Commitments and Contingencies | Commitments and Contingencies Operating Leases The Company leases primarily 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 the Company’s facility for certain leases provide for rental payments on a graduated scale. The Company recognizes lease expense on a straight-line basis over the lease term. The operating lease expense for the three months ended March 31, 2019 was as follows: Statements of Operations Location March 31, 2019 (In thousands) Operating lease cost (1) General and administrative $ 863 ________________________ (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 March 31, 2019 were as follows: Leases Balance Sheet Location March 31, 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 27,033 14,400 — Operating leases (2) Accrued liabilities — (107 ) 107 Operating leases (2) Accrued liabilities 3,135 2,356 — Operating leases (2) Non-current deferred rent — (1,141 ) 1,141 Operating leases (2) Non-current operating lease liabilities 25,256 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 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 have been 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 an estimated value of ROU assets and lease liabilities of $14.3 million , representing two thirds of the value of the ROU and lease liabilities. Upon expected completion of the leasehold improvements in the second quarter of fiscal 2019, the Company will recognize the remaining estimated value of ROU and lease liabilities of approximately $7.2 million . Supplemental cash flow information related to operating leases for the three months ended March 31, 2019 was as follows (in thousands): Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 756 Right-of-use assets obtained in exchange for lease liabilities Operating leases $ 14,559 Weighted average remaining lease term and weighted average discount rate related to operating leases for the three months ended March 31, 2019 were as follows: Weighted average remaining lease term 6.0 years Weighted average discount rate 5.58 % The maturity of lease liabilities related to operating leases for each of the next five years and thereafter as of March 31, 2019 was as follows (in thousands): 2019 (Remaining nine months) $ 3,167 2020 5,021 2021 4,864 2022 4,730 2023 4,023 Thereafter 13,786 Total lease payments 35,591 Less: interest (1) (7,200 ) Total $ 28,391 Accrued liabilities $ 3,135 Non-current operating lease liabilities 25,256 Total $ 28,391 ________________________ (1) Calculated using the Company’s incremental borrowing rate on a collateralized basis plus LIBOR rate that closely matches contractual term of most leases. 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 March 31, 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. 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 March 31, 2019 , the Company had approximately $28.1 million in non-cancelable purchase commitments with suppliers. The Company establishes a loss liability for all products it does not expect to sell for which it has committed purchases from suppliers. As of March 31, 2019 , the loss liability from committed purchases was $2.9 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. 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 March 31, April 1, (In thousands) Balance at the beginning of the period $ 3,712 $ 31,756 Reclassified to sales returns upon adoption of ASC 606 (1) — (28,713 ) Provision for warranty obligation made during the period — 633 Settlements made during the period (511 ) (189 ) Balance at the end of the period $ 3,201 $ 3,487 ________________________ (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 putative securities class action complaints in the Superior Court of California, County of Santa Clara, and 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 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. A case management conference for all state actions is scheduled for May 31, 2019. In the state court lawsuits, the court has issued an order deeming the cases complex and temporarily staying discovery. The plaintiffs are seeking to consolidate their cases and file a consolidate complaint. In the federal action, four investors filed motions to be appointed lead plaintiff. A hearing on the lead plaintiff motions is scheduled for May 9, 2019. The Company has not filed an answer in the state court or federal court lawsuits. 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 March 31, 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 March 31, 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. 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. Employment Agreements NETGEAR has signed various employment agreements with the Company’s key executives pursuant to which, if their employment is terminated without cause, such employees are entitled to receive their base salary (and commission or bonus, as applicable) for up to one year. Such employees will also continue to have equity awards vest for up to a one -year period following such termination without cause. If a termination without cause or resignation for good reason occurs within one year of a change in control, certain key employees are entitled to up to two years acceleration of any unvested portion of his or her equity awards. The Company had no liabilities recorded for these agreements as of March 31, 2019 . In connection with the completion of the IPO, the Company entered into executive confirmatory employment offer letters and change in control and severance agreements with each of the Company’s key executives, which superseded and replaced any employment arrangements that such executives had previously entered into with NETGEAR. Refer to Note 1, The Company and Basis of Presentation , for details relating to the Company’s IPO and related transactions. 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. |