacturers (“ODMs”). In most cases, we rely on these manufacturers to procure components and, in some cases, subcontract engineering work. We currently outsource manufacturing to Foxconn Corporation, Sky Light Industrial Ltd., and Pegatron Corporation. We do not have any long-term contracts with any of these third-party manufacturers, although we have executed product supply agreements with these manufacturers, which typically provide indemnification for intellectual property infringement, epidemic failure clauses, agreed-upon price concessions, and certain product quality requirements. Some of these third-party manufacturers produce products for our competitors. In addition, one of our principal manufacturers, Foxconn Corporation closed its acquisition of Belkin International on September 21, 2018, which includes the WeMo brand of home automation products, which may compete directly with us. Due to changing economic conditions, the viability of some of these third-party manufacturers may be at risk. The loss of the services of any of our primary third-party manufacturers could cause a significant disruption in operations and delays in product shipments. Qualifying a new manufacturer and commencing volume production is expensive and time consuming. Ensuring that a contract manufacturer is qualified to manufacture our products to our standards is time consuming. In addition, there is no assurance that a contract manufacturer can scale its production of our products at the volumes and in the quality that we require. If a contract manufacturer is unable to do these things, we may have to move production for the products to a new or existing third-party manufacturer, which would take significant effort and our business, results of operations, and financial condition could be materially adversely affected. In addition, as we contemplate moving manufacturing into different jurisdictions, we may be subject to additional significant challenges in ensuring that quality, processes, and costs, among other issues, are consistent with our expectations. For example, while we expect our manufacturers to be responsible for penalties assessed on us because of excessive failures of the products, there is no assurance that we will be able to collect such reimbursements from these manufacturers, which causes us to take on additional risk for potential failures of our products.
Our reliance on third-party manufacturers also exposes us to the following risks over which we have limited control:

• | unexpected increases in manufacturing and repair costs;

• | inability to control the quality and reliability of finished products;

• | inability to control delivery schedules;

• | potential liability for expenses incurred by third-party manufacturers in reliance on our forecasts that later prove to be inaccurate;

• | potential lack of adequate capacity to manufacture all or a part of the products we require; and

• | potential labor unrest affecting the ability of the third-party manufacturers to produce our products.

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All of our products must satisfy safety and regulatory standards and some of our products must also receive government certifications. Our third-party manufacturers are primarily responsible for conducting the tests that support our applications for most regulatory approvals for our products. If our third-party manufacturers fail to timely and accurately conduct these tests, we would be unable to obtain the necessary domestic or foreign regulatory approvals or certificates to sell our products in certain jurisdictions. As a result, we would be unable to sell our products and our sales and profitability could be reduced, our relationships with our sales channel could be harmed, and our reputation and brand would suffer.
Specifically, substantially all of our manufacturing and assembly occurs in the Asia Pacific region, primarily in Vietnam, and any disruptions due to natural disasters, health epidemics, and political, social, and economic instability in the region would affect the ability of our third-party manufacturers to manufacture our products. In particular, in the event the labor market in Vietnam becomes saturated, our third-party manufacturers in Vietnam may increase our costs of production. If these costs increase, it may affect our margins and ability to lower prices for our products to stay competitive. Labor unrest may also affect our third-party manufacturers, as workers may strike and cause production delays. If our third-party manufacturers fail to maintain good relations with their employees or contractors, and production and manufacturing of our products are affected, then we may be subject to shortages of products and the quality of products delivered may be affected. Further, if our manufacturers or warehousing facilities are disrupted or destroyed, we could have no other readily available alternatives for manufacturing and assembling our products, and our business, results of operations, and financial condition could be materially adversely affected.
In the future, we may work with more third-party manufacturers on a contract manufacturing basis, which could result in our exposure to additional risks not inherent in a typical ODM arrangement. Such risks may include our inability to properly source and qualify components for the products, lack of software expertise resulting in increased software defects, and lack of resources to properly monitor the manufacturing process. In our typical ODM arrangement, our ODMs are generally responsible for sourcing the components of the products and warranting that the products will work according to a product’s specification, including any software specifications. In a contract manufacturing arrangement, we would take on much more, if not all, of the responsibility around these areas. If we are unable to properly manage these risks, our products may be more susceptible to defects, and our business, results of operations, and financial condition could be materially adversely affected.
* We depend substantially on our sales channels, and our failure to maintain and expand our sales channels would result in lower sales and reduced revenue.
To maintain and grow our market share, revenue, and brand, we must maintain and expand our sales channels. Our sales channels consist primarily of traditional retailers, online retailers, and wholesale distributors, but also include service providers such as wireless carriers and telecommunications providers. We generally have no minimum purchase commitments or long-term contracts with any of these third parties.
Traditional retailers have limited shelf space and promotional budgets, and competition is intense for these resources. A competitor with more extensive product lines and stronger brand identity may have greater bargaining power with these retailers. Any reduction in available shelf space or increased competition for such shelf space would require us to increase our marketing expenditures simply to maintain current levels of retail shelf space, which would harm our operating margin. Our traditional retail customers have faced increased and significant competition from online retailers. If we cannot effectively manage our business amongst our online customers and traditional retail customers, our business would be harmed. The recent trend in the consolidation of online retailers has resulted in intensified competition for preferred product placement, such as product placement on an online retailer’s internet home page. In addition, our efforts to realign or consolidate our sales channels may cause temporary disruptions in our product sales and revenue, and these efforts may not result in the expected longer-term benefits that prompted them.
In addition, to the extent our retail and distributor channel partners supply products that compete with our own, it is possible that these channel partners may choose not to offer our products to end-users or to offer our products to end-users on less favorable terms, including with respect to product placement. If this were to occur, we may not be able to increase or maintain our sales, and our business, results of operations, and financial condition could be materially adversely
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affected. For example, Amazon, one of our primary retailers, produces the Amazon Cloud Cam, which competes with our security camera products, and also recently acquired two of our competitors, Blink and Ring. For the three and nine months ended September 29, 2019, we derived 8.2% and 9.5% of our revenue from Amazon and its affiliates, respectively.
We must also continuously monitor and evaluate emerging sales channels. If we fail to establish a presence in an important developing sales channel, our business, results of operations, and financial condition could be materially adversely affected.
If disruptions in our transportation network occur or our shipping costs substantially increase, we may be unable to sell or timely deliver our products, and our operating expenses could increase.
We are highly dependent upon the transportation systems we use to ship our products, including surface and air freight. Our attempts to closely match our inventory levels to our product demand intensify the need for our transportation systems to function effectively and without delay. On a quarterly basis, our shipping volume also tends to steadily increase as the quarter progresses, which means that any disruption in our transportation network in the latter half of a quarter will likely have a more material effect on our business than a disruption at the beginning of a quarter.
The transportation network is subject to disruption or congestion from a variety of causes, including labor disputes or port strikes, acts of war or terrorism, natural disasters, and congestion resulting from higher shipping volumes. Labor disputes among freight carriers and at ports of entry are common, particularly in Europe, and we expect labor unrest and its effects on shipping our products to be a continuing challenge for us. A port worker strike, work slow-down, or other transportation disruption in Long Beach, California, where we import our products to fulfill our Americas orders, could significantly disrupt our business. Our international freight is regularly subjected to inspection by governmental entities. If our delivery times increase unexpectedly for these or any other reasons, our ability to deliver products on time would be materially adversely affected and result in delayed or lost revenue as well as customer imposed penalties. In addition, if increases in fuel prices occur, our transportation costs would likely increase. Moreover, the cost of shipping our products by air freight is greater than other methods. From time to time in the past, we have shipped products using extensive air freight to meet unexpected spikes in demand and shifts in demand between product categories, to bring new product introductions to market quickly and to timely ship products previously ordered. If we rely more heavily upon air freight to deliver our products, our overall shipping costs will increase. A prolonged transportation disruption or a significant increase in the cost of freight could materially adversely affect our business, results of operations, and financial condition.
If we are unable to secure and protect our intellectual property rights, our ability to compete could be harmed.
We rely on a combination of copyright, trademark, patent, and trade secret laws, nondisclosure agreements with employees, consultants, and suppliers, and other contractual provisions to establish, maintain, and protect our intellectual property and technology. Despite efforts to protect our intellectual property, unauthorized third parties may attempt to design around, copy aspects of our product design or obtain and use technology or other intellectual property associated with our products. Furthermore, our competitors may independently develop similar technology or design around our intellectual property. Our inability to secure and protect our intellectual property rights could materially adversely affect our brand and business, results of operations, and financial condition.
We rely upon third parties for technology that is critical to our products, and if we are unable to continue to use this technology and future technology, our ability to develop, sell, maintain, and support technologically innovative products would be limited.
We rely on third parties to obtain non-exclusive patented hardware and software license rights in technologies that are incorporated into and necessary for the operation and functionality of most of our products. In these cases, because the intellectual property we license is available from third parties, barriers to entry into certain markets may be lower for potential or existing competitors than if we owned exclusive rights to the technology that we license and use. Moreover, if a competitor or potential competitor enters into an exclusive arrangement with any of our key third-party technology providers, or if any of these providers unilaterally decides not to do business with us for any reason, our ability to develop
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and sell products containing that technology would be severely limited. In addition, certain of Arlo’s firmware and the AI-based algorithms that we use in our Arlo Smart services incorporate open source software, the licenses for which may include customary requirements for, and restrictions on, use of the open source software.
If we are offering products or services that contain third-party technology that we subsequently lose the right to license, then we will not be able to continue to offer or support those products or services. In addition, these licenses may require royalty payments or other consideration to the third-party licensor. Our success will depend, in part, on our continued ability to access these technologies, and we do not know whether these third-party technologies will continue to be licensed to us on commercially acceptable terms, if at all. In addition, if these third-party licensors fail or experience instability, then we may be unable to continue to sell products and services that incorporate the licensed technologies, in addition to being unable to continue to maintain and support these products and services. We do require escrow arrangements with respect to certain third-party software which entitle us to certain limited rights to the source code, in the event of certain failures by the third party, in order to maintain and support such software. However, there is no guarantee that we would be able to fully understand and use the source code, as we may not have the expertise to do so. We are increasingly exposed to these risks as we continue to develop and market more products containing third-party technology and software. If we are unable to license the necessary technology, we may be forced to acquire or develop alternative technology, which could be of lower quality or performance standards. The acquisition or development of alternative technology may limit and delay our ability to offer new or competitive products and services and increase our costs of production. As a result, our business, results of operations, and financial condition could be materially adversely affected.
We also utilize third-party software development companies and contractors to develop, customize, maintain, and support software that is incorporated into our products and services. If these companies and contractors fail to timely deliver or continuously maintain and support the software, as we require of them, we may experience delays in releasing new products and services or difficulties with supporting existing products, services, and our users.
* Our sales and operations in international markets expose us to operational, financial and regulatory risks.
International sales comprise a significant amount of our overall revenue. International sales were 23.3% and 17.5% of overall revenue in three months ended September 29, 2019 and September 30, 2018, respectively, and 25.4% and 23.0% of overall revenue in nine months ended September 29, 2019 and September 30, 2018, respectively. We continue to be committed to growing our international sales, and while we have committed resources to expanding our international operations and sales channels, these efforts may not be successful. International operations are subject to a number of risks, including but not limited to:

• | exchange rate fluctuations;

• | political and economic instability, international terrorism, and anti-American sentiment, particularly in emerging markets;

• | potential for violations of anti-corruption laws and regulations, such as those related to bribery and fraud;

• | preference for locally branded products, and laws and business practices favoring local competition;

• | potential consequences of, and uncertainty related to, the “Brexit” process in the United Kingdom, which could lead to additional expense and complexity in doing business there;

• | increased difficulty in managing inventory;

• | delayed revenue recognition;

• | less effective protection of intellectual property;

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• | stringent consumer protection and product compliance regulations, including but not limited to General Data Protection Regulation in the European Union, European competition law, the Restriction of Hazardous Substances directive, the Waste Electrical and Electronic Equipment directive and the European Ecodesign directive, that are costly to comply with and may vary from country to country;

• | difficulties and costs of staffing and managing foreign operations;

• | business difficulties, including potential bankruptcy or liquidation, of any of our worldwide third-party logistics providers; and

• | changes in local tax and customs duty laws or changes in the enforcement, application, or interpretation of such laws.

We are also required to comply with local environmental legislation, and those who sell our products rely on this compliance in order to sell our products. If those who sell our products do not agree with our interpretations and requirements of new legislation, they may cease to order our products and our business, results of operations, and financial condition could be materially adversely affected.
The development of our operations and infrastructure in connection with our separation from NETGEAR, and any future expansion of such operations and infrastructure, may not be entirely successful, and may strain our operations and increase our operating expenses.
In connection with our separation from NETGEAR, we have been implementing a new information technology infrastructure for our business, which includes the creation of management information systems and operational and financial controls unique to our business. We may not be able to put in place adequate controls in an efficient and timely manner in connection with our separation from NETGEAR and as our business grows, our current systems may not be adequate to support our future operations. The difficulties associated with installing and implementing new systems, procedures, and controls may place a significant burden on our management and operational and financial resources. In addition, as we grow internationally, we will have to expand and enhance our communications infrastructure. If we fail to continue to improve our management information systems, procedures, and financial controls, or encounter unexpected difficulties during expansion and reorganization, our business could be harmed.
For example, we are investing significant capital and human resources in the design, development, and enhancement of our financial and enterprise resource planning systems. We will depend on these systems in order to timely and accurately process and report key components of our results of operations, financial condition, and cash flows. If the systems fail to operate appropriately or we experience any disruptions or delays in enhancing their functionality to meet current business requirements, our ability to fulfill customer orders, bill, and track our customers, fulfill contractual obligations, accurately report our financials, and otherwise run our business could be adversely affected. Even if we do not encounter these adverse effects, the development and enhancement of systems may be much more costly than we anticipated. If we are unable to continue to develop and enhance our information technology systems as planned, our business, results of operations, and financial condition could be materially adversely affected.
Governmental regulations of imports or exports affecting internet security could affect our revenue.
Any additional governmental regulation of imports or exports or failure to obtain required export approval of our encryption technologies could adversely affect our international and domestic sales. The United States and various foreign governments have imposed controls, export license requirements, and restrictions on the import or export of some technologies, particularly encryption technology. In addition, from time to time, governmental agencies have proposed additional regulation of encryption technology, such as requiring the escrow and governmental recovery of private encryption keys. In response to terrorist activity, governments could enact additional regulation or restriction on the use, import, or export of encryption technology. This additional regulation of encryption technology could delay or prevent the acceptance and use of encryption products and public networks for secure communications, resulting in decreased demand
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for our products and services. In addition, some foreign competitors are subject to less stringent controls on exporting their encryption technologies. As a result, they may be able to compete more effectively than we can in the United States and the international internet security market.
We are involved in litigation matters in the ordinary course and may in the future become involved in additional litigation, including litigation regarding intellectual property rights, which could be costly and subject us to significant liability.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding infringement of patents, trade secrets, and other intellectual property rights. From time to time, third parties have asserted, and may continue to assert, exclusive patent, copyright, trademark, and other intellectual property rights against us, demanding license or royalty payments or seeking payment for damages, injunctive relief, and other available legal remedies through litigation. These also include third-party non-practicing entities who claim to own patents or other intellectual property that they believe cover our products. If we are unable to resolve these matters or obtain licenses on acceptable or commercially reasonable terms, we could be sued or we may be forced to initiate litigation to protect our rights. The cost of any necessary licenses and litigation related to alleged infringement could materially adversely affect our business, results of operations, and financial condition.
In the event successful claims of infringement are brought by third parties, and we are unable to obtain licenses or independently develop alternative technology on a timely basis, we may be subject to indemnification obligations, be unable to offer competitive products, or be subject to increased expenses. If we do not resolve these claims on a favorable basis, our business, results of operations, and financial condition could be materially adversely affected.
As part of growing our business, we may make acquisitions. If we fail to successfully select, execute, or integrate our acquisitions, then our business, results of operations, and financial condition could be materially adversely affected and our stock price could decline.
From time to time, we may undertake acquisitions to add new product and service lines and technologies, acquire talent, gain new sales channels, or enter into new sales territories. Acquisitions involve numerous risks and challenges, including relating to the successful integration of the acquired business, entering into new territories or markets with which we have limited or no prior experience, establishing or maintaining business relationships with new retailers, distributors, or other channel partners, vendors, and suppliers, and potential post-closing disputes.
We cannot ensure that we will be successful in selecting, executing, and integrating acquisitions. Failure to manage and successfully integrate acquisitions could materially harm our business, financial condition, and results of operations. In addition, if stock market analysts or our stockholders do not support or believe in the value of the acquisitions that we choose to undertake, our stock price may decline.
If we do not effectively manage our sales channel inventory and product mix, we may incur costs associated with excess inventory, or lose sales from having too few products.
If we are unable to properly monitor, control, and manage our sales channel inventory and maintain an appropriate level and mix of products with our distributors and within our sales channels, we may incur increased and unexpected costs associated with this inventory. We generally allow distributors and traditional retailers to return a limited amount of our products in exchange for other products. Under our price protection policy, if we reduce the list price of a product, we are often required to issue a credit in an amount equal to the reduction for each of the products held in inventory by our wholesale distributors and retailers. If our wholesale distributors and retailers are unable to sell their inventory in a timely manner, we might lower the price of the products, or these parties may exchange the products for newer products. Also, during the transition from an existing product to a new replacement product, we must accurately predict the demand for the existing and the new product.
