Alarm.com Annual Report 2015

Plain-text annual report

ALARM.COM HOLDINGS, INC. FORM 10-K (Annual Report) Filed 02/29/16 for the Period Ending 12/31/15 Address Telephone CIK Symbol SIC Code Fiscal Year 8281 GREENSBORO DRIVE SUITE 100 TYSONS, VA 22102 877-389-4033 0001459200 ALRM 7372 - Prepackaged Software 12/31 http://www.edgar-online.com © Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2015OR¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number: 001-37461ALARM.COM HOLDINGS, INC.(Exact name of registrant as specified in its charter) Delaware 26-4247032(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification Number)8281 Greensboro Drive, Suite 100, Tysons, Virginia 22102(Address of principal executive offices) (zip code)Tel: (877) 389-4033(Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock, $0.01 par value per share The NASDAQ Stock Market LLCSecurities registered pursuant to section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes ý No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes ý NoIndicate 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 suchshorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant toRule 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 and post such files). ý Yes ¨ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large Accelerated Filer ¨ Accelerated Filer ¨ Non-accelerated Filer ý Smaller Reporting Company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on a closing price of $15.38 per share of the registrant's common stock asreported on The Nasdaq Global Select Market on June 30, 2015 and giving effect to the conversion of all convertible preferred stock into common equity that occurred on July 1, 2015, was$138.5 million. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not beTable of Contentsdeemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.As of February 12, 2016, there were 45,582,662 outstanding shares of the registrant's common stock, $0.01 par value per share.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the registrant’s 2016 Annual Meeting ofStockholders, which will be filed subsequent to the date hereof, are incorporated by reference into Part III of this Form 10-K. Such proxy statement will be filed with the Securities and ExchangeCommission not later than 120 days following the end of the registrant’s fiscal year ended December 31, 2015. ALARM.COM®Table of ContentsALARM.COM HOLDINGS, INC.INDEX TO ANNUAL REPORT ON FORM 10-KFor the Fiscal Year Ended December 31, 2015 PagePART I. Item 1.Business3Item 1A.Risk Factors13Item 1B.Unresolved Staff Comments33Item 2.Properties33Item 3.Legal Proceedings34Item 4.Mine Safety Disclosures34Part II. Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities35Item 6.Selected Consolidated Financial Data37Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations40Item 7A.Quantitative and Qualitative Disclosures about Market Risk61Item 8.Financial Statements and Supplementary Data63 Report of Independent Registered Public Accounting Firm64 Consolidated Financial Statements Consolidated Statements of Operations65 Consolidated Statements of Comprehensive Income66 Consolidated Balance Sheets67 Consolidated Statements of Cash Flows68 Consolidated Statements of Equity70 Notes to the Consolidated Financial Statements71 Schedule II. Valuation and Qualifying Accounts105Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure106Item 9A.Controls and Procedures106Item 9B.Other Information106Part III. Item 10.Directors, Executive Officers and Corporate Governance106Item 11.Executive Compensation106Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.106Item 13.Certain Relationships and Related Transactions and Director Independence.106Item 14.Principal Accounting Fees and Services106Part IV. Item 15.Exhibits, Financial Statement Schedules107 Signatures1101Table of ContentsSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K, or this Annual Report, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, orthe Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that reflect our current expectations regarding future events, ourstrategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management. The forward-looking statements are containedprincipally in Part I, Item 1. “Business,” Part I, Item 1A. “Risk Factors,” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”but are also contained elsewhere in this Annual Report. Forward-looking statements include any statement that does not directly relate to a current or historical fact. In some cases,you can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,”“project,” “potential,” “should,” “will,” or “would,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statementsinvolve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from theinformation expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in thisprospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot becertain. Forward-looking statements include statements about:•our ability to continue to increase revenue, maintain existing subscribers and sell new services to new and existing subscribers;•our ability to add new service providers, maintain existing service provider relationships and increase the productivity of our service providers;•the effects of increased competition as well as innovations by new and existing competitors in our market;•our ability to adapt to technological change and effectively enhance, innovate and scale our solution;•our ability to effectively manage or sustain our growth;•potential acquisitions and integration of complementary business and technologies;•our ability to maintain, or strengthen awareness of, our brand;•perceived or actual security, integrity, reliability, quality or compatibility problems with our solutions, including related to security breaches in our subscribers’ systems,unscheduled downtime, or outages;•statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and stock performance;•our ability to attract and retain qualified employees and key personnel and further expand our overall headcount;•our ability to develop relationships with service providers in order to expand internationally;•our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally;•our ability to maintain, protect and enhance our intellectual property;•costs associated with defending intellectual property infringement and other claims; and•other risks detailed below in Item 1A. “Risk Factors.”You should refer to Item 1A. “Risk Factors” section of this Annual Report for a discussion of important factors that may cause our actual results to differ materially from thoseexpressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report will prove to beaccurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-lookingstatements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frameor at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Annual Report.Except as otherwise indicated herein or as the context otherwise requires, references in this Annual Report to “Alarm.com,” “the company,” “we,” “us,” “our” and similarreferences refer to Alarm.com Holdings, Inc. and, where appropriate, our consolidated subsidiaries.2Table of ContentsPART I.ITEM 1. BUSINESSOverviewWe are the leading platform solution for the connected home. Through our cloud-based services, we make connected home technology broadly accessible to millions of home andbusiness owners. Our multi-tenant software-as-a-service, or SaaS, platform enables home and business owners to intelligently secure their properties and automate and control abroad array of connected devices through a single, intuitive user interface.Our connected home platform currently has more than 2.6 million residential and business subscribers and connects to tens of millions of devices. More than 20 billion data pointswere generated and processed by those subscribers and devices in the last year alone. We believe that this scale of subscribers, devices and data makes us the leader in the smarthome services market.Our solutions are delivered through an established network of over 5,000 trusted service providers, who are experts at designing, selling, installing and supporting our solutions.We primarily generate SaaS and license revenue, our largest source of revenue, through our service providers who resell our services and pay us monthly fees. Our serviceproviders have indicated that they typically have three to five-year service contracts with home or business owners, whom we call subscribers. We believe that the length of thesecontracts, combined with our SaaS model and over a decade of operating experience, provides us with reasonable visibility into our future operating results. In addition, we generatehardware and other revenue primarily by selling our service providers and distributors an Alarm.com gateway module that enables cellular communications between the devicesinstalled in the home or business and our cloud-based platform. We also sell other hardware devices, such as video cameras as part of our video monitoring solution.We have experienced significant growth since inception. We generated total revenue of $208.9 million , $167.3 million and $130.2 million in 2015, 2014 and 2013. Our SaaS andlicense revenue was $140.9 million , $111.5 million and $82.6 million in 2015, 2014 and 2013, representing a compound annual growth rate of approximately 31%. We also generatednet income of $11.8 million , $13.5 million and $4.5 million in 2015, 2014 and 2013, as well as Adjusted EBITDA, a non-GAAP metric, of $34.3 million , $28.3 million and $28.3 millionin 2015, 2014 and 2013. See footnote 4 to the table contained in the section of this Annual Report titled “Selected Consolidated Financial Data” for a reconciliation of Adjusted EBITDAto net income, the most directly comparable financial measures calculated and presented in accordance with GAAP.Our Solutions and Integrated PlatformOur technology platform was purpose-built for the entire connected home ecosystem, including the consumers who use it, the service providers who deliver it and the hardwarepartners whose devices are enabled by the platform. Our solutions are used by both home and business owners, and we refer to this market as the connected home market.We invented solutions that connect people in new ways with their properties and devices, making them safer, smarter and more efficient. Our scalable, flexible platform isdesigned to meet a wide range of user needs with its breadth of services, depth of feature capability and broad support for the growing Internet of Things devices in the home. Wepower four primary solutions, which can be used individually or combined and integrated within a single user interface accessible through the web and mobile apps: interactivesecurity, intelligent automation, video monitoring and energy management.These solutions are delivered through our cloud-based platform enabling a breadth of connected home solutions, which can be integrated together or provided on a standalonebasis. We enable quick, intuitive access to the consumer through our mobile app as well as enabling new ways to engage with the home through wearables like the Apple Watch,through the TV through Apple TV and Amazon Fire TV and by using smart home voice control through Amazon Echo.3Table of ContentsConsumer SolutionsInteractive Security Our interactive security solution provides an always-on intelligent security and awareness service through a dedicated, cellular, two-way connection to the home or business. Thissolution includes customized triggers and smart schedules to connect the system to door locks, garage doors and other connected security devices, and 24x7 emergency responsethrough trusted and integrated service providers. The capabilities associated with this solution include:◦Alarm Transmission. Transmission of alarm signals from the subscriber’s property through the Alarm.com platform to over 900 third-party central monitoring stations staffed24/7 with live operators who can initiate emergency police/fire response.◦Persistent Awareness. Always-on monitoring of sensors whether the security system is armed or disarmed.◦Mobile Control. Remote security system management and control through the web and mobile apps for users.◦Intuitive Interactions. Users can interact with the Alarm.com service through their TV with Apple TV or Amazon Fire TV, through their wearable device like Apple Watch and byusing smart home voice control through Amazon Echo.◦Instant Alerts. Real-time system alerts for any type of system event activity through push notifications, SMS, email and voice.