Employee Benefit Plans | Employee Benefit Plans 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 as of December 31, 2018. The Company’s consolidated statements of operations reflect compensation expense for these stock-based plans associated with the portion of NETGEAR’s plans in which Arlo employees participated. On December 31, 2018, in connection with the Distribution, all outstanding NETGEAR equity awards (whether held by Arlo employees and non-employee directors or NETGEAR employees and non-employee directors) were equitably adjusted to reflect the impact of the Distribution. The adjustments to each type of award outstanding pursuant to the NETGEAR stock-based plans as of immediately prior to the Distribution was determined in accordance with the terms of the employee matters agreement between NETGEAR and Arlo, dated as of August 2, 2018 (the “employee matters agreement”). In connection with this adjustment, certain NETGEAR equity awards were adjusted into Arlo equity awards, as follows: • NETGEAR stock options granted prior to August 3, 2018 (the “cutoff date”) were converted into both an adjusted NETGEAR stock option and an Arlo stock option. The formulas applicable to the adjustment are set forth in the employee matters agreement and, in each case, the exercise price and number of shares subject to each option was adjusted to preserve the aggregate intrinsic value of the original NETGEAR stock option as measured immediately prior to and immediately following the Distribution, subject to rounding. Following the Distribution, the NETGEAR stock options and Arlo stock options are subject to substantially the same terms and vesting conditions that applied to the original NETGEAR stock option immediately prior to the Distribution. • NETGEAR restricted stock units granted prior to the cutoff date were converted into both an adjusted NETGEAR restricted stock unit covering the same number of shares of NETGEAR common stock subject to the award prior to the distribution and an Arlo restricted stock unit covering a number of shares of Arlo common stock equal to the number of shares of NETGEAR common stock subject to the award prior to the distribution multiplied by 1.980295 , subject to rounding, which is the number of shares of Arlo common stock that was distributed in respect of each share of NETGEAR common stock in the Distribution. The formulas applicable to the foregoing NETGEAR restricted stock unit adjustment are set forth in the employee matters agreement. Following the Distribution, the NETGEAR restricted stock units and Arlo restricted stock units are subject to substantially the same terms and vesting conditions that applied to the original NETGEAR restricted stock units immediately prior to the Distribution. • NETGEAR stock options and NETGEAR restricted stock units held by non-U.S. holders: NETGEAR, in its sole discretion, determined to treat certain NETGEAR stock options and NETGEAR restricted stock unit awards that were outstanding as of the effective time of the Distribution and held by current and former service providers of Arlo and NETGEAR in jurisdictions other than the United States in a manner inconsistent with the immediately preceding two paragraphs, which, in certain jurisdiction, resulted in the issuance of additional Arlo stock options and/or Arlo restricted stock units. We did not recognize any incremental expense in connection with the conversion of NETGEAR’ equity awards into Arlo awards since the impact is immaterial. 2018 Equity Incentive Plan On August 1, 2018, the Company reserved a total sum of (1) 7,500,000 shares of its common stock for issuance and (2) the number of shares of its common stock that may be issuable upon exercise or vesting of awards relating to NETGEAR common stock that may be converted into awards relating to the Company’s common stock upon the completion of the Distribution for issuance under the Company’s 2018 Plan and 1,500,000 shares of its common stock for issuance under the 2018 ESPP, as applicable. On December 31, 2018, upon the completion of the Distribution, the number of shares described in clause (2) was finally determined, and awards relating to NETGEAR common stock were adjusted into awards covering 6,822,787 shares of the Company’s common stock. Refer to Note 16. Subsequent Events , for further details regarding plan share increase. The 2018 Plan provides for the granting of stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares to eligible directors, employees and consultants. Award vesting periods for this plan are generally 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 calculates the fair value of stock option using the