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We determine production levels based on our forecasts of demand for our products. Actual demand for our products depends on many factors, which makes it difficult to forecast. We have experienced differences between our actual and our forecasted demand in the past and expect differences to arise in the future. If we improperly forecast demand for our products, we could end up with too many products and be unable to sell the excess inventory in a timely manner, if at all, or, alternatively, we could end up with too few products and not be able to satisfy demand. This problem is exacerbated because we attempt to closely match inventory levels with product demand, leaving limited margin for error. If these events occur, we could incur increased expenses associated with writing off excessive or obsolete inventory, lose sales, incur penalties for late delivery, or have to ship products by air freight to meet immediate demand, thereby incurring incremental freight costs above the sea freight costs, a preferred method, and suffering a corresponding decline in gross margin.
* Global economic conditions could materially adversely affect our revenue and results of operations.
Our business has been and may continue to be affected by a number of factors that are beyond our control, such as general geopolitical, economic, and business conditions, conditions in the financial markets, and changes in the overall demand for connected lifestyle products. Our products and services may be considered discretionary items for our consumer and small business end-users. A severe and/or prolonged economic downturn could adversely affect our customers’ financial condition and the levels of business activity of our customers. Weakness in, and uncertainty about, global economic conditions may cause businesses to postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our products.
In the recent past, various regions worldwide have experienced slow economic growth. In addition, current economic challenges in China, including any global economic ramifications of these challenges, may continue to put negative pressure on global economic conditions. If conditions in the global economy, including Europe, China, Australia and the United States, or other key vertical or geographic markets deteriorate, such conditions could materially adversely affect our business, results of operations, and financial condition. If we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, which could materially adversely affect our business, results of operations, and financial condition. In addition, the economic problems affecting the financial markets and the uncertainty in global economic conditions resulted in a number of adverse effects, including a low level of liquidity in many financial markets, extreme volatility in credit, equity, currency, and fixed income markets, instability in the stock market, and high unemployment.
For example, the challenges faced by the European Union to stabilize some of its member economies, such as Greece, Portugal, Spain, Hungary, and Italy, have had international implications, affecting the stability of global financial markets and hindering economies worldwide. Many member nations in the European Union have been addressing the issues with controversial austerity measures. In addition, the potential consequences of the “Brexit” process in the United Kingdom have led to significant uncertainty in the region. Should the European Union monetary policy measures be insufficient to restore confidence and stability to the financial markets, or should the United Kingdom’s “Brexit” decision lead to additional economic or political instability, the global economy, including the U.S. and European Union economies where we have a significant presence, could be hindered, which could have a material adverse effect on us. There could also be a number of other follow-on effects from these economic developments on our business, including the inability of customers to obtain credit to finance purchases of our products, customer insolvencies, decreased customer confidence to make purchasing decisions, decreased customer demand, and decreased customer ability to pay their trade obligations.
In addition, availability of our products from third-party manufacturers and our ability to distribute our products into non-U.S. jurisdictions may be impacted by factors such as an increase in duties, tariffs, or other restrictions on trade; raw material shortages, work stoppages, strikes and political unrest; economic crises and international disputes or conflicts; changes in leadership and the political climate in countries from which we import products; and failure of the United States to maintain normal trade relations with China and other countries.
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A portion of our global and U.S. sales are comprised of goods assembled and manufactured in our facilities in Taiwan and the People’s Republic of China, and components for a number of our goods are sourced from suppliers in the People’s Republic of China. When tariffs, duties, or other restrictions are placed on goods imported into the United States from China or any related counter-measures are taken by China, our revenue and results of operations may be materially harmed.
On September 17, 2018, President Trump announced the imposition of a 10% ad valorem duty on approximately $200 billion worth of Chinese imports, known as List 3, pursuant to Section 301 of the Trade Act of 1974. The Office of the U.S. Trade Representative concurrently published the final list of products that will be subject to the additional duty, effective September 24, 2018. On May 10, 2019, the President increased the additional duty to 25% ad valorem, and has since proposed a further increase of this rate to 30% in the coming months. In addition, the President has imposed a 15% import duty on other Chinese imports, known as List 4, with the additional duties on certain products (List 4A) effective September 1, 2019, and the remainder (List 4B) effective December 15, 2019. We are actively addressing the risks related to these additional and potential ad valorem duties, which have affected, or have the potential to affect, at least some of our imports from China. Although we have already taken some steps to mitigate these risks, including by moving a significant portion of our manufacturing and assembly to Vietnam and other areas in the Asia Pacific region outside of China, if these duties are imposed, the cost of our products may increase. These duties may also make our products more expensive for consumers, which may reduce consumer demand. We may need to offset the financial impact by, among other things, moving even more of our product manufacturing to other locations, modifying other business practices or raising prices. If we are not successful in offsetting the impact of any such duties, our revenue, gross margins, and operating results may be materially adversely affected.
The success of our business depends on customers’ continued and unimpeded access to our platform on the internet.
Our users must have internet access in order to use our platform. Some providers may take measures that affect their customers’ ability to use our platform, such as degrading the quality of the data packets we transmit over their lines, giving those packets lower priority, giving other packets higher priority than ours, blocking our packets entirely, or attempting to charge their customers more for using our platform.
In December 2010, the Federal Communications Commission (the “FCC”), adopted net neutrality rules barring internet providers from blocking or slowing down access to online content, protecting services like ours from such interference. Recently, the FCC voted in favor of repealing the net neutrality rules, and it is currently uncertain how the U.S. Congress will respond to this decision. To the extent network operators attempt to interfere with our services, extract fees from us to deliver our solution, or otherwise engage in discriminatory practices, our business, results of operations, and financial condition could be materially adversely affected. Within such a regulatory environment, we could experience discriminatory or anti-competitive practices that could impede our domestic and international growth, cause us to incur additional expense, or otherwise materially adversely affect our business, results of operations, and financial condition.
* Changes in tax laws or exposure to additional income tax liabilities could affect our future profitability.
Factors that could materially affect our future effective tax rates include, but are not limited to:

• | changes in tax laws or the regulatory environment;

• | changes in accounting and tax standards or practices;

• | changes in the composition of operating income by tax jurisdiction; and

• | our operating results before taxes.

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We are subject to income taxes in the United States and numerous foreign jurisdictions. Because we do not have a long history of operating as a separate company and we have significant expansion plans, our effective tax rate may fluctuate in the future. Future effective tax rates could be affected by operating losses in jurisdictions where no tax benefit can be recorded under GAAP, changes in the composition of earnings in countries with differing tax rates, changes in deferred tax assets and liabilities, or changes in tax laws.
The IRS and several foreign tax authorities have increasingly focused attention on intercompany transfer pricing with respect to sales of products and services and the use of intangibles. Tax authorities could disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. If we do not prevail in any such disagreements, our profitability may be affected.
We must comply with indirect tax laws in multiple jurisdictions, as well as complex customs duty regimes worldwide. Audits of our compliance with these rules may result in additional liabilities for taxes, duties, interest and penalties related to our international operations which would reduce our profitability.
Our operations are routinely subject to audit by tax authorities in various countries. Many countries have indirect tax systems where the sale and purchase of goods and services are subject to tax based on the transaction value. These taxes are commonly referred to as value-added tax (“VAT”) or goods and services tax (“GST”). In addition, the distribution of our products subjects us to numerous complex customs regulations, which frequently change over time. Failure to comply with these systems and regulations can result in the assessment of additional taxes, duties, interest, and penalties. While we believe we are in compliance with local laws, we cannot assure that tax and customs authorities agree with our reporting positions and upon audit may assess us additional taxes, duties, interest, and penalties.
Additionally, some of our products are subject to U.S. export controls, including the Export Administration Regulations and economic sanctions administered by the Office of Foreign Assets Control. We also incorporate encryption technology into certain of our solutions. These encryption solutions and underlying technology may be exported outside of the United States only with the required export authorizations or exceptions, including by license, a license exception, appropriate classification notification requirement, and encryption authorization.
Furthermore, our activities are subject to U.S. economic sanctions laws and regulations that prohibit the shipment of certain products and services without the required export authorizations, including to countries, governments, and persons targeted by U.S. embargoes or sanctions. Additionally, the Trump administration has been critical of existing trade agreements and may impose more stringent export and import controls. Obtaining the necessary export license or other authorization for a particular sale may be time consuming, and may result in delay or loss of sales opportunities even if the export license ultimately is granted. While we take precautions to prevent our solutions from being exported in violation of these laws, including using authorizations or exceptions for our encryption products and implementing IP address blocking and screenings against U.S. government and international lists of restricted and prohibited persons and countries, we have not been able to guarantee, and cannot guarantee, that the precautions we take will prevent all violations of export control and sanctions laws, including if purchasers of our products bring our products and services into sanctioned countries without our knowledge. Violations of U.S. sanctions or export control laws can result in significant fines or penalties and incarceration could be imposed on employees and managers for criminal violations of these laws.
Also, various countries, in addition to the United States, regulate the import and export of certain encryption and other technology, including import and export licensing requirements, and have enacted laws that could limit our ability to distribute our products and services or our end-users’ ability to utilize our solutions in their countries. Changes in our products and services or changes in import and export regulations may create delays in the introduction of our products in international markets. Furthermore, recent actions by the Trump administration announcing increased duties on products imported from China may severely impact the price of our goods imported into the United States in the future, and other countries may follow suit and increase duties on goods produced in China.
Adverse action by any government agencies related to indirect tax laws could materially adversely affect our business, results of operations and financial condition.
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We are subject to, and must remain in compliance with, numerous laws and governmental regulations concerning the manufacturing, use, distribution, and sale of our products, as well as any such future laws and regulations. Some of our customers also require that we comply with their own unique requirements relating to these matters. Any failure to comply with such laws, regulations, and requirements, and any associated unanticipated costs, could materially adversely affect our business, results of operations, and financial condition.
We manufacture and sell products which contain electronic components, and such components may contain materials that are subject to government regulation in both the locations where we manufacture and assemble our products, as well as the locations where we sell our products. For example, certain regulations limit the use of lead in electronic components. To our knowledge, we maintain compliance with all applicable current government regulations concerning the materials utilized in our products for all the locations in which we operate. Since we operate on a global basis, this is a complex process which requires continual monitoring of regulations and an ongoing compliance process to ensure that we and our suppliers are in compliance with all existing regulations. There are areas where new regulations have been enacted which could increase our cost of the components that we utilize or require us to expend additional resources to ensure compliance. For example, the SEC’s “conflict minerals” rules apply to our business, and we are expending resources to ensure compliance. The implementation of these requirements by government regulators and our partners and/or customers could adversely affect the sourcing, availability and pricing of minerals used in the manufacture of certain components used in our products. In addition, the supply-chain due diligence investigation required by the conflict minerals rules will require expenditures of resources and management attention regardless of the results of the investigation. If there is an unanticipated new regulation which significantly impacts our use of various components or requires more expensive components, that regulation could materially adversely affect our business, results of operations, and financial condition.
One area that has a large number of regulations is environmental compliance. Management of environmental pollution and climate change has produced significant legislative and regulatory efforts on a global basis, and we believe this will continue both in scope and in the number of countries participating. These changes could directly increase the cost of energy, which may have an impact on the way we manufacture products or utilize energy to produce our products. In addition, any new regulations or laws in the environmental area might increase the cost of raw materials we use in our products. Environmental regulations require us to reduce product energy usage, monitor and exclude an expanding list of restricted substances, and participate in required recovery and recycling of our products. While future changes in regulations are certain, we are currently unable to predict how any such changes will impact us and if such impacts will be material to our business. If there is a new law or regulation that significantly increases our costs of manufacturing or causes us to significantly alter the way that we manufacture our products, this could have a material adverse effect on our business, financial condition, and results of operations.
Our selling and distribution practices are also regulated in large part by U.S. federal and state as well as foreign, antitrust and competition laws and regulations. In general, the objective of these laws is to promote and maintain free competition by prohibiting certain forms of conduct that tend to restrict production, raise prices or otherwise control the market for goods or services to the detriment of consumers of those goods and services. Potentially prohibited activities under these laws may include unilateral conduct or conduct undertaken as the result of an agreement with one or more of our suppliers, competitors, or customers. The potential for liability under these laws can be difficult to predict as it often depends on a finding that the challenged conduct resulted in harm to competition, such as higher prices, restricted supply, or a reduction in the quality or variety of products available to consumers. We utilize a number of different distribution channels to deliver our products to customers and end-users and regularly enter into agreements with resellers of our products at various levels in the distribution chain that could be subject to scrutiny under these laws in the event of private litigation or an investigation by a governmental competition authority. In addition, many of our products are sold to consumers via the internet. Many of the competition-related laws that govern these internet sales were adopted prior to the advent of the internet and, as a result, do not contemplate or address the unique issues raised by online sales. New interpretations of existing laws and regulations, whether by courts or by the state, federal, or foreign governmental authorities charged with the enforcement of those laws and regulations, may also impact our business in ways we are currently unable to predict. Any failure on our part or on the part of our employees, agents, distributors, or other business