◦Managed Access. User access tools to manage who can access the protected property through the local security system or through remote user interfaces.Intelligent AutomationOur intelligent automation solution integrates the growing Internet of Things into a meaningful unified experience for our subscribers. It connects, integrates and controls thedevices in the home or business such as security systems, garage doors, lights, door locks, thermostats, electrical appliances, environmental sensors and other connected devices. Itlearns activity patterns from all devices to recommend intelligent optimization that improve the safety and efficiency of the home. The capabilities associated with this solution include:◦Anywhere Access and Control . Remote management and control of connected devices including security systems, thermostats, door locks, video cameras, lights, garagedoors, water heaters, appliances and other connected devices.◦Intelligent Rules . Intelligent rules running locally and in the cloud automatically control connected devices based on various triggers including security and sensor events,time/day schedules, user location and weather.◦Flexible and Personal. Highly flexible rules, triggers and schedules allow customization and personalization of all the connected devices in the home or business.Subscribers can create automation rules by device, user, time of day and4Table of Contentsday of week to fit any schedule or lifestyle or have the system automatically make adjustments based on conditions like location and weather.◦Environmental Monitoring . A variety of environmental sensors can be integrated into the solution to provide monitoring and remote control of key home or business systemssuch as water sensors, water valves, sump pumps and gas sensors. For example, integration with these devices enables early detection and curtailment of leaks that canlead to major water damage and waste. In addition, we provide remote monitoring and control of gas sensors, which can enable early detection of gas leaks (e.g. natural gas,or carbon monoxide) for life safety applications.Video Monitoring Our video monitoring solution provides live streaming, smart clip capture, high definition continuous recording and instant video alerts delivered through our mobile app or on theweb. The capabilities associated with this solution include:◦Live Streaming . Users can securely access live video of their property through the web and mobile apps.◦Smart Clip Capture . Video clips can be automatically recorded when there is motion activity or when the security system reports an event (e.g. an alarm, door opening, etc.).◦Secure Cloud Storage . Video clips are immediately uploaded to the platform for secure storage and access.◦Instant Video Alerts . Smart clips can be automatically sent via SMS, push notifications or email the instant they are recorded.◦Continuous HD Recording. 24x7 onsite recording is enabled through our Stream Video Recorder, or SVR, and can be played back securely, from anywhere, through theweb and mobile user interfaces.◦Location-Based Recording Schedules . Location-based rules enable enhanced privacy settings through automatic adjustments to recording schedules based on the user’slocation. For example, when everyone is out of the home, all cameras can record all activity, and when they return, certain cameras, like those in the living room or kitchen,can automatically pause recording for privacy purposes.◦Commercial Video Surveillance. Our commercial video offering supports large scale, multi-camera installations with continuous recording, cloud based storage and mobileaccess. It integrates leading commercial grade network cameras to support a wide range of business solutions large and small.Energy ManagementOur energy management solution provides enhanced energy monitoring and management through increased awareness of energy usage at the whole home and individual devicelevel, intelligent control of thermostats (which drive HVAC energy consumption), lights and sophisticated automation rules to sustain savings over time. Web and mobile apps integratewith connected thermostats, power meters, lights, shades and appliances to control devices and manage temperature as well as provide real-time insights into home energy usageand efficiency. The capabilities associated with this solution include:◦Smart Thermostat Schedules. System activity patterns are analyzed over time to recommend a more energy efficient thermostat schedule that can maximize efficiencyduring periods when the property is not likely to be occupied.◦Responsive Savings . The thermostats can respond to other devices and sensors in the home to reduce energy waste and improve efficiency. When the security system isarmed away, an arming state used when the property is not occupied, the thermostat can automatically go back to an energy saving mode. If a door or window is left open,after a pre-defined period of time, then the HVAC system can be set to automatically turn off to reduce energy waste.◦Energy Usage Monitoring. Real-time and historical energy usage data at the whole-home or business and individual device level gives users greater insight into theproperty’s energy consumption profile to drive more efficient use of energy-consuming devices in and around the home or business.◦Thermodynamic Modeling . Each home or business has a unique fingerprint with respect to energy usage for heating and cooling. Our algorithms analyze HVAC data,weather information and other factors to determine the unique heating and cooling attributes of a property and use this information as a foundation for smarter thermostatprogramming and other energy efficiency recommendations.◦Geo-Service . The location of users further calibrates and optimizes thermostat settings, enabling effortless energy management with changes happening automaticallywithout need for a user action or rigid schedule.◦Demand Response . Homes and businesses with connected thermostats and other connected appliances can be accessed to reduce power consumption during peakdemand periods. Our acquisition of EnergyHub in 2013 brought us an existing demand response software platform and relationships with energy utilities. These utilities canleverage connected thermostats across our platform to improve the results of certain demand response events.5Table of ContentsIn addition to our primary solutions, we continue to add capabilities and functionality to our platform. For example, we launched our Wellness solution in 2014. This solutiongathers data from various types of sensors over time to learn the home patterns of daily living, and identify anomalies that may indicate a problem. Real-time alerts notify familymembers and other care providers when critical anomalies are detected or an emergency takes place. This enables people who are older or have disabilities to live at home safely andindependently for a longer period of time. Our extensible cloud-based platform allows us to continue to innovate and integrate compelling new solutions.Service Provider SolutionsIn addition to the solutions we offer consumers, we also offer a comprehensive suite of enterprise-grade business management solutions to our service providers to help themgrow their businesses and manage their customer base. ◦Service Provider Portal . Our permission-based online portal offers always-available access to a set of marketing, sales, training and support tools and information.▪Service Provider Website . Our online resource provides a comprehensive set of tools for service providers to activate and manage their Alarm.com customeraccounts, order equipment, access invoices and billing, remotely program customer systems using AirFX, obtain sales and marketing services, training, etc.◦Installation and Support. Our installation and support tools and apps help our service providers more efficiently install and service their connected home customers.▪MobileTech Application. Our installation resources include a mobile app designed for our service providers’ technicians to facilitate the successful installation andprogramming of equipment while on-site at their customer’s property.▪AirFX Remote Programming . This collection of remote system management tools available through the service provider website enables service providers tomake changes to a subscriber’s system programming without the need to send a service technician to the property. This saves the subscriber and the serviceprovider time and money, and greatly increases subscriber satisfaction because service requests can be handled immediately.◦Business Management. Our services can be deeply integrated with a service provider’s own offerings and offers increased business insight into their customer base and keybusiness health metrics.▪Web Services. Our service providers are able to integrate their existing customer account management tools with our platform using our web services. Thisintegration means service provider personnel can seamlessly perform functions like customer account creation, system status updates, system programming andservice plan upgrades through a unified interface.▪Business Intelligence . Our powerful business intelligence tools provide service providers with key insights into the performance of their Alarm.com subscriberaccount base. Service providers are able to access key operational metrics related to account plan adoption, attrition, and service quality to help them grow theirbusiness more and improve customer retention.◦Sales, Marketing & Training. Our comprehensive customer lifecycle sales and marketing services are available to help effectively promote and sell the connected home.▪Marketing Portal. Our online portal offers anytime access to a broad suite of marketing and sales tools. These include co-brandable assets like mobile optimizedwebsites, landing pages, lead capture, social media, email, videos, image library, collateral, direct mail and event material as well as services like direct mailcampaigns, email campaigns, CRM programs and print and ship services.▪Alarm.com Academy. Our online training offers courses through a learning management system where service providers can access training on the full suite ofAlarm.com solutions. This online option is offered in addition to our in-person, hands on training programs.Homes and businesses are now ripe for reinvention, as most properties lack even basic automation or security monitoring. The intersection of four significant technology trends ismaking the intelligent, connected home now possible: broad adoption of mobile devices, the emergence of the Internet of Things, the power of big data and the extensibility of thecloud. Security systems, thermostats, door locks, video cameras, lights, garage doors, appliances and other devices that were once inert now have the potential to become sensor-enabled, intelligent and connected. As a result of these technology advancements, it is now possible to offer an integrated connected home that can be managed anywhere and onany device at a price that makes it accessible to millions of consumers.Businesses have many of the same needs as residential subscribers. Security, energy management, awareness of activity in the property, video monitoring and the need to beconnected anywhere at anytime are all highly applicable to the business market. The service provider who is delivering the solution often services both residential homes andbusinesses.6Table of ContentsBenefits of Our SolutionsBenefits to ConsumersOur solutions offer consumers the following benefits:◦Intuitive Experience. We have designed our platform and user interfaces to be intuitive, simple and easy to operate without training or significant support. Our platform canbe accessed through any mobile device and provides secure, intelligent control through a single user interface.◦Single Connected Platform. Our cloud-based platform provides consumers with a single point of integrated control that can be easily upgraded to incorporate newfunctionality and can be personalized to suit the individual consumer’s needs. For example, when we introduced our geo-services offering, our subscribers automaticallyreceived this new service.◦Reliable Network Communications. Unlike competing products connected to the home by phone lines or wired networks, which can be susceptible to commonvulnerabilities, such as lines being cut, power outages or network connectivity issues, our platform utilizes a highly secure, highly reliable and dedicated cellular connection.◦Persistent Awareness. Our platform helps subscribers maintain an awareness of what is happening at their properties at all times. Whether or not the security system isarmed, the platform continuously monitors activity on each sensor and analyzes that data to determine whether the subscriber should be notified.◦Intelligent and Actionable. Our platform monitors all the sensor and device activity in the property aggregating real-time, multi-point data about activity in the home. Ourproprietary algorithms and custom rules use this data to drive intelligent triggers, learning and responsive automation for the consumer. For example, the adaptive learningcapability of our platform leverages all of the data collected from activity in the home to understand activity patterns and recommend optimized thermostat schedules tooptimize for comfort and efficiency.