Black-Scholes option pricing model. The period over which RSUs granted under the 2018 Plan may fully vest is generally no less than three years. RSUs do not have the voting rights of Arlo’s common stock, and the shares underlying the RSUs are not considered issued and outstanding prior to settlement of the RSUs. The fair value of RSUs represents the closing stock price of the Company’s common stock on the grant date. The following table sets forth the 2018 Plan during the year ended December 31, 2018 and the available shares for future grants as of December 31, 2018 : Number of Shares (In thousands) Shares reserved as of August 2, 2018 7,500 Granted at IPO (1) (3,403 ) Granted during the period (137 ) Additional authorized shares in the Distribution 6,823 Converted in the Distribution (2) (6,823 ) Cancelled 9 Shares available for grants as of December 31, 2018 3,969 _________________________ (1) Including Arlo IPO Options of 2.8 million shares granted to the Company’s Named Executive Officers (“NEOs”) with performance-based vesting criteria (in addition to service-based vesting criteria for any of such IPO Options that are deemed to have been earned). As of December 31, 2018 , 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 were expected to vest. The Company recorded an adjustment of $0.2 million reducing the stock-based compensation expense during the fourth fiscal quarter of 2018 as a result of the final determination of the performance metrics. (2) On December 31, 2018, in connection with the Distribution, certain NETGEAR equity awards held by Arlo non-employee directors and employees and NETGEAR non-employee directors and employees were adjusted into equity awards with respect to Arlo common stock and NETGEAR common stock as described in more detail in the employee matters agreement. IPO Options On August 2, 2018, in connection with the completion of the IPO, to create incentives for continued long-term success and to closely align executive pay with the Company’s stockholders’ interests in the achievement of significant milestones, the Company granted to its NEOs options to purchase 2,781,249 shares of Arlo common stock (“IPO Options”). The fair value of IPO options granted under the 2018 plan were calculated using the Black-Scholes option pricing model. Each of the IPO Options will have a ten-year contractual term and an exercise price equal to the fair value of a share of Arlo common stock on the date of grant and will vest as follows: • The Tranche 1 Service Option will vest in equal monthly installments during the 24 -month period that begins on the two-year anniversary of the option grant date; • The Tranche 2 Performance Option will vest on the later of (i) the date (prior to the four -year anniversary of the grant date) of satisfaction of a cumulative registered users milestone and (ii) if the milestone has been satisfied prior to the applicable date, then (a) with respect to 25% of the Tranche 2 Performance Option, on the first anniversary of the option grant date, (b) with respect to 25% of the Tranche 2 Performance Option, on the second anniversary of the option grant date, and (c) with respect to the remaining 50% of the Tranche 2 Performance Option, in equal monthly installments during the 24-month period on the first day of each month beginning on September 1, 2020; • The Tranche 3 Performance Option will vest on the later of (i) the date (prior to the four -year anniversary of the grant date) of satisfaction of a paid recurring revenue milestone and (ii) if the milestone has been satisfied prior to the applicable date, then (a) with respect to 25% of the Tranche 3 Performance Option, on the first anniversary of the option grant date, (b) with respect to 25% of the Tranche 3 Performance Option, on the second anniversary of the option grant date, and (c) with respect to the remaining 50% of the Tranche 3 Performance Option, in equal monthly installments during the 24-month period on the first day of each month beginning on September 1, 2020; • The Tranche 4 Performance Option will vest on the one-year anniversary of the grant date based on the extent to which the revenue and non-GAAP gross profit milestones for the second half of fiscal 2018 are achieved; and • The Tranche 5 Performance Option will vest on the one-year anniversary of the grant date based on the extent to which the revenue and non-GAAP gross profit milestones for the second half of fiscal 2019 are achieved. Employee Stock Purchase Plan Under the 2018 ESPP, eligible employees may contribute up to 15% of compensation, subject to certain income limits, to purchase shares of Arlo’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. The