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partners to comply with the laws and regulations governing competition can result in negative publicity and diversion of management time and effort and may subject us to significant litigation liabilities and other penalties.
We are exposed to the credit risk of some of our customers and to credit exposures in certain markets, which could result in material losses.
A substantial portion of our sales are on an open credit basis, with typical payment terms of 30 to 60 days in the United States and, because of local customs or conditions, longer in some markets outside the United States. We monitor individual customer financial viability in granting such open credit arrangements, seek to limit such open credit to amounts we believe the customers can pay and maintain reserves we believe are adequate to cover exposure for doubtful accounts.
Any bankruptcies or illiquidity among our customer base could harm our business and have a material adverse effect on our financial condition and results of operations. To the degree that turmoil in the credit markets makes it more difficult for some customers to obtain financing, our customers’ ability to pay could be adversely impacted, which in turn could materially adversely affect our business, results of operations, and financial condition.
If our products are not compatible with some or all leading third-party IoT products and protocols, we could be materially adversely affected.
A core part of our solution is the interoperability of our platform with third-party IoT products and protocols. The Arlo platform seamlessly integrates with third-party IoT products and protocols, such as Amazon Alexa, Apple HomeKit, Apple TV, Google Assistant, IFTTT, Stringify, and Samsung SmartThings. If these third parties were to alter their products, we could be adversely impacted if we fail to timely create compatible versions of our products, and such incompatibility could negatively impact the adoption of our products and solutions. A lack of interoperability may also result in significant redesign costs, and harm relations with our customers. Further, the mere announcement of an incompatibility problem relating to our products could materially adversely affect our business, results of operations, and financial condition.
In addition, to the extent our competitors supply products that compete with our own, it is possible these competitors could design their technologies to be closed or proprietary systems that are incompatible with our products or work less effectively with our products than their own. As a result, end-users may have an incentive to purchase products that are compatible with the products and technologies of our competitors over our products.
The marketability of our products may suffer if wireless telecommunications operators do not deliver acceptable wireless services.
The success of our business depends, in part, on the capacity, affordability, reliability, and prevalence of wireless data networks provided by wireless telecommunications operators and on which our IoT hardware products and solutions operate. Growth in demand for wireless data access may be limited if, for example, wireless telecommunications operators cease or materially curtail operations, fail to offer services that customers consider valuable at acceptable prices, fail to maintain sufficient capacity to meet demand for wireless data access, delay the expansion of their wireless networks and services, fail to offer and maintain reliable wireless network services, or fail to market their services effectively.
We are exposed to adverse currency exchange rate fluctuations in jurisdictions where we transact in local currency, which could materially adversely affect our business, results of operations, and financial condition.
Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our financial condition, results of operations, and cash flows. Although a portion of our international sales are currently invoiced in U.S. dollars, we have implemented and continue to implement for certain countries and customers both invoicing and payment in foreign currencies. Our primary exposure to movements in foreign currency exchange rates relates to non-U.S. dollar-denominated sales primarily in Europe and Australia, as well
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as our global operations, and non-U.S. dollar-denominated operating expenses and certain assets and liabilities. In addition, weaknesses in foreign currencies for U.S. dollar-denominated sales could adversely affect demand for our products. Conversely, a strengthening in foreign currencies against the U.S. dollar could increase foreign currency-denominated costs. As a result, we may attempt to renegotiate pricing of existing contracts or request payment to be made in U.S. dollars. We cannot be sure that our customers would agree to renegotiate along these lines. This could result in customers eventually terminating contracts with us or in our decision to terminate certain contracts, which would adversely affect our sales.
We established a hedging program after the IPO to hedge our exposure to fluctuations in foreign currency exchange rates as a response to the risk of changes in the value of foreign currency-denominated assets and liabilities. We may enter into foreign currency forward contracts or other instruments. We expect that such foreign currency forward contracts will reduce, but will not eliminate, the impact of currency exchange rate movements. For example, we may not execute forward contracts in all currencies in which we conduct business. In addition, we may hedge to reduce the impact of volatile exchange rates on revenue, gross profit and operating profit for limited periods of time. However, the use of these hedging activities may only offset a portion of the adverse financial effect resulting from unfavorable movements in foreign exchange rates.
Risks Related to Our Separation from NETGEAR
If the Distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, NETGEAR, Arlo and Arlo stockholders could be subject to significant tax liabilities, and, in certain circumstances, we could be required to indemnify NETGEAR for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement.
NETGEAR received an opinion of counsel regarding qualification of the Distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. The opinion of counsel was based upon and relied on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings of NETGEAR and us, including those relating to the past and future conduct of NETGEAR and us. If any of these representations, statements or undertakings are, or become, incomplete or inaccurate, or if we or NETGEAR breach any of the respective covenants in any of the separation-related agreements, the opinion of counsel could be invalid and the conclusions reached therein could be jeopardized.
Notwithstanding any opinion of counsel, the Internal Revenue Service (the “IRS”) could determine that the Distribution, together with certain related transactions, should be treated as a taxable transaction if it were to determine that any of the facts, assumptions, representations, statements or undertakings upon which any opinion of counsel was based were false or had been violated, or if it were to disagree with the conclusions in any opinion of counsel. Any opinion of counsel would not be binding on the IRS or the courts, and we cannot assure that the IRS or a court would not assert a contrary position. NETGEAR has not requested, and does not intend to request, a ruling from the IRS with respect to the treatment of the Distribution or certain related transactions for U.S. federal income tax purposes.
If the Distribution, together with certain related transactions, were to fail 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) of the Code, in general, NETGEAR would recognize taxable gain as if it had sold our common stock in a taxable sale for its fair market value, and NETGEAR stockholders who receive shares of our common stock in the Distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.
We have agreed in the tax matters agreement entered into between us and NETGEAR to indemnify NETGEAR for any taxes (and any related costs and other damages) resulting from the Separation and Distribution, and certain other related transactions, to the extent such amounts were to result from (i) an acquisition after the Distribution of all or a portion of our equity securities, whether by merger or otherwise (and regardless of whether we participated in or otherwise facilitated the acquisition), (ii) other actions or failures to act by us or (iii) any of the representations or undertakings
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contained in any of the Separation-related agreements or in the documents relating to the opinion of counsel being incorrect or violated. Any such indemnity obligations arising under the tax matters agreement could be material.
We may not be able to engage in desirable strategic or capital-raising transactions following the Distribution.