◦Broad Device Compatibility. Our platform supports a wide variety of connected devices and communications protocols, allowing seamless integration and automation ofmany devices throughout their home, as well as the addition of new devices in the future.◦Accessible and Affordable. Our platform provides an affordable alternative to expensive home automation systems, legacy home control products and disparate pointproduct solutions with minimal upfront expense and installation and support services.◦Trusted Provider of a Security Platform . We have built a reputation and brand as a trusted, reliable and innovative technology provider. We respect the privacy of oursubscribers and do not sell their data. Our reputation is strengthened through our network of over 5,000 service providers, who have significant expertise in delivery of ourplatform.Benefits to Service ProvidersOur solutions offer service providers the following benefits:◦New Revenue Generation Opportunities. Our solutions help broaden our service providers’ offerings beyond traditional home security and monitoring to includecomprehensive connected home solutions, allowing the service providers to access new revenue streams and drive incremental recurring monthly revenue. We providefrequent training and development programs to ensure our service provider network is aware of our latest solutions.◦Expanded Set of Value-Added Services. We provide a set of value-added services to our service providers, including training, marketing, installation, support tools andbusiness intelligence analytics. This superior support helps service providers manage the changing technology landscape and allows them to more efficiently target, acquire,install and support their customers on our platform.◦Improved Service Provider Economics. Our cloud-based platform provides improved service provider economics by reducing delivery and support costs, allowing remotedelivery of upgrades and increasing average monthly revenue. For example, our AirFX tool enables our service providers to support and upgrade a subscriber’s hardware orsoftware remotely eliminating the need to dispatch a technician to perform an in-person service call. In addition, our service providers are able to generate more revenue fromeach subscriber because, according to a Parks Associates report released in April 2015, consumers are willing to pay a 25% premium over the cost of a basic security systemfor a professionally monitored system that includes an interactive security and home automation solution.◦Broad Device Interoperability. We have an open platform which allows service providers to respond to consumer demands for new devices. Furthermore, our platformsupports broadly adopted communications protocols used in the home automation ecosystem, including Z-Wave, Wi-Fi and ZigBee, as well as cellular and broadband, givingour service providers a wide device selection to tailor their offerings to suit their customers now and in the future.7Table of ContentsCompetitive AdvantagesWe believe the benefits we deliver to our subscribers and our service providers create a significant competitive advantage for us in the connected home market. In addition, webelieve there are a number of other factors that contribute to our competitive advantage in the connected home market:◦Scale of Subscriber Base and Service Provider Coverage. Our connected home platform currently has more than 2.6 million residential and business subscribers. Inaddition to our large subscriber base, we have over 5,000 service providers reselling Alarm.com solutions, with comprehensive coverage throughout North America. Inaddition to our large service provider network and large subscriber base, we have tens of millions of connected devices managed by our platform. We believe the combinationof the size of our subscriber base, service provider network and number of integrated devices creates a competitive advantage for us and is challenging to replicate.◦Security Grade, Cloud-Based Architecture. We built our platform with a cloud-based, multi-tenant architecture that allows for real-time updates and upgrades. Ourplatform was built from the ground up with life safety standards at the core, where the reliability standard is substantially higher than that required for home automation andenergy management systems.◦Highly Scalable Data Analytics Engine. We processed more than 20 billion data points in and out of properties last year alone. As consumer preferences shift towardsmore intelligence-based features, we believe the scale of our data combined with our proprietary analytics serve as a sustainable competitive advantage.◦Trusted Brand. Given our leading position in the connected home, we believe that we have developed a trusted brand with both service providers and consumers forinnovating and delivering connected home solutions. We have developed considerable brand awareness and trust with our service providers. Our Alarm.com mobile app hasbeen downloaded over two million times. The Alarm.com mobile apps for iOS and for Android have more than one million downloads each. The Alarm.com iOS and Androidapps have exceptional app store ratings with an average rating above 4 out of 5 stars, as of February 2016. Our extensive service provider coverage enables us to utilize ourmarketing dollars efficiently nationwide to reinforce our brand and drive consumer referrals to our service providers.◦Commitment to Innovation. We are a pioneer in the connected home market and we continue to make significant investments in innovative research and development.Our investment has resulted in 50 issued patents which help ensure that our technology is competitively differentiated and protected.Growth StrategyWe intend to maintain our leadership position in the connected home market while continuing to innovate, add advanced capabilities and increase penetration of our connectedhome solutions. Our key growth strategies include:◦Drive SaaS and License Revenue Growth and Add New Service Providers. We will continue to focus on making our service providers successful in driving adoption ofthe connected home. We have made significant investments in sales and marketing services and training for our service providers to promote the advantages andopportunities associated with the connected home. We will continue to invest in building out this infrastructure for our service providers to become more productive in sellingour solutions to new customers. In addition, we plan to continue to grow our SaaS and license revenue and network of service providers.◦Upgrade Traditional Security Customers to Our Connected Home Solutions. We believe there is a significant opportunity for our service providers to expand adoptionof our connected home solutions within their customer base. We intend to leverage our status as a trusted provider and drive consumer interest in these services to enableour service providers to upgrade their legacy security customers to our connected home solutions.◦Continue to Invest in Our Platform. As a pioneer in connected home solutions, we have made significant investments in building our platform over the last 15 years. Weintend to invest heavily in developing our platform to add innovative offerings and broaden our solutions. As the Internet of Things grows and more devices becomeconnected, such as appliances, wearable devices and automobiles, we are building technology and partnerships to connect these devices to our platform.◦Expand International Presence. We are investing in international expansion because we believe there is a significant global market opportunity for our solutions. Werecently initiated product launches and partnerships in Latin America, including Brazil, Chile, Colombia and Mexico, have launched in other countries such as New Zealand,Australia, South Africa and Turkey, and have entered into strategic partnerships to address the European market. We believe our cloud-based architecture and our cellularcommunication technology will enable us to capitalize on opportunities worldwide.◦Expand Channels into the Home. Today, most consumers purchase a connected home solution through a security or home automation service provider. As the connectedhome market continues to grow we believe other home services providers will seek to participate in the market and may complement our current partner ecosystem. Weintend to8Table of Contentspartner with these other providers, which may include heating, ventilation and air conditioning installers, property management companies and other services companies.◦Pursue Selective Strategic Acquisitions. We may selectively pursue future acquisitions that complement our platform, represent a strategic fit and are consistent with ouroverall growth strategy. Such acquisitions could expand our technologies and teams which would allow us to add new features and functionalities to our connected homeplatform, accelerate the pace of our innovation or help us access new international markets.Market OpportunityOur addressable market consists of residential homes and businesses. We believe that the major technology trends of cloud computing, the Internet of Things, Mobile Access andBig Data will dramatically change the ability for people to control and access their homes and businesses and provide new insights into the activity and efficiency of thoseproperties. These trends have already made connected services and devices broadly available and affordable for households and businesses across North America. These largetechnology trends are also making these connected services and devices accessible and relevant to households and small businesses worldwide.Our residential subscribers are typically owners of single-family homes, while our business subscribers include retail businesses, restaurants, small-scale commercial facilities,offices of professional services providers and similar businesses. According to a new market research report, "Internet of Things (IoT) Security Market by Technologies, IndustryVerticals and Applications - Global Forecast to 2020", published by MarketsandMarkets, the Internet of Things (IoT) Security Market is expected to grow from USD $7 Billion in 2015 toUSD $29 Billion by 2020, at a Compound Annual Growth Rate (CAGR) of 33.2% from 2015 to 2020. According the U.S. Census, there were 133 million housing units in 2014,however, according to April 2015 data from Parks Associates, smart home controller penetration was only at 7.8% of U.S. households in 2014. According to Parks Associates researchdata, there were 22.5 million US households with a professionally monitored home security system in 2015 and this is projected to grow to 29.9 million households by 2020. Webelieve there is an opportunity for penetration rates to significantly increase, largely driven by the mass market adoption of connected home solutions by households with no solutiontoday. In addition, we believe there are commonalities between the residential and business markets for these services, and the business market therefore represents a sizable relatedopportunity.Our TechnologyCloud Services PlatformSince our inception, we have utilized a multi-tenant SaaS platform architecture to enable rapid innovation in a highly scalable environment that is designed to deliver our solutionsas a hosted service for security and connected home applications. Our platform is architected to scale and leverages various proprietary cloud-based applications built by ourtechnology team to support the needs of our service providers and subscribers. Because security and life safety are a key part of our service offering, our standards for reliability mustbe high and all of our solutions, not just those focused on security, are architected to meet these rigorous standards.The Alarm.com Cloud Services Platform manages communication in and out of the property through the Communications Supervisor, intelligently directs alerts and notificationsthrough the Notifications Engine, manages the user defined activity through the Rules Engine, and processes and stores video through our Video Processor and Video Storage.Additionally the platform enables device integration through the Partner APIs and offers service providers extensive services through our Enterprise Tools.Our internal engineering teams have designed and developed our core technology. As a leader in the connected home industry, we believe we have the most capable and robustimplementation of a connected home cloud service platform.OperationsWe operate our cloud services platform through two fully redundant network operation centers located in Phoenix, Arizona and Ashburn, Virginia. Each is designed to run theentire platform independent of the other.Hardware and ManufacturingWe are involved in the design and manufacturing of various types of hardware that are used to enable our solutions, including the following:◦Cellular Communication Modules. We offer various cellular communication modules that are tightly integrated with the security system control panel and other automationcontrol devices in the subscriber’s home or business. These modules, designed by our device engineering team and manufactured in the United States by a contractmanufacturing partner, provide a dedicated and fully managed two-way cellular connection from the subscriber’s property to our cloud platform modules. The modules run ourproprietary firmware that enables:▪Real-time analysis of system events reported by security sensors and other devices at the property.9Table of Contents▪Execution of automation rules at the property.