Company will calculate the fair value of a share purchase option under the 2018 ESPP using the Black-Scholes option pricing model. As of December 31, 2018 , no shares had been purchased under the 2018 ESPP by Arlo employees, as the program was suspended until the completion of the Distribution. The Company’s employees have historically participated in NETGEAR’s ESPP. For the years ended December 31, 2018 , 2017 and 2016, the Company recognized ESPP compensation expense of $0.2 million for each period. For the years ended December 31, 2018 , 2017 and 2016, employees specifically identifiable to Arlo purchased approximately 37,000 , 19,000 and 16,000 shares of NETGEAR’s common stock at an average exercise price of $45.06 , $43.09 and $31.52 , respectively. ARLO Options The following table sets forth the weighted average assumptions used to estimate the fair value of Arlo’s stock options granted using Black-Scholes option pricing model during the year ended December 31, 2018 . Expected life (in years) 6.3 Risk-free interest rate 2.86 % Expected volatility 40.0 % Dividend yield — Because the Company’s common stock did not have sufficient history of being publicly traded at grant date, the estimated term of Arlo’s stock options granted was determined by a combination of using a simplified method, which is an average of the contractual term and vesting period of the stock options and using management best estimate of the expected term. The risk-free interest rate of stock options granted was based on the implied yield currently available on U.S. Treasury securities, with a remaining term commensurate with the estimated expected term. The estimated volatility assumption was calculated based on a compensation peer group analysis of stock price volatility on the grant date. Arlo’s stock option activity during the year ended of December 31, 2018 was as follows: Number of Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (3) (In thousands) (In dollars) (In years) (In thousands) Outstanding as of August 2, 2018 — $ — Granted at IPO (1) 3,343 $ 16.00 Converted in the Distribution (2) 3,866 $ 8.69 Outstanding as of December 31, 2018 7,209 $ 12.08 7.84 $ 8,114 Vested and expected to vest as of December 31, 2018 7,209 $ 12.08 7.84 $ 8,114 Exercisable Options as of December 31, 2018 2,429 $ 7.10 5.02 $ 6,989 _________________________ (1) Including 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 December 31, 2018 , 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 were expected to vest. The Company recorded an adjustment of $0.2 million reducing the stock-based compensation expense during the fourth fiscal quarter of 2018 as a result of the final determination of the performance metrics. (2) On December 31, 2018, in connection with the Distribution, certain NETGEAR equity awards held by Arlo non-employee directors and employees and NETGEAR non-employee directors and employees were adjusted into equity awards with respect to Arlo common stock and NETGEAR common stock as described in more detail in the employee matters agreement. (3) Representing the total pre-tax intrinsic values (the difference between the Company’s closing stock price on the last trading day of 2018 and the exercise price, multiplied by the number of shares underlying the in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2018 . This amount changes based on the fair market value of the Company’s stock. Year Ended December 31, 2018 (In millions, except per share data) Total intrinsic value of options exercised $ — Total fair value of options vested $ — Weighted-average grant date fair value per share of options granted $ 7.02 The following table summarizes significant ranges of outstanding Arlo’s stock options as of December 31, 2018 . Options Outstanding (1) Options Exercisable (1) Range of Exercise Prices Shares Outstanding Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price Per Share Shares Exercisable Weighted- Average Exercise Price Per Share (In thousands) (In years) (In dollars) (In thousands) (In dollars) $2.51 - $6.94 1,534 4.69 $ 6.52 1,466 $ 6.53 $6.96 - $8.76 1,566 6.55 $ 8.18 951 $ 7.95 $10.09 - $13.23 100 9.27 $ 11.97 12 $ 10.09 $14.39 - $14.39 666 9.07 $ 14.39 — $ — $16.00 - $16.00 3,343 9.59 $ 16.00 — $ — $2.51 - $16.00 7,209 7.84 $ 12.08 2,429 $ 7.10 _________________________ (1) Including and reflecting the adjustments on December 31, 2018, in connection with the Distribution from NETGEAR options. NETGEAR Options The following table sets forth the weighted average assumptions used to estimate the fair value of NETGEAR’s stock options granted and purchase rights granted under the NETGEAR’s ESPP