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Employee Benefit Plans
 9 Months Ended
Sep. 29, 2019
Employee Benefit and Share-based Payment Arrangement, Noncash Expense [Abstract]  
Employee Benefit Plans
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.



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.

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.

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

NETGEAR’s RSU activity for Arlo employees during the 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
—

 
—

 
—

 
—
 
—

 
—

 
—

 
—



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
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.