▪Management of all the logic that determines whether a message should be transmitted to our cloud platform for further processing.◦Image Sensor . Our image sensor is a wireless, battery-operated, passive infrared motion sensor that is capable of capturing images based on various system triggers to betransmitted via our dedicated cellular communication path to our cloud platform.▪Images can be viewed securely by the subscriber through web and mobile user interfaces, and can be sent automatically to the subscriber through SMS and emailwhen triggered by an alarm or other high priority system event.▪Our image sensors are designed by our device engineering team and manufactured in the United States by a contract manufacturing partner.◦Video Cameras . We offer a suite of high definition, Internet protocol, or IP, video cameras to enable our video monitoring services. The cameras are available in variousindoor and outdoor versions with optional night vision, wireless and power over Ethernet, or PoE, communication features. We also offer a network video recording device,the SVR, for on-premise, continuous video recording that is seamlessly connected to the cloud platform for remote playback through the user interfaces. Our video camerasand SVRs are specified for our platform by our product management and software engineering teams, and are developed and manufactured by an original designmanufacturer, or ODM, in Taiwan. Our video service also enables third-party analog cameras to be integrated into our platform.◦Smart Thermostat . Our Smart Thermostat combines elegant design, sophisticated cloud services and advanced energy management features. It was designed specificallyfor a multi-sensor connected home, tight integration with the Alarm.com cloud services and to work in concert with other sensors and devices in the home. It communicateswith the Alarm.com communications module via Z-wave and supports both battery power and common wire power installation.▪Remote temperature sensors can be paired with the Smart Thermostat to enable temperature set points for any room in the house, not just the room where thethermostat is installed. For example a sensor can be placed in a bedroom with a specific set point for more precise temperature control through out the home.Multiple sensors can be added to a single thermostat.▪Our Smart Thermostat is powered by the Alarm.com platform and offers advanced learning and automation energy management features including AdaptiveLearning, Responsive Saving, Precision Comfort and Mobile Control.▪The Thermostat has been designed for better installation and remote support. The Mobile Tech app will assist in proper wiring and installation and AirFX enablesremote access to the thermostat settings for easy troubleshooting and support.▪Our Smart Thermostats are designed by our device engineering team and manufactured by a contract manufacturing partner.Research and DevelopmentWe invest substantial resources in research and development to enhance our platform, solutions and technology infrastructure, develop new capabilities, conduct qualityassurance testing and improve our core technology. We expect to continue to expand the capabilities of our technology in the future and to invest significantly in continued researchand development efforts. Our research and development of new products and services is a multidisciplinary effort that requires the focus of our Product Management, ProgramManagement, Software Engineering, Hardware Engineering, Quality Engineering, Configuration Management, and Network Operations teams, each of which is focused on the coreresearch and development mission. As of December 31, 2015, we had a total of 261 employees engaged in research and development functions. For the years ended December 31,2015, 2014 and 2013, our total research and development expenses were $40.0 million , $23.2 million and $13.1 million, respectively.Service Provider NetworkOur solutions are sold, installed and serviced by a network of professional, licensed service providers. We have developed an extensive professional service provider channel inNorth America consisting of over 5,000 service providers. Our service provider network is highly effective at account creation, installation and ongoing monitoring and has extended thetraditional home security business model to include connected home and business services. We believe this highly trusted, established network is a core strategic strength thatenables an efficient, scalable customer acquisition model and allows us to focus on technology innovation.10Table of ContentsOur service providers today are primarily licensed and authorized security dealers ranging from small, local providers to larger regional providers to national service providers withthousands of employees. With a strong reputation for trust and established practice of in-home installation and ongoing professional monitoring, our service providers are driving theadoption of connected home solutions through their established businesses and now serve as connected home solution providers. According to a 2015 report from Parks Associates,security and safety continue to be the leading features driving smart home adoption. To help drive adoption, we have developed powerful tools enabling our service providers to moreeffectively sell, install and manage our connected home solutions. We believe that the combination of our solutions and our service providers, with their strong pedigree in security, isthe most effective way to drive mass market adoption of the connected home.Our channels increasingly include new providers in the intelligent automation, HVAC and property management markets as well as service providers in international markets.The traditional security and home automation market is highly fragmented with over 13,000 dealers nationally. According to the February 2015 Barnes Buchanan ConferenceReport, the top 5 service providers represented 36% of all industry recurring monthly revenue in 2014. The distribution of revenue among our service providers is reflective of theindustry overall. Vivint represented greater than 10% but not more than 15% of our revenue in 2014 and 2013. Monitronics International, Inc. represented greater than 15% but notmore than 20% of our revenue in 2015, 2014 and 2013. United Technologies Corporation represented greater than 10% but not more than 15% of our revenue in 2014.SubscribersWe define our subscribers as the number of residential or commercial properties to which we are delivering at least one of our solutions. A subscriber who subscribes to one ofour service level packages as well as one or more of our a la carte add-ons is counted as one subscriber. The number of subscribers represents our number of subscribers, rounded tothe nearest thousand, on the last day of the applicable year. Our number of subscribers does not include the customers of our service providers to whom we license our intellectualproperty as they do not utilize our SaaS platform. While fewer than 1% of subscribers utilize a commercial service plan, we do not have exact data regarding the actual number ofcommercial properties utilizing our services.We classify our subscribers into two groups: standard subscribers, which represented approximately three-quarters of our total subscriber base as of December 31, 2015, andother subscribers, which represented approximately a quarter of our total subscriber base as of the same date. For our standard subscribers, our service providers pay us on a persubscriber basis for access to our cloud-based connected home solution, to provide a supervised cellular network service to the home or business, and to deliver an enterprise back-end software service. Our other subscribers are comprised of carrier operated subscribers where the service provider utilizes its own cellular network or partners with a cellular networkprovider. As we continue to expand our business into new markets or acquire businesses with different business models as was the case with our acquisition of EnergyHub, in thefuture our other subscribers may include subscribers where we offer a basic service for no monthly fee with the option to upgrade the service for a monthly fee or where we generaterevenue from the subscriber by other means.As of December 31, 2015, we had more than 2.6 million subscribers. Our subscriber acquisition cost payback period has historically been less than one year.Sales and MarketingThe goal of our sales team is to help our service providers be successful in selling, installing and supporting the full suite of our solutions. Our sales team is also responsible forrecruiting new service providers to Alarm.com. We also have a business development team dedicated to developing new service provider and distribution relationships in internationalmarkets.Our marketing team is focused on empowering our service providers to most effectively promote and sell our connected home solutions. We have developed a high value, highlyscalable marketing services platform to serve the breadth of our service providers both large and small. We design, develop and provide end-to-end marketing services through ourintegrated marketing solution, which includes tools and content for end-to-end lifecycle marketing to build awareness, create interest, drive trials, activate subscribers, develop theongoing customer relationship and drive upsell. This solution is highly scalable and flexible with smaller service providers leveraging the full suite of marketing services and largerservice providers adopting specific elements to enhance their existing marketing activities. We also provide comprehensive training through our Alarm.com Academy that includessales and marketing and technical training courses through in-person classes and an always-available online learning management system.Additionally, we manage targeted consumer marketing campaigns on behalf of our service provider network to increase awareness of the connected home, raise overallawareness and preference for Alarm.com solutions and drive prospective customers to our service providers.We believe our sales and marketing approach enables us to expand our breadth of service providers, provide highly custom services and scale quickly with only incrementalcosts. As of December 31, 2015, we had a total of 188 employees engaged in sales and marketing functions.Service Provider Support11Table of ContentsWe have a dedicated service operations team that strives to deliver an exceptional service experience to our service providers and our subscribers. We support the full suite ofsoftware and hardware on the Alarm.com platform through a highly trained and experienced team of United States based professionals using a tiered structure to efficiently escalateand resolve issues of varying complexity. This structure enables us to scale our organization in line with service provider and subscriber growth while building on our reputation as asource for answers in the connected home industry. We offer support via phone, web ticketing, and email for our service providers and maintain a commitment to industry-leadingresponse times. While we primarily support our service providers and in turn the service providers provide support to their customers, who are our subscribers, we are committed todelivering a great end-user experience. To that end, subscribers may sometimes reach us directly with service concerns or questions, and we either assist the subscriber directly or,when appropriate, route the subscriber to his or her applicable service provider for additional assistance. Our staff is multilingual and we continue to grow our language capabilities tosupport our emerging international initiatives.Our CompetitionThe market for connected home solutions is fragmented, highly competitive and constantly evolving. We expect competition to continue from existing competitors as well aspotential new market entrants. Our current primary competitors include providers of other technology platforms for the connected home, including iControl Networks, Inc. andHoneywell International Inc. that sell to dealers such as cable operators and other home automation providers. In addition, our service providers compete with managed serviceproviders, such as cable television, telephone and security companies like Comcast Corporation, AT&T Inc. and Time Warner Cable Inc., as well as providers of point products,including Nest Labs, Inc. (acquired by Google Inc.), which offers a thermostat, and Nest Cam, which offers video monitoring. Because our service providers compete with theseentities, we consider them competitive.In