0001736946-20-000036.txt : 20200806 0001736946-20-000036.hdr.sgml : 20200806 20200806161216 ACCESSION NUMBER: 0001736946-20-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 99 CONFORMED PERIOD OF REPORT: 20200628 FILED AS OF DATE: 20200806 DATE AS OF CHANGE: 20200806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Arlo Technologies, Inc. CENTRAL INDEX KEY: 0001736946 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 384061754 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38618 FILM NUMBER: 201081746 BUSINESS ADDRESS: STREET 1: 3030 ORCHARD PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: (408) 890-3900 MAIL ADDRESS: STREET 1: 3030 ORCHARD PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95134 10-Q 1 arlo-20200628.htm 10-Q arlo-20200628
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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 June 28, 2020
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) 
Delaware38-4061754
(State or other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification Number)
3030 Orchard Parkway
San Jose,California95134
(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 shareARLONew 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 every Interactive Data File required to be submitted 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 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 the definitions 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 78,136,752 as of July 24, 2020.
1

ARLO TECHNOLOGIES, INC.

TABLE OF CONTENTS
 
2

PART I: FINANCIAL INFORMATION

Item 1.Financial Statements

ARLO TECHNOLOGIES, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of
June 28,
2020
December 31,
2019
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents$185,424  $236,680  
Short-term investments (amortized cost of $20,016 and $19,967)
20,030  19,990  
Accounts receivable (net of allowance for credit losses of $810 and $609)
46,466  127,317  
Inventories65,814  68,624  
Prepaid expenses and other current assets9,948  16,958  
Total current assets327,682  469,569  
Property and equipment, net18,210  21,352  
Operating lease right-of-use assets, net26,048  31,300  
Intangibles, net594  1,306  
Goodwill11,038  11,038  
Restricted cash4,141  4,139  
Other non-current assets2,244  4,008  
Total assets$389,957  $542,712  
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable$52,902  $111,650  
Deferred revenue44,287  50,362  
Accrued liabilities99,423  127,400  
Income tax payable3,491  4,489  
Total current liabilities200,103  293,901  
Non-current deferred revenue10,259  15,736  
Non-current operating lease liabilities27,026  29,001  
Non-current income taxes payable92  92  
Other non-current liabilities573  606  
Total liabilities238,053  339,336  
Commitments and contingencies (Note 10)
Stockholders’ Equity:
Preferred stock: $0.001 par value; 50,000,000 shares authorized; none issued or outstanding
    
Common stock: $0.001 par value; 500,000,000 shares authorized; shares issued and outstanding: 78,089,035 at June 28, 2020 and 75,785,952 at December 31, 2019
78  76  
Additional paid-in capital351,913  334,821  
Accumulated other comprehensive income 14  (2) 
Accumulated deficit(200,101) (131,519) 
Total stockholders’ equity151,904  203,376  
Total liabilities and stockholders’ equity$389,957  $542,712  

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

ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedSix Months Ended
June 28,
2020
June 30,
2019
June 28,
2020
June 30,
2019
(In thousands, except per share data)
Revenue:
Products$49,603  $72,445  $100,326  $119,053  
Services17,029  11,153  31,756  22,425  
Total revenue66,632  83,598  132,082  141,478  
Cost of revenue:
Products51,186  67,839  103,374  118,123  
Services9,957  6,109  19,266  11,760  
Total cost of revenue61,143  73,948  122,640  129,883  
Gross profit5,489  9,650  9,442  11,595  
Operating expenses:
Research and development14,192  17,594  29,435  35,755  
Sales and marketing11,713  14,511  22,751  28,732  
General and administrative9,837  10,914  28,621  21,450  
Separation expense82  717  161  1,623  
Gain on sale of business    (292)   
Total operating expenses35,824  43,736  80,676  87,560  
Loss from operations(30,335) (34,086) (71,234) (75,965) 
Interest income151  712  686  1,574  
Other income (expense), net1,111  31  2,294  (16) 
Loss before income taxes(29,073) (33,343) (68,254) (74,407) 
Provision for income taxes183  349  328  569  
Net loss$(29,256) $(33,692) $(68,582) $(74,976) 
Net loss per share:
Basic$(0.38) $(0.45) $(0.89) $(1.01) 
Diluted$(0.38) $(0.45) $(0.89) $(1.01) 
Weighted average shares used to compute net loss per share:
Basic77,885  74,729  77,229  74,569  
Diluted77,885  74,729  77,229  74,569  

