Related Party Transactions

Related party transactions and activities are conducted on terms equivalent to those that would prevail in an arm’s-length transaction where conditions of competitive, free-market dealing may exist. Related party transactions between Arlo and NETGEAR completed prior to consummation of the IPO were settled in cash. The related party receivables are reflected in Prepaid expenses and other current assets, and the related party payables are reflected in Accrued liabilities on the unaudited condensed combined balance sheets. The related party receivables balance was $0.1 million as of December 31, 2017 and there was no related party payable as of December 31, 2017.

On August 2, 2018, in connection with the IPO, the Company entered into a master separation agreement, a transition services agreement, an intellectual property rights cross-license agreement, a tax matters agreement, an employee matters agreement, and a registration rights agreement, in each case with NETGEAR, which effect the Separation, provide a framework for the Company’s relationship with NETGEAR after the Separation and provide for the allocation between the Company and NETGEAR of NETGEAR’s assets, employees, liabilities and obligations (including its investments, property and employee benefits assets and liabilities) attributable to periods prior to, at and after the Separation. See below for detailed descriptions of those agreements.

Pursuant to the agreements between NETGEAR and the Company, NETGEAR transferred substantially all of the assets and liabilities and operations of Arlo business to the Company. As a result, Receivables from NETGEAR was $27.6 million and Payables to NETGEAR was $15.2 million as of September 30, 2018. Additionally, the Company received a contribution of cash of approximately $70.0 million from NETGEAR.

Allocation of Corporate Expenses

Prior to the completion of the IPO, NETGEAR provided certain corporate services to the Company, such as executive management, information technology, legal, finance and accounting, human resources, tax, treasury, research and development, sales and marketing, shared facilities and other shared services, as well as stock-based compensation expense attributable to Arlo’s employees and an allocation of stock-based compensation expense attributable to NETGEAR’s employees. These costs were allocated based on revenue, headcount, or other measures the Company has determined as reasonable through July 1, 2018. Following July 1, 2018, the Company assumed responsibility for the costs of these functions.

The amount of these allocations from NETGEAR reflected within operating expenses in the unaudited condensed consolidated statements of operations was $11.0 million for the three months ended October 1, 2017, which included $3.1 million for research and development, $3.6 million for sales and marketing, and $4.3 million for general and administrative expense. The amount of these allocations from NETGEAR was $30.6 million from the January 1, 2018 to the date of the completion of the Company’s IPO, which included $9.4 million for research and development, $10.0 million for sales and marketing, and $11.2 million for general and administrative expense. Corporate expense allocations amounted to $27.3 million for the nine months ended October 1, 2017, which included $8.1 million for research and development, $8.8 million for sales and marketing, and $10.4 million for general and administrative expense.

Related Party Arrangements

Prior to the completion of the IPO, the Company entered into agreements with NETGEAR that govern Arlo’s separation from NETGEAR and various interim arrangements. These agreements have been in effect since the completion of the IPO and the Separation, and provide for, among other things, the transfer from NETGEAR to Arlo of assets and the assumption by Arlo of liabilities comprising the business through a master separation agreement between the Company and NETGEAR (the “master separation agreement”).

The Company also entered into certain other agreements that provide a framework for the relationship with NETGEAR after the Separation, including:

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a transition services agreement governing NETGEAR’s provision of various services to the Company, and the Company’s provision of various services to NETGEAR, on a transitional basis (the “transition services agreement”). During the three months ended September 30, 2018, $4.2 million transition services agreement-related costs incurred, which included $0.1 million for cost of revenue, $0.4 million for research and development, $0.9 million for sales and marketing, and $2.8 million for general and administrative expense;

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a tax matters agreement with NETGEAR that governs the respective rights, responsibilities and obligations of NETGEAR and Arlo after the completion of the IPO with respect to tax matters (including responsibility for taxes attributable to the Company and its subsidiaries, entitlement to refunds, allocation of tax attributes, preparation of tax returns, control of tax contests and other matters) (the “tax matters agreement”);

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an employee matters agreement with NETGEAR that addresses employment, compensation and benefits matters, including the allocation and treatment of assets and liabilities relating to employees and compensation and benefit plans and programs in which the Company’s employees participate prior to the distribution, as well as other human resources, employment and employee benefit matters (the “employee matters agreement”);


•	an intellectual property rights cross-license agreement with NETGEAR, which governs the Company’s and NETGEAR’s rights, responsibilities and obligations to use NETGEAR and Arlo intellectual property, respectively (the “intellectual property rights cross-license agreement”); and


•	a registration rights agreement with NETGEAR, pursuant to which the Company granted NETGEAR and its affiliates certain registration rights with respect to Arlo’s common stock owned by them (the “registration rights agreement”).