addition, we may in the future compete with other large technology companies that offer control capabilities among their products, applications and services, and have ongoingdevelopment efforts to address the broader connected home market. Such companies may have longer operating histories, significantly greater financial, technical, marketing,distribution or other resources and greater name recognition than we do. In some instances, we may have commercial partnerships with technology or services providers in theconnected home market with whom we may otherwise compete and our relationships with both our competitors and partners may change through time.We expect to encounter new competitors as we enter new markets as well as increased competition, both domestically and internationally, from other established and emergingsecurity, home automation and energy management companies. Our current and potential competitors may also establish cooperative relationships among themselves or with thirdparties and rapidly acquire significant market share.We believe the principal competitive factors in the connected home market include the following:• simplicity and ease of use;• ability to offer persistent awareness, control and intelligent automation;• breadth of features and functionality provided on the connected home platform;• flexibility of the solutions and ability to personalize for the individual consumer;• compatibility with a wide selection of third-party devices;• pricing, affordability and accessibility;• sales reach and local installation and support capabilities; and• brand awareness and reputation.We believe that we compete favorably with respect to each of these factors. In addition, we believe that our cloud-based software platform, connected home solutions and provenscalability help further differentiate us from competitors. Nevertheless, our competitors may have substantially greater financial, technical and other resources, greater namerecognition, larger sales and marketing budgets and broader distribution channels than we do.Our Intellectual PropertyOur success and ability to compete effectively depend in part on our ability to protect our proprietary technology and to establish and adequately protect our intellectual propertyrights. To accomplish these objectives, we rely on a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions, as well as licenseagreements, confidentiality agreements and other contractual protections.As of December 31, 2015, we owned 50 issued United States patents that are scheduled to expire between 2021 and 2034. We continue to file patent applications and as ofDecember 31, 2015, we had 48 pending utility patent applications and 27 provisional patent applications filed in the United States. We also had five pending patent applications inCanada and three12Table of Contentsinternational patent applications pending under the Patent Cooperation Treaty. The claims for which we have sought patent protection apply to both our platform and solutions. Ourpatent and patent applications generally apply to the features and functions of our platform, and solutions and the applications associated with our platform. We also have, and may berequired to seek, licenses under patents or intellectual property rights owned by third parties, including open-source software and other commercially available software.We also rely on several registered and unregistered trademarks to protect our brand. We have 16 registered trademarks in the United States, including Alarm.com and theAlarm.com logo and design, and three registered trademarks in Canada.We seek to protect our intellectual property rights by requiring our employees and independent contractors involved in development to enter into agreements acknowledging thatall inventions, trade secrets, works of authorship, developments, concepts, processes, improvements and other works generated by them on our behalf are our intellectual property,and assigning to us any rights, including intellectual property rights, that they may claim in those works.We expect that products in our industry may be subject to third-party infringement lawsuits as the number of competitors grows and the functionality of products in differentindustry segments overlaps. We have brought infringement claims against third parties in the past and may do so in the future to defend our intellectual property position. In addition,from time to time, we may face claims by third parties that we infringe upon or misappropriate their intellectual property rights, and we may be found to be infringing upon or to havemisappropriated such rights. In the future, we, or our service providers or subscribers, may be the subject of legal proceedings alleging that our solutions or underlying technologyinfringe or violate the intellectual property rights of others.EmployeesAs of December 31, 2015, we had 507 full-time employees. We also engage consultants and temporary employees. None of our employees are covered by collective bargainingagreements and we consider our relations with our employees to be good.Segment RevenueInformation about segment revenue is set forth in Note 20 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Corporate InformationWe were founded in 2000 as a business unit within MicroStrategy Incorporated. We were incorporated in 2003 under the name Alarm.com Incorporated as a majority-ownedsubsidiary of MicroStrategy. MicroStrategy sold all of its interests in Alarm.com Incorporated in 2009 and we established Alarm.com Holdings, Inc. in connection with the saletransaction. Our principal executive offices are located at 8281 Greensboro Drive, Tysons, Virginia 22102. Our telephone number is (877) 389-4033. We completed our initial publicoffering in July 2015 and our common stock is listed on The NASDAQ Global Select Market under the symbol “ALRM.”Available InformationOur website is located at www.alarm.com and our investor relations website is located at http://investors.alarm.com. Our Annual Reports on Form 10-K, Quarterly Reports onForm 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, asamended, or the Exchange Act, are available free of charge on our investor relations website as soon as reasonably practicable after we electronically file such material with, or furnishit to, the Securities and Exchange Commission, or the SEC. The public may read and copy the materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street,NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally the SEC maintainsan internet site that contains reports, proxy and information statements and other information. The address of the SEC’s website is www.sec.gov.Webcasts of our earnings calls and certain events we participate in or host with members of the investment community are on our investor relations website. Additionally, we aprovide notifications of news or announcements regarding our business and financial performance, SEC filings, investor events, and our press and earnings releases, as part of ourinvestor relations website. Investors and others can receive real-time notifications of new information posted on our investor relations website by signing up for email alerts and RSSfeeds. Further corporate governance information, including our corporate governance guidelines and board committee charters, is also available on our investor relations websiteunder the heading "Corporate Governance." The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other reportor document we file with the SEC, and any references to our websites are intended to be inactive textual references only.ITEM 1A. RISK FACTORS13Table of ContentsOur business is subject to numerous risks. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this AnnualReport on Form 10-K as well as our other public filings with the Securities and Exchange Commission. Any of the following risks could have a material adverse effect on our business,financial condition, results of operations and prospects and cause the trading price of our common stock to decline.Risks Related to Our Business and IndustryOur quarterly results of operations have fluctuated and are likely to continue to fluctuate. As a result, we may fail to meet or exceed the expectations of investors orsecurities analysts, which could cause our stock price to decline.Our quarterly revenue and results of operations may fluctuate as a result of a variety of factors, including revenue related to the product mix that we sell, including the relativesales related to our platform and solutions and other factors which are outside of our control. If our quarterly revenue or results of operations fall below the expectations of investors orsecurities analysts, the price of our common stock could decline substantially. Fluctuations in our results of operations may be due to a number of factors, including: • the portion of our revenue attributable to software-as-a-service, or SaaS, and license versus hardware andother sales; • fluctuations in demand, including due to seasonality, for our platform and solutions; • changes in pricing by us in response to competitive pricing actions; • our ability to increase, retain and incentivize the service providers that market, sell, install and support ourplatform and solutions; • the ability of our hardware vendors to continue to manufacture high-quality products and to supply sufficientproducts to meet our demands; • the timing and success of introductions of new solutions, products or upgrades by us or our competitorsand the entrance of new competitors; • changes in our business and pricing policies or those of our competitors; • the ability to accurately forecast revenue as we generally rely upon our service provider network togenerate new revenue; • our ability to control costs, including our operating expenses and the costs of the hardware we purchase; • competition, including entry into the industry by new competitors and new offerings by existing competitors; • our ability to successfully manage any future acquisitions of businesses; • issues related to introductions of new or improved products such as shortages of prior generation productsor short-term decreased demand for next generation products; • the amount and timing of expenditures, including those related to expanding our operations, increasingresearch and development, introducing new solutions or paying litigation expenses; • the ability to effectively manage growth within existing and new markets domestically and abroad; • changes in the payment terms for our platform and solutions; • the strength of regional, national and global economies; and • the impact of natural disasters or manmade problems such as terrorism.Due to the foregoing factors and the other risks discussed in this Annual Report, you should not rely on quarter-to-quarter comparisons of our results of operations as an indicationof our future performance. You should not consider our recent revenue and Adjusted EBITDA growth or results of one quarter as indicative of our future performance.14Table of ContentsWe may not sustain our growth rate and we may not be able to manage any future growth effectively.We have experienced significant growth in a short period of time. Our revenue increased from $37.2 million in 2010 to $208.9 million in 2015. We do not expect to achieve similargrowth rates in future periods. You should not rely on our operating results for any prior quarterly or annual periods as an indication of our future operating performance. If we areunable to maintain expected revenue growth in both absolute dollars and as a percentage of prior period revenue, our financial results could suffer and our stock price could decline.Our future operating results depend to a large extent on our ability to successfully manage our anticipated expansion and growth. To manage our growth successfully and handlethe responsibilities of being a public company, we believe we must effectively, among other things: • maintain our relationships with existing service providers and add new service providers; • increase our subscribers and help our service providers maintain and improve their revenue retention rates,while also expanding their cross-sell effectiveness; • add sales and marketing personnel; • expand our international operations; and • continue to implement and improve our administrative, financial and operational systems, procedures andcontrols.We intend to increase our investment in research and development, sales and marketing, and general and administrative functions and other areas to grow our business. We arelikely to recognize the costs associated with these increased investments earlier than some of the anticipated benefits and the return on these investments may be lower, or maydevelop more slowly, than we expect, which could adversely affect our operating results.If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new solutions or enhancements to our existingsolutions and we may fail to satisfy subscriber and service provider requirements, maintain the quality