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

4

ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 Three Months EndedSix Months Ended
June 28,
2020
June 30,
2019
June 28,
2020
June 30,
2019
(In thousands)
Net loss$(29,256) $(33,692) $(68,582) $(74,976) 
Other comprehensive income (loss), before tax:
Unrealized gain (loss) on derivative instruments(28) (64) 25  (24) 
Unrealized gain (loss) on available-for-sale securities(75) 53  (9) 74  
Total other comprehensive income (loss), before tax(103) (11) 16  50  
Tax benefit (provision) related to derivative instruments  6    1  
Total other comprehensive income (loss), net of tax(103) (5) 16  51  
Comprehensive loss$(29,359) $(33,697) $(68,566) $(74,925) 

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

5

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

SharesAmount Additional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
(In thousands)
Balance as of March 29, 202077,361  $77  $349,212  $117  $(170,845) $178,561  
Net loss—  —  —  —  (29,256) (29,256) 
Stock-based compensation expense—  —  3,772  —  —  3,772  
Settlement of liability classified RSUs—  —  57  —  —  57  
Issuance of common stock under stock-based compensation plans1,150  1  —  —  —  1  
Restricted stock unit withholdings(422)   (1,128) —  —  (1,128) 
Change in unrealized gains and losses on available-for-sale securities, net of tax—  —  —  (75) —  (75) 
Change in unrealized gains and losses on derivatives, net of tax—  —  —  (28) —  (28) 
Balance as of June 28, 202078,089  $78  $351,913  $14  $(200,101) $151,904  
Common Stock

SharesAmount Additional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
(In thousands)
Balance as of March 31, 201974,552  $75  $318,862  $56  $(86,852) $232,141  
Net loss—  —  —  —  (33,692) (33,692) 
Stock-based compensation expense—  —  5,389  —  —  5,389  
Issuance of common stock under stock-based compensation plans472    11  —  —  11  
Restricted stock unit withholdings(155) (614) —  —  (614) 
Change in unrealized gains and losses on available-for-sale securities, net of tax—  —  —  53  —  53  
Change in unrealized gains and losses on derivatives, net of tax—  —  —  (58) —  (58) 
Balance as of June 30, 201974,869  $75  $323,648  $51  $(120,544) $203,230  

6

Common Stock

SharesAmount Additional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
(In thousands)
Balance as of December 31, 201975,786  $76  $334,821  $(2) $(131,519) $203,376  
Net loss—  —  —  —  (68,582) (68,582) 
Stock-based compensation expense—  —  15,757  —  —  15,757  
Settlement of liability classified RSUs—  —  2,630  —  —  2,630  
Issuance of common stock under stock-based compensation plans2,525  2    —  —  2  
Issuance of common stock under Employee Stock Purchase Plan732  1  1,853  —  —  1,854  
Restricted stock unit withholdings(954) (1) (3,148) —  —  (3,149) 
Change in unrealized gains and losses on available-for-sale securities, net of tax—  —  —  (9) —  (9) 
Change in unrealized gains and losses on derivatives, net of tax—  —  —  25  —  25  
Balance as of June 28, 202078,089  $78  $351,913  $14  $(200,101) $151,904  
Common Stock

SharesAmount Additional Paid-In CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
(In thousands)
Balance as of December 31, 201874,247  $74  $315,277  $  $(45,849) $269,502  
Cumulative-effect adjustment from adoption of ASC 842, net of tax—  —  —  —  281  281  
Net loss—  —  —  —  (74,976) (74,976) 
Stock-based compensation expense—  —  10,042  —  —  10,042  
Issuance of common stock under stock-based compensation plans953  1  11  —  —  12  
Restricted stock unit withholdings(331)   (1,682) —  —  (1,682) 
Change in unrealized gains and losses on available-for-sale securities, net of tax—  —  —  74  —  74  
Change in unrealized gains and losses on derivatives, net of tax—  —  —  (23) —  (23) 
Balance as of June 30, 201974,869  $75  $323,648  $51  $(120,544) $203,230  