to employees specifically identifiable to Arlo during the years ended December 31, 2018 , 2017 and 2016: Stock Options ESPP (1) 2018 2017 2016 2018 2017 2016 Expected life (in years) 4.4 4.4 4.4 0.5 0.5 0.5 Risk-free interest rate 2.32 % 1.66 % 1.28 % 1.81 % 0.93 % 0.43 % Expected volatility 30.9 % 31.6 % 35.4 % 37.1 % 29.7 % 38.3 % Dividend yield — — — — — — _________________________ (1) Arlo employees have completed their participation into NETGEAR’s ESPP by the end of the second quarter of fiscal 2018. As of December 31, 2018 , no shares had been purchased under the 2018 ESPP by Arlo employees, as the program was suspended until the completion of the Distribution. The estimated expected term of NETGEAR’s options granted to employees specifically identifiable to Arlo is under NETGEAR’s plans derived from historical data on employee exercise and post-vesting employment termination behavior. The risk-free interest rate of options granted and the purchase rights granted under the NETGEAR’s ESPP is based on the implied yield currently available on U.S. Treasury securities, with a remaining term commensurate with the estimated expected term. Expected volatility of NETGEAR’s options granted and the purchase rights granted under the NETGEAR’s ESPP is based on historical volatility over the most recent period commensurate with the estimated expected term. NETGEAR’s stock option activity for employees specifically identifiable to Arlo during the year ended December 31, 2018 was as follows: Number of Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (In thousands) (In dollars) (In years) (In thousands) Outstanding as of December 31, 2017 78 $ 35.56 Granted 60 $ 70.15 Converted in the Distribution (1) 283 $ 26.53 Exercised (11 ) $ 20.30 Cancelled (6 ) $ 28.59 Cancelled in the Distribution (1) (276 ) $ 45.11 Transferred (2) 155 $ 36.71 Outstanding as of December 31, 2018 283 $ 26.53 6.82 $ 7,219 Vested and expected to vest as of December 31, 2018 283 $ 26.53 6.82 $ 7,219 Exercisable Options as of December 31, 2018 152 $ 21.27 5.36 $ 4,684 _________________________ (1) On December 31, 2018, in connection with the Distribution, certain NETGEAR equity awards held by Arlo non-employee directors and employees and NETGEAR non-employee directors and employees were adjusted into equity awards with respect to Arlo common stock and NETGEAR common stock as described in more detail in the employee matters agreement. (2) Transferred options are attributable to employees that transferred from other NETGEAR’s divisions. Year Ended December 31, 2018 2017 2016 (In millions, except per share data) Total intrinsic value of options exercised $ 0.6 $ 0.5 $ 0.8 Total fair value of options vested $ 1.1 $ 0.2 $ 0.2 Weighted-average grant date fair value per share of NETGEAR’s stock options granted to employees specifically identifiable to Arlo $ 20.63 $ 12.25 $ 12.28 For the year ended December 31, 2018 , cash received from NETGEAR stock option exercises and ESPP purchases by employees specifically identifiable to Arlo was $0.4 million through the completion of the IPO. Cash received from NETGEAR stock option exercises and ESPP purchases by employees specifically identifiable to Arlo was $1.6 million and $1.9 million for the years ended December 31, 2017 and 2016, respectively. ARLO RSUs Arlo’s RSU activity during the year ended of December 31, 2018 was as follows: Range of Exercise Prices Number of Shares Weighted Average Grant Date Fair Value Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (In thousands) (In dollars) (In years) (In thousands) Outstanding as of August 2, 2018 — $ — Granted 197 $ 14.46 Converted in the Distribution (1) 2,957 $ 10.67 Vested (4 ) $ 10.44 Cancelled (9 ) $ 22.71 Outstanding as of December 31, 2018 3,141 $ 12.22 1.44 $ 31,349 _________________________ (1) On December 31, 2018, in connection with the Distribution, certain NETGEAR equity awards held by Arlo non-employee directors and employees and NETGEAR non-employee directors and employees were adjusted into equity awards with respect to Arlo common stock and NETGEAR common stock as described in more detail in the employee matters agreement. Year Ended December 31, 2018 (In millions, except per share data) Total intrinsic value of RSUs vested (the release date fair value) $ 0.04 Total fair value of RSUs vested (the grant date fair value) $ 0.04 weighted-average fair value of RSUs granted $ 14.46 NETGEAR RSUs NETGEAR’s RSU activity for employees specifically identifiable to Arlo during the year ended December 31, 2018 was as follows: Number of Shares Weighted Average Grant Date Fair Value Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (In thousands) (In