of our solutions, execute on our business plan or respond to competitivepressures, which could result in our financial results suffering and a decline in our stock price.We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels ofservice or address competitive challenges adequately.We increased our number of full-time employees from 253 to 400 to 507 at December 31, 2013, 2014 and 2015, respectively. Our revenue increased from $130.2 million in 2013to $167.3 million in 2014 to $208.9 million in 2015. Our growth has placed, and may continue to place, a significant strain on our managerial, administrative, operational, financial andother resources. We intend to further expand our overall business, service provider network, subscriber base, headcount and operations. Creating a global organization and managinga geographically dispersed workforce will require substantial management effort and significant additional investment in our infrastructure. We will be required to continue to improveour operational, financial and management controls and our reporting procedures and we may not be able to do so effectively. As such, we may be unable to manage our expenseseffectively in the future, which may negatively impact our gross profit or operating expenses in any particular quarter. If we fail to manage our anticipated growth and change in amanner that preserves the key aspects of our corporate culture, the quality of our solutions may suffer, which could negatively affect our brand and reputation and harm our ability toretain and attract service providers and consumers.The markets in which we participate are highly competitive and many companies, including large technology companies, broadband and security service providers andother managed service providers, are actively targeting the home automation, security monitoring, video monitoring and energy management markets. If we are unable tocompete effectively with these companies, our sales and profitability could be adversely affected.We compete in several markets, including home automation, security monitoring, video monitoring and energy management. The markets in which we participate are highlycompetitive and competition may intensify in the future.Our ability to compete depends on a number of factors, including: • our platform and solutions’ functionality, performance, ease of use, reliability, availability and costeffectiveness relative to that of our competitors’ products; • our success in utilizing new and proprietary technologies to offer solutions and features previouslynot available in the marketplace; 15Table of Contents • our success in identifying new markets, applications and technologies; • our ability to attract and retain service providers; • our name recognition and reputation; • our ability to recruit software engineers and sales and marketing personnel; and • our ability to protect our intellectual property.Consumers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. In the event a consumer decides toevaluate a new home automation, security monitoring, video monitoring or energy management solution, the consumer may be more inclined to select one of our competitors whoseproduct offerings are broader than those that we offer.Our current primary competitors include providers of other technology platforms for the connected home, including iControl Networks, Inc. and Honeywell International Inc., thatsell to service providers such as cable operators and other home automation providers. In addition, our service providers compete with managed service providers, such as cabletelevision, telephone and security companies like Comcast Corporation, AT&T Inc. and Time Warner Cable Inc., and providers of point products, including Nest Labs, Inc. (acquired byGoogle Inc.), which offers a thermostat, and Nest Cam (acquired by Nest Labs, Inc.), which offers video monitoring. Because our service providers compete with these entities, weconsider them competitive. For example, several cable and telecommunications companies have introduced home automation and security services packages, including interactivesecurity services, which are competitive with our platform and solutions. In addition, we may compete with other large technology companies that offer control capabilities among theirproducts, applications and services, and have ongoing development efforts to address the broader connected home market. For example, Apple, Inc. introduced a feature in 2014 thatallows some manufacturers’ devices to be controlled through a service available in Apple's iOS operating system.Most of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing,distribution and other resources than we have. We expect to encounter new competitors as we enter new markets as well as increased competition, both domestically andinternationally, from other established and emerging home automation, security monitoring, video monitoring and energy management companies as well as large technologycompanies. In addition, there may be new technologies that are introduced that reduce demand for our solutions or make them obsolete. Our current and potential competitors mayalso establish cooperative relationships among themselves or with third parties and rapidly acquire significant market share. Increased competition could also result in price reductionsand loss of market share, any of which could result in lower revenue and negatively affect our ability to grow our business.Aggressive business tactics by our competitors may reduce our revenue.Increased competition in the markets in which we compete may result in aggressive business tactics by our competitors, including: • selling at a discount; • offering products similar to our platform and solutions on a bundled basis at no charge; • announcing competing products combined with extensive marketing efforts; • providing financing incentives to consumers; and • asserting intellectual property rights irrespective of the validity of the claims.Our service providers may switch and offer the products and services of competing companies, which would adversely affect our sales and profitability. Competition from othercompanies may also adversely affect our negotiations with service providers and suppliers, including, in some cases, requiring us to lower our prices. Opportunities to take marketshare using innovative products, services and sales approaches may also attract new entrants to the field. We may not be able to compete successfully with the offerings and salestactics of other companies, which could result in the loss of service providers offering our platform and solutions and, as a result, our revenue and profitability could be adverselyaffected.16Table of ContentsIf we fail to compete successfully against our current and future competitors, or if our current or future competitors employ aggressive business tactics, including those describedabove, demand for our platform and solutions could decline, we could experience cancellations of our services to consumers, or we could be required to reduce our prices or increaseour expenses.The proper and efficient functioning of our network operations centers and data back-up systems is central to our solutions.Our solutions operate with a cloud-based architecture and we update our solutions regularly while our solutions are operating. If our solutions and/or upgrades fail to operateproperly, our solutions could stop functioning for a period of time, which could put our users at risk. Our ability to keep our business operating is highly dependent on the proper andefficient operation of our network operations centers and data back-up systems. Although our network operations centers have back-up computer and power systems, if there is acatastrophic event, natural disaster, terrorist attacks, security breach or other extraordinary event, we may be unable to provide our subscribers with uninterrupted monitoring service.Furthermore, because data back-up systems are susceptible to malfunctions and interruptions (including those due to equipment damage, power outages, human error, computerviruses, computer hacking, data corruption and a range of other hardware, software and network problems), we cannot guarantee that we will not experience data back-up failures inthe future. A significant or large-scale malfunction or interruption of our network operations centers or data back-up systems could adversely affect our ability to keep our operationsrunning efficiently. If a malfunction results in a wider or sustained disruption, it could have a material adverse effect on our reputation, business, financial condition, cash flows orresults of operations.We sell security and life safety solutions and if our solutions fail for any reason, we could be subject to liability and our business could suffer.We sell security and life safety solutions, which are designed to secure the safety of our subscribers and their residences or business. If these solutions fail for any reason,including due to defects in our software, a carrier outage, a failure of our network operating center, a failure on the part of our service providers or user error, we could be subject toliability for such failures and our business could suffer.Our platform and solutions may contain undetected defects in the software, infrastructure, third-party components or processes. If our platform or solutions suffer from defects, wecould experience harm to our branded reputation, claims by our subscribers or service providers or lost revenue during the period required to address the cause of the defects. Wemay find defects in new or upgraded solutions, resulting in loss of, or delay in, market acceptance of our platform and solutions, which could harm our business, results of operationsand financial condition.Since solutions that enable our platform are installed by our service providers, if they do not install or maintain such solutions correctly, our platform and solutions may not functionproperly. If the improper installation or maintenance of our platform and solutions leads to service failures after introduction of, or an upgrade to, our platform or a solution, we couldexperience harm to our branded reputation, claims by our subscribers or service providers or lost revenue during the period required to address the cause of the problem. Further, werely on our service providers to provide the primary source of support and ongoing service to our subscribers and, if our service providers fail to provide an adequate level of supportand services to our subscribers, it could have a material adverse effect on our reputation, business, financial condition or results of operations.Any defect in, or disruption to, our platform and solutions could cause consumers not to purchase additional solutions from us, prevent potential consumers from purchasing ourplatform and solutions or harm our reputation. Although our contracts with our service providers limit our liability to our service providers for these defects, disruptions or errors, wenonetheless could be subject to litigation for actual or alleged losses to our service providers or our subscribers, which may require us to spend significant time and money in litigationor arbitration, or to pay significant settlements or damages. Defending a lawsuit, regardless of its merit, could be costly, divert management's attention and affect our ability to obtain ormaintain liability insurance on acceptable terms and could harm our business. Although we currently maintain some warranty reserves, we cannot assure you that these warrantyreserves will be sufficient to cover future liabilities.We rely on our service provider network to acquire additional subscribers, and the inability of our service providers to attract additional subscribers or retain their currentsubscribers could adversely affect our operating results.Substantially all of our revenue is generated through the sales of our platform and solutions by our service providers, and our service providers are responsible for subscriberacquisition, as well as providing customer service and technical support for our platform and solutions to the subscribers. We provide our service providers with specific training andprograms to assist them in selling and providing support for our platform and solutions, but we cannot assure that these steps will be effective. In addition, we rely on our serviceproviders to sell our platform and solutions into new markets in the intelligent and connected home space. If our service providers are unsuccessful in marketing, selling, andsupporting our platform and solutions, our operating results could be adversely affected.In order for us to maintain our current revenue sources and grow our revenues, we must effectively manage and grow relationships with our service providers. Recruiting andretaining qualified service providers and training them in our technology17Table of Contentsand solutions requires significant time and resources. If we fail to maintain existing service providers or develop relationships