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

7

ARLO TECHNOLOGIES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended
June 28,
2020
June 30,
2019
(In thousands)
Cash flows from operating activities:
Net loss$(68,582) $(74,976) 
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization5,476  4,980  
Premium amortization / discount accretion on investments, net 44  (274) 
Stock-based compensation expense17,337  10,042  
Allowance for (release of) credit losses and inventory reserves1,182  (51) 
Gain on sale of business(292)   
Deferred income taxes27  74  
Changes in assets and liabilities:
Accounts receivable, net 80,650  85,916  
Inventories1,827  28,042  
Prepaid expenses and other assets 8,745  1,784  
Accounts payable (58,669) (59,865) 
Deferred revenue(11,553) (2,527) 
Accrued and other liabilities(24,875) (47,806) 
Net cash used in operating activities(48,683) (54,661) 
Cash flows from investing activities:
Purchases of property and equipment (1,184) (7,116) 
Purchases of short-term investments(25,094) (24,793) 
Proceeds from maturities of short-term investments25,000  30,000  
Net cash used in investing activities(1,278) (1,909) 
Cash flows from financing activities:
Proceeds related to employee benefit plans1,856  12  
Restricted stock unit withholdings(3,149) (1,682) 
Net cash used in financing activities(1,293) (1,670) 
Net decrease in cash and cash equivalents and restricted cash
(51,254) (58,240) 
Cash and cash equivalents and restricted cash, at beginning of period
240,819  155,424  
Cash and cash equivalents and restricted cash, at end of period
$189,565  $97,184  
Non-cash investing and financing activities:
Purchases of property and equipment included in accounts payable and accrued liabilities$1,523  $(2,753) 
De-recognition of build-to-suit assets and liabilities$  $(21,610) 

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

8


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

Note 1. The Company and Basis of Presentation

The Company

The Company combines an intelligent cloud infrastructure and mobile app with a variety of smart connected devices that transform the way people experience the connected lifestyle. The Company's cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real-time with the people and things that matter most, from any location with a Wi-Fi or a cellular connection. The Company conducts business across three geographic regions - Americas; Europe, Middle-East and Africa (“EMEA”); and Asia Pacific (“APAC”) and primarily generates revenue by selling devices through retail channels, wholesale distribution and wireless carrier channels and paid subscription services.

The Company has dual corporate headquarters located in San Jose, California and Carlsbad, California and also maintains offices to provide sales and customer support at various global locations.

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All periods presented have been accounted for in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”).

These unaudited condensed consolidated financial statements should be read in conjunction with the notes to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair statement of the unaudited condensed consolidated financial statements for interim periods.

Reclassification

Certain reclassifications have been made to the prior year’s condensed consolidated statements of cash flows to conform to the current year’s presentation. The reclassifications had no effect on the net cash used (provided by) in operating activities, investing activities or financing activities on the prior year’s statement of cash flows.

Fiscal periods

The Company’s fiscal year begins on January 1 of the year stated and ends on December 31 of the same year. The Company reports its results on a fiscal quarter basis rather than on a calendar quarter basis. Under the fiscal quarter basis, each of the first three fiscal quarters ends on the Sunday closest to the calendar quarter end, with the fourth quarter ending on December 31.

Use of estimates

The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Management bases its estimates on various assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from those estimates and operating results for the six months ended June 28, 2020
9


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any future period.

Note 2. Significant Accounting Policies and Recent Accounting Pronouncements

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There have been no significant changes during the six months ended June 28, 2020, other than the accounting policies discussed below and the recent accounting pronouncements adopted and discussed below under Accounting Pronouncements Recently Adopted.

Trade accounts receivable

The Company is exposed to credit losses primarily through sales of products and services. The Company's allowance for current estimated credit losses for trade accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimated amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default.

The Company’s monitoring activities include timely and regular account reconciliations, dispute resolution, payment confirmation, review of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding the novel coronavirus ("COVID-19") pandemic and determined that the estimate of credit losses was not significantly impacted. Although the Company has historically not experienced significant credit losses, it is possible that there could be a material adverse impact from potential adjustments of the carrying amount of trade receivables.

Recent accounting pronouncements

Emerging Growth Company Status

As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies, unless the Company otherwise irrevocably elects not to avail itself of this exemption. The Company did not make such an irrevocable election and has not delayed the adoption of any applicable accounting standards.

Accounting Pronouncements Recently Adopted

ASU 2016-13 - Measurement of Credit Losses on Financial Instruments

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326), which replaces the incurred-loss impairment methodology and requires immediate recognition of estimated credit losses expected to occur for most financial assets, including trade receivables. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses, limited to the amount by which fair value is below amortized cost. The Company adopted Topic 326 on January 1, 2020, using a modified retrospective transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated. The cumulative-effect adjustment recorded on January 1, 2020 is immaterial.