dollars) (In years) (In thousands) Outstanding as of December 31, 2017 132 $ 45.54 Granted 339 $ 67.24 Converted in the Distribution (1) 521 $ 30.91 Vested (119 ) $ 56.70 Cancelled (7 ) $ 59.85 Cancelled in the Distribution (1) (530 ) $ 59.27 Transferred (2) 185 $ 43.60 Outstanding as of December 31, 2018 521 $ 34.89 1.49 $ 27,111 _________________________ (1) On December 31, 2018, in connection with the Distribution, certain NETGEAR equity awards held by Arlo non-employee directors and employees and NETGEAR non-employee directors and employees were adjusted into equity awards with respect to Arlo common stock and NETGEAR common stock as described in more detail in the employee matters agreement. (2) Transferred RSUs are attributable to employees that transferred from other NETGEAR’s divisions. Year Ended December 31, 2018 2017 2016 (In millions, except per share data) Total intrinsic value of RSUs vested (the release date fair value) $ 6.9 $ 2.7 $ 1.4 Total fair value of RSUs vested (the grant date fair value) $ 5.0 $ 2.0 $ 1.0 weighted-average fair value of RSUs granted $ 67.24 $ 52.89 $ 41.92 For the year ended December 31, 2018 , cash paid to administer the RSU withholdings relating to employees specifically identifiable to Arlo was $0.8 million through the completion of the IPO. Cash paid to administer the RSU withholdings relating to employees specifically identifiable to Arlo for the years ended December 31, 2017 and 2016 was $1.1 million and $0.6 million , respectively. Stock-Based Compensation Expense The Company recognizes these stock-based compensation expense generally on a straight-line basis over the requisite service period of the award. The following tables set forth stock-based compensation expense for employees specifically identifiable to Arlo and allocated charges deemed attributable to Arlo operations resulting from NETGEAR’s and Arlo’s RSUs and stock options, and the purchase rights under the NETGEAR’s ESPP included in the Company’s consolidated statements of operations during the years ended December 31, 2018 , 2017 and 2016: Year Ended December 31, 2018 2017 2016 Direct (1) Indirect Total Direct Indirect Total Direct Indirect Total (In thousands) Cost of revenue $ 608 $ 583 $ 1,191 $ 102 $ 599 $ 701 $ 61 $ 266 $ 327 Research and development 3,078 396 3,474 1,959 455 2,414 1,349 195 1,544 Sales and marketing 1,992 969 2,961 390 866 1,256 110 407 517 General and administrative 3,153 2,100 5,253 — 2,547 2,547 — 1,216 1,216 Total stock-based compensation $ 8,831 $ 4,048 $ 12,879 $ 2,451 $ 4,467 $ 6,918 $ 1,520 $ 2,084 $ 3,604 _________________________ (1) Reflecting expenses for those legacy NETGEAR stock-based plans that have converted to equivalent Arlo stock-based plans upon the spin-off transaction. As of December 31, 2018 , after the adjustments upon the Distribution, $17.8 million of unrecognized compensation cost related to Arlo’s stock options and PSOs was expected to be recognized over a weighted-average period of 3.5 years and $12.7 million of unrecognized compensation cost related to unvested Arlo’s RSUs was expected to be recognized over a weighted-average period of 2.6 years. As of December 31, 2018, after the adjustments upon the Distribution, $1.2 million of unrecognized compensation cost related to NETGEAR’s stock options for employees specifically identifiable to Arlo was expected to be recognized over a weighted-average period of 2.5 years and $14.3 million of unrecognized compensation cost related to unvested NETGEAR’s RSUs for employees specifically identifiable to Arlo was expected to be recognized over a weighted-average period of 2.7 years. 401(k) Plan The Company’s employees have historically participated in NETGEAR’s 401(k) Plan, which was adopted in April 2000. Under NETGEAR’s 401(k) Plan, employees may contribute up to 100% of salary subject to the legal maximum and NETGEAR matches 50% of contributions for employees that remain active with NETGEAR or its subsidiaries through the end of the fiscal year, up to a maximum of $6,000 in employee contributions. During the years ended December 31, 2018 , 2017 and 2016, the Company recognized $0.5 million , $0.2 million and $0.2 million , respectively, in expenses for employees specifically identifiable to Arlo related to NETGEAR 401(k) Plan match. In January 2019, the Company adopted Arlo 401(k) Plan to which employees may contribute up to 100% of salary subject to the legal maximum. In the fourth quarter of fiscal year 2018, the Company began matching 50% of contributions for employees that remain active with the Company through the end of the fiscal year, up to a maximum of $6,000 in employee contributions. |