Under current law, a distribution that would otherwise qualify as a tax-free transaction, for U.S. federal income tax purposes, under Section 355 of the Code can be rendered taxable to the parent corporation and its stockholders as a result of certain post-distribution acquisitions of shares or assets of the distributed corporation. For example, such a distribution could result in taxable gain to the parent corporation under Section 355(e) of the Code if the distribution were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquired, directly or indirectly, shares representing a 50% or greater interest (by vote or value) in the distributed corporation.
To preserve the tax-free treatment of the Separation and Distribution, and in addition to our expected indemnity obligations described above, we have agreed in the tax matters agreement to restrictions that address compliance with Section 355 (including Section 355(e)) of the Code. These restrictions, which generally will be effective during the two-year period following the Distribution, could limit our ability to pursue certain strategic transactions, equity issuances or repurchases or other transactions that we may believe to be in the best interests of our stockholders or that might increase the value of our business.
The assets and resources that we acquired from NETGEAR in the Separation may not be sufficient for us to operate as a standalone company, and we may experience difficulty in separating our assets and resources from NETGEAR.
Because we did not operate as an independent company prior to the Separation, we will need to acquire assets in addition to those contributed by NETGEAR and its subsidiaries to us and our subsidiaries in connection with the Separation. We may also face difficulty in separating our assets from NETGEAR’s assets and integrating newly acquired assets into our business. Our business, financial condition and results of operations could be harmed if we fail to acquire assets that prove to be important to our operations or if we incur unexpected costs in separating our assets from NETGEAR’s assets or integrating newly acquired assets.
The services that NETGEAR provides to us may not be sufficient to meet our needs, which may result in increased costs and otherwise adversely affect our business.
Pursuant to the transition services agreement entered into between us and NETGEAR, NETGEAR has agreed to continue, for a transitional period, to provide us with corporate and shared services related to corporate functions, such as executive oversight, risk management, information technology, accounting, audit, legal, investor relations, tax, treasury, shared facilities, engineering, operations, customer support, human resources and employee benefits, sales and sales operations, and other services in exchange for the fees specified in the transition services agreement. NETGEAR is not obligated to provide these services in a manner that differs from the nature of the services provided to the Arlo business during the 12-month period prior to the completion of the IPO, and thus we may not be able to modify these services in a manner desirable to us as a standalone public company. Further, once we no longer receive these services from NETGEAR, due to the termination or expiration of the transition services agreement or otherwise, we may not be able to perform these services ourselves and/or find appropriate third party arrangements at a reasonable cost (and any such costs may be higher than those charged by NETGEAR).
Our ability to operate our business effectively may suffer if we are unable to cost-effectively establish our own administrative and other support functions in order to operate as a standalone company after the expiration of our shared services and other intercompany agreements with NETGEAR.
As an operating segment of NETGEAR, we relied on administrative and other resources of NETGEAR, including information technology, accounting, finance, human resources and legal services, to operate our business. In connection with our IPO, we entered into various service agreements to retain the ability for specified periods to use these
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NETGEAR resources. These services may not be provided at the same level as when we were a business segment within NETGEAR, and we may not be able to obtain the same benefits that we received prior to the completion of the IPO. These services may not be sufficient to meet our needs, and after our agreements with NETGEAR expire (which will generally occur within 18 months following the completion of the IPO, which occurred on August 7, 2018), we may not be able to replace these services at all or obtain these services at prices and on terms as favorable as those we currently have with NETGEAR. We will need to create our own administrative and other support systems or contract with third parties to replace NETGEAR’s systems. Any failure or significant downtime in our own administrative systems or in NETGEAR’s administrative systems during the transitional period could result in unexpected costs, impact our results and/or prevent us from paying our suppliers or employees and performing other administrative services on a timely basis.
We are a smaller company relative to our former parent, NETGEAR, which could result in increased costs in our supply chain and in general because of a decrease in our purchasing power as a result of the Separation. We may also experience decreased revenue due to difficulty maintaining existing customer relationships and obtaining new customers.
Prior to the completion of the IPO, we were able to take advantage of NETGEAR’s size and purchasing power in procuring goods, technology and services, including insurance, employee benefit support, and audit and other professional services. In addition, as a segment of NETGEAR, we were able to leverage NETGEAR’s size and purchasing power to bargain with suppliers of our components and our ODMs. We are a smaller company than NETGEAR, and we cannot assure you that we will have access to financial and other resources comparable to those that were available to us prior to the completion of the IPO. As a standalone company, we may be unable to obtain office space, goods, technology, and services in general, as well as components and services that are part of our supply chain, at prices or on terms as favorable as those that were available to us prior to the completion of the IPO, which could increase our costs and reduce our profitability. Our future success depends on our ability to maintain our current relationships with existing customers, and we may have difficulty attracting new customers due to our smaller size.
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NETGEAR has agreed to indemnify us for certain liabilities. However, we cannot assure that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that NETGEAR’s ability to satisfy its indemnification obligation will not be impaired in the future.
Pursuant to the master separation agreement entered into between us and NETGEAR and certain other agreements with NETGEAR, NETGEAR has agreed to indemnify us for certain liabilities. The master separation agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us 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 us and NETGEAR, each party, in its capacity as a licensee, indemnifies the other party, in its capacity as a licensor, as well as 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 us 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 such party under the tax matters agreement. In addition, we have agreed in the tax matters agreement that each party will generally be responsible for any taxes and related amounts imposed on us 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, we have 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 us 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.
However, third parties could also seek to hold us responsible for any of the liabilities that NETGEAR has agreed to retain, and we cannot assure that an indemnity from NETGEAR will be sufficient to protect us against the full amount of such liabilities, or that NETGEAR will be able to fully satisfy its indemnification obligations in the future. Even if we ultimately succeed in recovering from NETGEAR any amounts for which we are held liable, we may be temporarily required to bear these losses. Each of these risks could materially adversely affect our business, results of operations, and financial condition.
We may have received better terms from unaffiliated third parties than the terms we received in the agreements that we entered into with NETGEAR in connection with the Separation.
The agreements that we entered into with NETGEAR in connection with the Separation, including the master separation agreement, the transition services agreement, the intellectual property cross-license agreement, the tax matters agreement, the employee matters agreement and the registration rights agreement with respect to NETGEAR’s continuing ownership of our common stock, were prepared in the context of the Separation while we were still a wholly owned subsidiary of NETGEAR. Accordingly, during the period in which the terms of those agreements were prepared, we did not have a board of directors or a management team that was independent of NETGEAR. As a result, the terms of those agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties.
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Risks Related to Ownership of Our Common Stock
The market price of our common stock could be volatile and is influenced by many factors, some of which are beyond our control.
The market price of our common stock could be volatile and is influenced by many factors, some of which are beyond our control, including those described above in “Risks Related to Our Business” and the following:

• | the failure of securities analysts to cover our common stock or changes in financial estimates by analysts;

• | the inability to meet the financial estimates of securities analysts who follow our common stock or changes in earnings estimates by analysts;

• | strategic actions by us or our competitors;

• | announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;

• | our quarterly or annual earnings, or those of other companies in our industry;

• | actual or anticipated fluctuations in our operating results and those of our competitors;

• | general economic and stock market conditions;

• | the public reaction to our press releases, our other public announcements and our filings with the SEC;

• | risks related to our business and our industry, including those discussed above;

• | changes in conditions or trends in our industry, markets or customers;

• | the trading volume of our common stock;

• | future sales of our common stock or other securities; and

• | investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives.

In particular, the realization of any of the risks described in these “Risk Factors” could have a material adverse impact on the market price of our common stock in the future and cause the value of your investment to decline. In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low.
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We may change our dividend policy at any time.
Although we currently intend to retain future earnings to finance the operation and expansion of our business and therefore do not anticipate paying cash dividends on our capital stock in the foreseeable future, our dividend policy may change at any time without notice to our stockholders. The declaration and amount of any future dividends to holders of our common stock will be at the discretion of our board of directors in accordance with applicable law and after taking into account various factors, including our financial condition, results of operations, current and anticipated cash needs, cash flows, impact on our effective tax rate, indebtedness, contractual obligations, legal requirements, and other factors that our board of directors deems relevant. As a result, we cannot assure you that we will pay dividends at any rate or at all.
* Future sales, or the perception of future sales, of our common stock may depress the price of our common stock.
The market price of our common stock could decline significantly as a result of sales or other distributions of a large number of shares of our common stock in the market. The perception that these sales might occur could depress the market price of our common stock. These sales, or the possibility that these sales may occur, might also make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
The 11,747,250 shares of our common stock sold in the IPO are freely tradable in the public market. On December 31, 2018, NETGEAR completed the Distribution to its stockholders of the 62,500,000 shares of Arlo common stock that it owned. As of September 29, 2019, we have 75,705,632 shares of common stock outstanding.
In the future, we may issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock.
Our costs will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to complying with public company regulations.
Prior to the Separation, we historically operated our business as a segment of a public company. As a standalone public company, we have additional legal, accounting, insurance, compliance, and other expenses that we had not incurred historically. We are now obligated to file with the SEC annual and quarterly reports and other reports that are specified in Section 13 and other sections of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We are also required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. In addition, we are and will continue to become subject to other reporting and corporate governance requirements, including certain requirements of the NYSE, and certain provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the regulations promulgated thereunder, which will impose significant compliance obligations upon us.
Sarbanes-Oxley, as well as rules subsequently implemented by the SEC and the NYSE, have imposed increased regulation and disclosure and required enhanced corporate governance practices of public companies. We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard are likely to result in increased selling and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. These changes will require a significant commitment of additional resources. We may not be successful in implementing these requirements and implementing them could materially adversely affect our business, results of operations and financial condition. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our operating results on a timely and accurate basis could be impaired. If we do not implement such requirements in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC and the NYSE. Any such action could harm our reputation and the confidence of investors and customers in us and could materially adversely affect our business and cause our share price to fall.
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Any impairment of goodwill and other intangible assets could negatively impact our results of operations.
Under generally accepted accounting principles, we review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered when determining if the carrying value of our goodwill or intangible assets may not be recoverable include a significant decline in our expected future cash flows or a sustained, significant decline in our stock price and market capitalization.
If, in any period our stock price decreases to the point where the fair value of our assets (as partially indicated by our market capitalization) is less than our book value, this could indicate a potential impairment and we may be required to record an impairment charge in that period. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from actual results. As a result, we may incur substantial impairment charges to earnings in our financial statements should an impairment of our goodwill or intangible assets be determined resulting in an adverse impact on our results of operations.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of Sarbanes-Oxley could materially adversely affect our business, results of operations, financial condition, and stock price.
As a public company, we are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of Sarbanes-Oxley (“Section 404”), which will require annual management assessments of the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K for the year ending December 31, 2019. Upon loss of status as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”), an annual report by our independent registered public accounting firm that addresses the effectiveness of internal control over financial reporting will be required. During the course of our testing, we may identify deficiencies which we may not be able to remediate in time to meet our deadline for compliance with Section 404. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. We also expect the regulations under Sarbanes-Oxley to increase our legal and financial compliance costs, make it more difficult to attract and retain qualified officers and members of our board of directors, particularly to serve on our audit committee, and make some activities more difficult, time consuming, and costly. We may not be able to conclude on an ongoing basis that we have effective internal control over our financial reporting in accordance with Section 404 or our independent registered public accounting firm may not be able or willing to issue an unqualified report on the effectiveness of our internal control over financial reporting. If we conclude that our internal control over financial reporting is not effective, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or their effect on our operations because there is presently no precedent available by which to measure compliance adequacy. If either we are unable to conclude that we have effective internal control over our financial reporting or our independent auditors are unable to provide us with an unqualified report as required by Section 404, then investors could lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our stock, or if our operating results do not meet their expectations, our stock price could decline.
The trading market for our common stock will be influenced by the research, reports and recommendations that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrades our stock or if our operating results do not meet their expectations, our stock price could decline.
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* We are subject to securities class action and derivative litigation.
We are subject to various securities class action and derivative complaints, as more fully discussed in the heading under “Litigation and Other Legal Matters” in Note 8, Commitments and Contingencies, in the Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Regardless of the merits or ultimate results of the above-described litigation matters, they could result in substantial costs, which would hurt the Company’s financial condition and results of operations and divert management’s attention and resources from our business. At this point, however, it is too early to reasonably estimate any financial impact to the Company resulting from these litigation matters.
Your percentage ownership in Arlo may be diluted in the future.
In the future, your percentage ownership in Arlo may be diluted because of equity awards that Arlo may grant to Arlo’s directors, officers, and employees or otherwise as a result of equity issuances for acquisitions or capital market transactions. In addition, following the Distribution, Arlo and NETGEAR employees hold awards in respect of shares of our common stock as a result of the conversion of certain NETGEAR stock awards (in whole or in part) to Arlo stock awards in connection with the Distribution. Such awards have a dilutive effect on Arlo’s earnings per share, which could adversely affect the market price of Arlo common stock. From time to time, Arlo will issue additional stock-based awards to its employees under Arlo’s employee benefits plans.
In addition, Arlo’s amended and restated certificate of incorporation authorizes Arlo to issue, without the approval of Arlo’s stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over Arlo’s common stock respecting dividends and distributions, as Arlo’s board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, Arlo could grant the holders of preferred stock the right to elect some number of Arlo’s directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences that Arlo could assign to holders of preferred stock could affect the residual value of the common stock.
We are an emerging growth company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common shares less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including exemption from compliance with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We will remain an emerging growth company until the earliest of (1) December 31, 2023, (2) the last day of the fiscal year in which we have total annual revenue of at least $1.07 billion, (3) the last day of the fiscal year in which we become a large accelerated filer, which means that we have been public for at least 12 months, have filed at least one annual report and the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last day of our then most recently completed second fiscal quarter, or (4) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements including exemption from compliance with the auditor attestation requirements of Section 404 and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.
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We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price may be more volatile.
Certain provisions in our amended and restated certificate of incorporation and amended and restated bylaws and of Delaware law may prevent or delay an acquisition of Arlo, which could decrease the trading price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others:

• | the inability of our stockholders to call a special meeting;

• | the inability of our stockholders to act without a meeting of stockholders;

• | rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;

• | the right of our board of directors to issue preferred stock without stockholder approval;

• | the division of our board of directors into three classes of directors, with each class serving a staggered three-year term, and this classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult;

• | a provision that stockholders may only remove directors with cause while the board of directors is classified; and

• | the ability of our directors, and not stockholders, to fill vacancies on our board of directors.

In addition, because we have not elected to be exempt from Section 203 of the Delaware General Corporation Law (the “DGCL”), this provision could also delay or prevent a change of control that you may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation (an “interested stockholder”) shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which the person became an interested stockholder, unless (i) prior to such time, the board of directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (iii) on or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.
We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make Arlo immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent
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an acquisition that our board of directors determines is not in the best interests of Arlo and its stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.
Our amended and restated certificate of incorporation contains exclusive forum provisions that may discourage lawsuits against us and our directors and officers.
Our amended and restated certificate of incorporation provides that unless the board of directors otherwise determines, the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of Arlo, any action asserting a claim of breach of a fiduciary duty owed by any director or officer of Arlo to Arlo or Arlo’s stockholders, any action asserting a claim against Arlo or any director or officer of Arlo arising pursuant to any provision of the DGCL or Arlo’s amended and restated certificate of incorporation or bylaws, or any action asserting a claim against Arlo or any director or officer of Arlo governed by the internal affairs doctrine under Delaware law. Our amended and restated certificate of incorporation further provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These exclusive forum provisions may limit the ability of Arlo’s stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with Arlo or Arlo’s directors or officers, which may discourage such lawsuits against Arlo and Arlo’s directors and officers. Alternatively, if a court were to find one or more of these exclusive forum provisions inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, Arlo may incur additional costs associated with resolving such matters in other jurisdictions or forums, which could materially and adversely affect Arlo’s business, financial condition, or results of operations.
On December 19, 2018, the Delaware Chancery Court issued an opinion in Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL, invalidating provisions in the certificates of incorporation of Delaware companies that purport to limit to federal court the forum in which a stockholder could bring a claim under the Securities Act. The Chancery Court held that a Delaware corporation can only use its constitutive documents to bind a plaintiff to a particular forum where the claim involves rights or relationships established by or under Delaware’s corporate law. This case may be appealed to the Delaware Supreme Court. As such, and in light of the recent Sciabacucchi decision, we do not intend to enforce the foregoing federal forum selection provision unless the Sciabacucchi decision is appealed and the Delaware Supreme Court reverses the decision. If there is no appeal of the Sciabacucchi decision or if the Delaware Supreme Court affirms the Chancery Court’s decision, then we will seek approval by our stockholders to amend our amended and restated certificate of incorporation at our next regularly-scheduled annual meeting of stockholders to remove the invalid provision.
Our board of directors has the ability to issue blank check preferred stock, which may discourage or impede acquisition attempts or other transactions.
Our board of directors has the power, subject to applicable law, to issue series of preferred stock that could, depending on the terms of the series, impede the completion of a merger, tender offer or other takeover attempt. For instance, subject to applicable law, a series of preferred stock may impede a business combination by including class voting rights, which would enable the holder or holders of such series to block a proposed transaction. Our board of directors will make any determination to issue shares of preferred stock on its judgment as to our and our stockholders’ best interests. Our board of directors, in so acting, could issue shares of preferred stock having terms which could discourage an acquisition attempt or other transaction that some, or a majority, of the stockholders may believe to be in their best interests or in which stockholders would have received a premium for their stock over the then prevailing market price of the stock.
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Item 6. | Exhibits

Exhibit Index

|  |  |  | Incorporated by Reference |  |
Exhibit Number |  | Exhibit Description |  | Form |  | Date |  | Number |  | Filed Herewith
3.1 |  | Amended and Restated Certificate of Incorporation of Arlo Technologies, Inc. |  | 8-K |  | 8/7/2018 |  | 3.1 |  |
3.2 |  | Amended and Restated Bylaws of Arlo Technologies, Inc. |  | 8-K |  | 8/7/2018 |  | 3.2 |  |
4.1 |  | Common Stock Certificate of Arlo Technologies, Inc. |  | S-1/A |  | 7/23/2018 |  | 4.1 |  |
10.1* |  | Form of Service and Stock Market Performance-Based Restricted Stock Unit Agreement for Executive Officers |  |  |  |  |  |  |  | X
10.2* |  | Form of Service and Revenue Performance-Based Restricted Stock Unit Agreement for Executive Officers |  |  |  |  |  |  |  | X
10.3* |  | Form of Service-Based Restricted Stock Unit Agreement for Executive Officers |  |  |  |  |  |  |  | X
31.1 |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer |  |  |  |  |  |  |  | X
31.2 |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer |  |  |  |  |  |  |  | X
32.1# |  | Section 1350 Certification of Principal Executive Officer |  |  |  |  |  |  |  | X
32.2# |  | Section 1350 Certification of Principal Financial Officer |  |  |  |  |  |  |  | X
101.INS |  | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |  |  |  |  |  |  |  | X
101.SCH |  | Inline XBRL Taxonomy Extension Schema Document |  |  |  |  |  |  |  | X
101.CAL |  | Inline XBRL Taxonomy Extension Calculation Linkbase Document |  |  |  |  |  |  |  | X
101.DEF |  | Inline XBRL Taxonomy Extension Definition Linkbase Document |  |  |  |  |  |  |  | X
101.LAB |  | Inline XBRL Taxonomy Extension Label Linkbase Document |  |  |  |  |  |  |  | X
101.PRE |  | Inline XBRL Taxonomy Extension Presentation Linkbase Document |  |  |  |  |  |  |  | X
104 |  | 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |  |  |  |  |  |  |  | X
# |  | This certification is deemed to accompany this Quarterly Report on Form 10-Q and will not be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that section. This certification will not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
* |  | Indicates management contract or compensatory plan or arrangement. |  |  |  |  |  |  |  |

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ARLO TECHNOLOGIES, INC.
Registrant
/s/ MATTHEW MCRAE
Matthew McRae
Chief Executive Officer
(Principal Executive Officer)
/s/ CHRISTINE M. GORJANC
Christine M. Gorjanc
Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: November 7, 2019
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