10


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning January 1, 2022 (or January 1, 2021 should the Company cease to be classified as an EGC), with early adoption permitted. The Company early adopted ASU 2019-12 in the first quarter of 2020. The impact of the adoption of ASU 2019-12 on the Company's financial statements is immaterial.

Accounting Pronouncements Not Yet Effective

In March 2020, FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The accounting standards update is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its financial statements and related disclosures.

With the exception of the new standards discussed above, there have been no other new accounting pronouncements that have significance, or potential significance, to the Company’s financial position, results of operations, or cash flows.

Note 3. Deferred Revenue

Deferred Revenue

Deferred revenue consists of advance payments and deferred revenue, where the Company has unsatisfied performance obligations. Deferred revenue consists of prepaid services and customer billings in advance of revenues being recognized from the Company's subscription contracts. Advance payments include prepayments for products and Non-Recurring Engineering ("NRE") services under the Supply Agreement with Verisure S.à.r.l. (“Verisure”). Refer to Note 4, Disposal of Business, for a complete discussion of Verisure transaction.

Transaction Price Allocated to the Remaining Performance Obligations

Remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Unsatisfied and partially unsatisfied performance obligations consist of contract liabilities, in-transit orders with destination terms, and non-cancellable backlog. Non-cancellable backlog includes goods and services for which customer purchase orders have been accepted and that are scheduled or in the process of being scheduled for shipment.

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of June 28, 2020:
1 year2 yearsGreater than 2 yearsTotal
(In thousands)
Performance obligations$57,380  $8,266  $2,066  $67,712  

11


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The majority of the performance obligation classified as greater than one year pertains to revenue deferral from prepaid services.

For the six months ended June 28, 2020 and June 30, 2019, $21.4 million and $20.2 million of revenue was deferred due to unsatisfied performance obligations, primarily relating to over time service revenue, and $29.0 million and $22.8 million of revenue was recognized for the satisfaction of performance obligations over time, respectively. $15.4 million and $16.1 million of this recognized revenue was included in the contract liability balance at the beginning of the periods. There were no significant changes in estimates during the period that would affect the contract balances.

Disaggregation of Revenue

The Company conducts business across three geographic regions: Americas, EMEA, and APAC. Sales and usage-based taxes are excluded from revenue. Refer to Note 14, Segment and Geographic Information, for revenue by geography.

Note 4. Disposal of Business

On November 4, 2019, the Company and Verisure concurrently entered into an Asset Purchase Agreement (the “Purchase Agreement”) and Supply Agreement (the “Supply Agreement” and together with the Purchase Agreement, the “Verisure Agreements”). The Verisure Agreements created a strategic partnership that leverages both the Company and Verisure’s capabilities to create incremental scale to address the ever-growing demand for residential and commercial security. The strategic partnership combines the Company’s innovative connected cameras and cloud services platform with Verisure’s professionally monitored security solutions to provide a new level of smart security for European customers. The Purchase Agreement provided that, upon the terms and subject to the conditions set forth in the Purchase Agreement, the Company transferred, sold and assigned to Verisure certain assets (the "Assets") related to the Company’s commercial operations in Europe (the "Business") to Verisure for $50.0 million in cash plus additional cash for certain inventory. The Purchase Agreement contained customary representations and warranties regarding Verisure, the Business and the Assets, indemnification provisions, termination rights and other customary provisions. Further, the Company has agreed not to engage in any business that competes with the Business for a period of three years.

The transaction closed on December 30, 2019 pursuant to which the Company received $52.7 million including working capital adjustments and resulted in a pretax gain of $54.9 million in the fourth fiscal quarter of 2019. In the first fiscal quarter of 2020, the Company recorded an additional gain of $292 thousand that was recorded in Gain on sale of business in the Company's unaudited condensed consolidated statements of operations as a result of the final working capital adjustment.