with new service providers, our revenue and operatingresults would be adversely affected. In addition, to execute on our strategy to expand our sales internationally, we must develop relationships with service providers that sell into thesemarkets.Any of our service providers may choose to offer a product from one of our competitors instead of our platform and solutions, elect to develop their own competing solutions orsimply discontinue their operations with us. For example, we entered into a license agreement in November 2013 with Vivint, Inc., or Vivint, pursuant to which we granted a license touse the intellectual property associated with our connected home solutions. Under the terms of this arrangement, Vivint has transitioned from selling our solutions directly to itscustomers to selling its own home automation product to its new customers. We now generate revenue from a monthly fee charged to Vivint on a per customer basis from sales of thisservice provider’s product; however, these monthly fees are less on a per customer basis than fees from our SaaS solutions. Therefore, we receive less revenue on a per customerbasis from Vivint compared to our SaaS subscriber base, which may result in a lower revenue growth rate. We must also work to expand our network of service providers to ensurethat we have sufficient geographic coverage and technical expertise to address new markets and technologies. While it is difficult to estimate the total number of available serviceproviders in our markets, there are a finite number of service providers that are able to perform the types of technical installations required for our platform and solutions. In the eventthat we saturate the available service provider pool, or if market or other forces cause the available pool of service providers to decline, it may be increasingly difficult to grow ourbusiness. If we are unable to expand our network of service providers, our business could be harmed.As the consumers’ product and service options grow, it is important that we enhance our service provider footprint by broadening the expertise of our service providers, workingwith larger and more sophisticated service providers and expanding the mainstream solutions our service providers offer. If we do not succeed in this effort, our current and potentialfuture service providers may be unable or unwilling to broaden their offerings to include our connected home solution, resulting in harm to our business.We receive a substantial portion of our revenue from a limited number of service providers, and the loss of, or a significant reduction in, orders from one or more of ourmajor service providers would result in decreased revenue and profitability.Our success is highly dependent upon establishing and maintaining successful relationships with a variety of service providers. We market and sell our platform and solutionsthrough an all-channel assisted sales model and we derive substantially all of our revenue from these service providers. We generally enter into agreements with our service providersoutlining the terms of our relationship, including service provider pricing commitments, installation, maintenance and support requirements, and our sales registration process forregistering potential sales to subscribers. These contracts, including our contract with Monitronics International, Inc., typically have an initial term of one year, with subsequent renewalterms of one year, and are terminable at the end of the initial term or renewal terms without cause upon written notice to the other party. In some cases, these contracts provide theservice provider with the right to terminate prior to the expiration of the term without cause upon 30 days written notice, or, in the case of certain termination events, the right toterminate the contract immediately. While we have developed a network of over 5,000 service providers to sell, install and support our platform and solutions, we receive a substantialportion of our revenue from a limited number of channel partners. During the years ended December 31, 2015, 2014 and 2013, our 10 largest revenue service providers accounted forapproximate ly 63.4%, 64.7% a nd 65.7% of our revenue. Vivint represented greater than 10% but not more than 15% of our revenue in 2014 and 2013 . Monitronics International, Inc.represented greater than 15% but not more than 20% of our revenu e in 2015, 201 4 and 2013. United Technologies Corporation represented greater than 10% but not more than 15%of our revenue in 2014.We anticipate that we will continue to be dependent upon a limited number of service providers for a significant portion of our revenue for the foreseeable future and, in somecases, a portion of our revenue attributable to individual service providers may increase in the future. The loss of one or more key service providers, a reduction in sales through anymajor service providers or the inability or unwillingness of any of our major service providers to pay for our platform and solutions would reduce our revenue and could impair ourprofitability.We have relatively limited visibility regarding the consumers that ultimately purchase our solutions, and we often rely on information from third-party service providers tohelp us manage our business. If these service providers fail to provide timely or accurate information, our ability to quickly react to market changes and effectivelymanage our business may be harmed.We sell our solutions through service providers. These service providers work with consumers to design, install, update and maintain their connected home installations andmanage the relationship with our subscribers. While we are able to track orders from service providers and have access to certain information about the configurations of theirAlarm.com systems that we receive through our platform, we also rely on service providers to provide us with information about consumer behavior, product and system feedback,consumer demographics and buying patterns. We use this channel sell-through data, along with other metrics, to forecast our revenue, assess consumer demand for our solution,develop new solutions, adjust pricing and make other strategic business decisions. Channel sell-through data is subject to limitations due to collection methods and the third-partynature of the data and thus may not be complete or accurate. If we do not receive consumer information on a timely or18Table of Contentsaccurate basis, or if we do not properly interpret this information, our ability to quickly react to market changes and effectively manage our business may be harmed.Consumers may choose to adopt point products that provide control of discrete home functions rather than adopting our connected home platform. If we are unable toincrease market awareness of the benefits of our unified solutions, our revenue may not continue to grow, or it may decline.Many vendors have emerged, and may continue to emerge, to provide point products with advanced functionality for use in the home, such as a thermostat that can be controlledby an application on a smartphone. We expect more and more consumer electronic and consumer appliance products to be network-aware and connected — each very likely to haveits own smart device (phone or tablet) application. Consumers may be attracted to the relatively low costs of these point products and the ability to expand their home control solutionover time with minimal upfront costs, despite some of the disadvantages of this approach, may reduce demand for our connected home solutions. If so, our service providers mayswitch and offer the point products and services of competing companies, which would adversely affect our sales and profitability. If a significant number of consumers in our targetmarket choose to adopt point products rather than our connected home solutions, then our business, financial condition and results of operations will be harmed, and we may not beable to achieve sustained growth or our business may decline.Mergers or other strategic transactions involving our competitors could weaken our competitive position, which could adversely affect our ability to compete effectivelyand harm our results of operations.Our industry is highly fragmented, and we believe it is likely that some of our existing competitors will consolidate or be acquired. In addition, some of our competitors may enterinto new alliances with each other or may establish or strengthen cooperative relationships with systems integrators, third-party consulting firms or other parties. Any suchconsolidation, acquisition, alliance or cooperative relationship could adversely affect our ability to compete effectively and lead to pricing pressure and our loss of market share andcould result in a competitor with greater financial, technical, marketing, service and other resources, all of which could harm our business, results of operations and financial condition.We are dependent on our connected home solutions, and the lack of continued market acceptance of our connected home solutions would result in lower revenue.Our connected home solutions account for substantially all of our revenue and will continue to do so for the foreseeable future. As a result, our revenue could be reduced by: • any decline in demand for our connected home solutions; • the failure of our connected home solutions to achieve continued market acceptance; • the introduction of products and technologies that serve as a replacement or substitute for, or representan improvement over, our connected home solutions; • technological innovations or new communications standards that our connected home solutions doesnot address; and • our inability to release enhanced versions of our connected home solutions on a timely basis.We are vulnerable to fluctuations in demand for Internet-connected devices in general and interactive security systems in particular. If the market for connected home solutionsgrows more slowly than anticipated or if demand for connected home solutions does not grow as quickly as anticipated, whether as a result of competition, product obsolescence,technological change, unfavorable economic conditions, uncertain geopolitical environment, budgetary constraints of our consumers or other factors, we may not be able to continue toincrease our revenue and earnings and our stock price would decline.A significant decline in our SaaS and license revenue renewal rate would have an adverse effect on our business, financial condition and operating results.We generally bill our service providers based on the number of subscribers they have on our platform and the features being utilized by subscribers on a monthly basis inadvance. Subscribers could elect to terminate our services in any given month. If our efforts and our service providers’ efforts to satisfy our existing subscribers are not successful, wemay not be able to retain them or sell additional functionality to them and, as a result, our revenue and ability to grow could be adversely affected. We track our SaaS and licenserevenue renewal rate on an annualized basis, as reflected in the section of this Annual Report titled “Management’s Discussion and Analysis — Key Metrics —SaaS and LicenseRevenue Renewal Rate.” However, our service providers, who resell our services to our subscribers, have indicated that they typically have three to five year service contracts with oursubscribers. Our SaaS and license revenue renewal rate is calculated across our entire subscriber base,19Table of Contentsincluding subscribers whose contract with their service provider reached the end of its contractual term during the measurement period, as well as subscribers whose contract withtheir service provider has not reached the end of its contractual term during the measurement period, and is not intended to estimate the rate at which our subscribers renew theircontracts with our service providers. As a result, we may not be able to accurately predict future trends in renewals and the resulting churn. Subscribers may choose not to renew theircontracts for many reasons, including the belief that our service is not required for their needs or is otherwise not cost-effective, a desire to reduce discretionary spending, or a beliefthat our competitors’ services provide better value. Additionally, our subscribers may not renew for reasons entirely out of our control, such as moving a residence or the dissolution oftheir business, which is particularly common for small to mid-sized businesses. A significant increase in our churn would have an adverse effect on our business, financial condition,and operating results.If we are unable to develop new solutions, sell our platform and solutions into new markets or further penetrate our existing markets, our revenue may not grow asexpected.Our ability to increase sales will depend, in large part, on our ability to enhance and improve our platform and solutions, introduce new solutions in a timely manner, sell into newmarkets and further penetrate our existing markets. The