The assets and liabilities sold and assigned to Verisure were determined to have met the criteria to be classified as held for sale as of November 4, 2019, the execution date of the Purchase Agreement. The transaction contemplated by the Purchase Agreement did not meet the criteria for discontinued operations as the Company is expected to have continued involvement in Europe through manufacturing and shipping of products to the region through sales to Verisure as part of the Supply Agreement and therefore no significant change in revenue from the region is expected; it was determined the transaction did not represent a strategic shift. The Company also assessed whether a loss needed to be recorded upon initial classification of the assets and liabilities as held for sale to adjust its carrying amount to the fair value less cost to sell. As the carrying amount of the assets and liabilities was lower than fair value less cost to sell, no adjustment was necessary. As of the closing date of December 30, 2019, the Company concluded that no impairment existed for the assets and no adjustment was necessary for the liabilities. Further, the Company reassessed the fair value and cost to sell, and noted that they had not changed since the initial classification of the assets and liabilities as held for sale. Given such, no loss adjustment was necessary.

The Supply Agreement provides that Verisure is the exclusive distributor of the Company's products in Europe for all channels, and will non-exclusively distribute the Company's products through its direct channels globally for an
12


ARLO TECHNOLOGIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
initial term of five years. During the five-year period commencing January 1, 2020, Verisure has an aggregate minimum purchase commitment of $500 million, which includes annual minimum commitments. On December 30, 2019, Verisure prepaid the Company $20.0 million for product purchases in fiscal 2020 and will prepay $40.0 million on the first anniversary of the closing of the Purchase Agreement for product purchases in fiscal 2021.

The Supply Agreement also includes certain NRE services to be delivered to Verisure, including developing certain custom products specified by Verisure in exchange for an aggregate of $10.0 million, payable in installments upon meeting certain development milestones. In the second fiscal quarter of 2020, an additional $3.5 million was added to the contract price as a result of a modification to Verisure's specification for the Outdoor Custom Camera. As of June 28, 2020, Verisure has paid $5.0 million for this NRE service. For the three and six months ended June 28, 2020, the Company recognized service revenue of $2.3 million and $3.2 million, respectively, for this NRE service.

As part of the Purchase Agreement, the Company also entered into a Transition Services Agreement with Verisure (“Verisure TSA”) to assist Verisure with the transition of the Company’s European commercial operations. These transition services primarily include IT support for 12 months, and other services for three to six months, including sales and marketing, operations and supply chain, finance, legal, and human resources which may be extended as mutually agreed upon by the parties. As compensation for these transition services, the Company will be reimbursed by Verisure based on actual direct costs plus allocation of overhead. For the three and six months ended June 28, 2020, the Company charged Verisure $1.0 million and $2.1 million, respectively, for Verisure TSA services which were recorded as Other income, given such services are not related to the primary business in which the Company operates. The related Verisure TSA expenses in the same amount were recognized as incurred and reported under their natural expense classification.

Note 5. Balance Sheet Components

Cash and Cash Equivalents and Restricted cash

The Company maintains certain cash balances restricted as to withdrawal or use. The restricted cash is comprised primarily of cash used as a collateral for a letter of credit associated with the Company’s lease agreement for its headquarters in San Jose, California. The Company deposits restricted cash with high credit quality financial institutions. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the balance sheets that sum to the total of the same amounts shown on the statements of cash flows:
As of
June 28,
2020
December 31,
2019
(In thousands)
Cash and cash equivalents$185,424  $236,680  
Restricted cash4,141  4,139  
Total as presented on the unaudited condensed consolidated statements of cash flows$189,565  $240,819  
As of
June 30,
2019
December 31,
2018
(In thousands)
Cash and cash equivalents$93,050  $151,290  
Restricted cash4,134  4,134  
Total as presented on the unaudited condensed consolidated statements of cash flows$97,184  $155,424  
13


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

Available-for-sale short-term investments
As of June 28, 2020As of December 31, 2019
 CostUnrealized GainsUnrealized LossesEstimated Fair ValueCostUnrealized GainsUnrealized LossesEstimated Fair Value
(In thousands)
U.S. treasuries$20,016  $14  $  $20,030  $19,967  $23  $  $19,990  

The Company’s short-term investments are classified as available-for-sale and consist of government securities with an original maturity or remaining maturity at the time of purchase of greater than three months and no more than 12 months. Accordingly, none of the available-for-sale securities have unrealized losses greater than 12 months. The Company did not recognize any allowance for credit losses related to available for sale short-term investment for the three and six months ended June 28, 2020.

Accounts receivable, net
As of
June 28,
2020
December 31,
2019
(In thousands)
Gross accounts receivable$47,276  $127,926  
Allowance for credit losses(810) (609) 
Total accounts receivable, net$46,466  $127,317  

The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected.
Three Months EndedSix Months Ended
June 28, 2020June 28, 2020
(In thousands)
Balance at the beginning of the period$863  $