success of any enhancement or new solution or service depends on several factors, including the timely completion,introduction and market acceptance of enhanced or new solutions, the ability to maintain and develop relationships with service providers, the ability to attract, retain and effectivelytrain sales and marketing personnel and the effectiveness of our marketing programs. Any new product or service we develop or acquire may not be introduced in a timely or cost-effective manner, and may not achieve the broad market acceptance necessary to generate significant revenue. Any new markets into which we attempt to sell our platform andsolutions, including new vertical markets and new countries or regions, may not be receptive. Our ability to further penetrate our existing markets depends on the quality of our platformand solutions and our ability to design our platform and solutions to meet consumer demand.We benefit from integration of our solutions with third-party security platform providers. If these developers choose not to partner with us, or are acquired by ourcompetitors, our business and results of operations may be harmed.Our solutions are incorporated into the hardware of our third-party security platform providers. For example, our hardware platform partners produce control devices that deliverour platform services to subscribers. It may be necessary in the future to renegotiate agreements relating to various aspects of these solutions or other third parties. The inability toeasily integrate with, or any defects in, any third-party solutions could result in increased costs, or in delays in new product releases or updates to our existing solutions until suchissues have been resolved, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and future prospects and could damageour reputation. In addition, if these third-party solution providers choose not to partner with us, choose to integrate their solutions with our competitors’ platforms, or are unable orunwilling to update their solutions, our business, financial condition and results of operations could be harmed. Further, if third-party solution providers that we partner with or that wewould benefit from partnering with are acquired by our competitors, they may choose not to offer their solutions on our platform, which could adversely affect our business, financialcondition and results of operations. We rely on wireless carriers to provide access to wireless networks through which we provide our wireless alarm, notification and intelligent automation services, andany interruption of such access would impair our business.We rely on wireless carriers to provide access to wireless networks for machine-to-machine data transmissions, which are an integral part of our services. Our wireless carriersmay suspend wireless service to expand, maintain or improve their networks. Any suspension or other interruption of services would adversely affect our ability to provide our servicesto our service providers and subscribers and may adversely affect our reputation. In addition, the inability to maintain our existing contracts with our wireless carriers or enter into newcontracts with such wireless carriers could have a material adverse effect on our business, financial condition and results of operations.If we are unable to adapt to technological change, including maintaining compatibility with a wide range of devices, our ability to remain competitive could be impaired.The market for connected home solutions is characterized by rapid technological change, frequent introductions of new products and evolving industry standards. Our ability toattract new subscribers and increase revenue from existing subscribers will depend in significant part on our ability to anticipate changes in industry standards, to continue to enhanceour existing solutions or introduce new solutions on a timely basis to keep pace with technological developments, and to maintain compatibility with a wide range of connected devicesin the home and business. We may change aspects of our operating system and may utilize open source technology in the future, which may cause difficulties including compatibility,stability and time to market. The success of this or any enhanced or new product or solution will depend on several factors, including the timely completion and market acceptance ofthe enhanced or new product or solution. Similarly, if any of our competitors implement new technologies before we are able to implement them, those competitors may be able toprovide more effective products than ours, possibly at lower prices. Any delay or failure in the introduction of new or enhanced solutions could harm our business, results of operationsand financial condition.20Table of ContentsThe technology we employ may become obsolete, and we may need to incur significant capital expenditures to update our technology.Our industry is characterized by rapid technological innovation. Our platform and solutions interact with the hardware and software technology of systems and devices located atour subscribers’ properties. We may be required to implement new technologies or adapt existing technologies in response to changing market conditions, consumer preferences orindustry standards, which could require significant capital expenditures. For example, many of our service providers are currently working to upgrade our solutions that were installedusing 2G wireless technology, which could impact the delivery of our solutions for existing subscribers reliant upon 2G wireless technology. It is also possible that one or more of ourcompetitors could develop a significant technical advantage that allows them to provide additional or superior quality products or services, or to lower their price for similar products orservices, which could put us at a competitive disadvantage. Our inability to adapt to changing technologies, market conditions or consumer preferences in a timely manner couldmaterially and adversely affect our business, financial condition, cash flows or results of operations.We depend on our suppliers, and the loss of any key supplier could materially and adversely affect our business, financial condition and results of operations.Our hardware products depend on the quality of components that we procure from third-party suppliers. Reliance on suppliers, as well as industry supply conditions, generallyinvolves several risks, including the possibility of defective parts, which can adversely affect the reliability and reputation of our platform and solutions, and a shortage of componentsand reduced control over delivery schedules and increases in component costs, which can adversely affect our profitability. We have several large hardware suppliers from which weprocure hardware on a purchase order basis, including one supplier that supplied products and components in an am ount equal to 37% of our hardware and other revenue in 2015. Ifthese suppliers are unable to continue to provide a timely and reliable supply, we could experience interruptions in delivery of our platform and solutions to service providers, whichcould have a material adverse effect on our business, financial condition and results of operations. If we were required to find alternative sources of supply, qualification of alternativesuppliers and the establishment of reliable supplies could result in delays and a possible loss of sales, which could have a material adverse effect on our business, financial conditionand results of operations.Growth of our business will depend on market awareness and a strong brand, and any failure to develop, maintain, protect and enhance our brand would hurt our abilityto retain or attract subscribers.We believe that building and maintaining market awareness, brand recognition and goodwill in a cost-effective manner is critical to our overall success in achieving widespreadacceptance of our existing and future solutions and is an important element in attracting new service providers and subscribers. An important part of our business strategy is toincrease service provider and consumer awareness of our brand and to provide marketing leadership, services and support to our service provider network. This will depend largely onour ability to continue to provide high-quality solutions, and we may not be able to do so effectively. While we may choose to engage in a broader marketing campaign to furtherpromote our brand, this effort may not be successful. Our efforts in developing our brand may be hindered by the marketing efforts of our competitors and our reliance on our serviceproviders and strategic partners to promote our brand. If we are unable to cost-effectively maintain and increase awareness of our brand, our business, results of operations andfinancial condition could be harmed.We operate in the emerging and evolving connected home market, which may develop more slowly or differently than we expect. If the connected home market does notgrow as we expect, or if we cannot expand our platform and solutions to meet the demands of this market, our revenue may decline, fail to grow or fail to grow at anaccelerated rate, and we may incur additional operating losses.The market for solutions that bring objects and systems not typically connected to the Internet, such as home automation, security monitoring, video monitoring and energymanagement solutions, into an Internet-like structure is in an early stage of development, and it is uncertain whether, how rapidly or how consistently this market will develop, and evenif it does develop, whether our platform and solutions will be accepted into the markets in which we operate. Some consumers may be reluctant or unwilling to use our platform andsolutions for a number of reasons, including satisfaction with traditional solutions, concerns about additional costs and lack of awareness of the benefits of our platform and solutions.Our ability to expand the sales of our platform and solutions into new markets depends on several factors, including the awareness of our platform and solutions, the timely completion,introduction and market acceptance of our platform and solutions, the ability to attract, retain and effectively train sales and marketing personnel, the ability to develop relationshipswith service providers, the effectiveness of our marketing programs, the costs of our platform and solutions and the success of our competitors. If we are unsuccessful in developingand marketing our platform and solutions into new markets, or if consumers do not perceive or value the benefits of our platform and solutions, the market for our platform andsolutions might not continue to develop or might develop more slowly than we expect, either of which would harm our revenue and growth prospects. Risks of liability from our operations are significant.21Table of ContentsThe nature of the solutions we provide, including our interactive security solutions, potentially exposes us to greater risks of liability for employee acts or omissions or systemfailure than may be inherent in other businesses. Substantially all of our service provider agreements contain provisions limiting our liability to service providers and our subscribers inan attempt to reduce this risk. However, in the event of litigation with respect to these matters, we cannot assure you that these limitations will be enforced, and the costs of suchlitigation could have a material adverse effect on us. In addition, there can be no assurance that we are adequately insured for these risks. Certain of our insurance policies and thelaws of some states may limit or prohibit insurance coverage for punitive or certain other types of damages or liability arising from gross negligence.Failure to maintain the security of our information and technology networks, including information relating to our service providers, subscribers and employees, couldadversely affect us.We are dependent on information technology networks and systems, including the Internet, to process, transmit and store electronic information and, in the normal course of ourbusiness, we collect and retain certain information pertaining to our service providers, subscribers and employees, including credit card information for many of our service providersand certain of our subscribers. If security breaches in connection with the delivery of our solutions allow unauthorized third parties to access any of this data or obtain control of oursubscribers’ systems, our reputation, business, results of operations and financial condition could be harmed.The legal, regulatory and contractual environment surrounding information security, privacy and credit card fraud is constantly evolving and companies that collect and retain suchinformation are under increasing attack by cyber-criminals around the world. A significant actual or potential theft, loss, fraudulent use or misuse of service provider, subscriber,employee or other personally identifiable data, whether by third parties or as a result of employee malfeasance or otherwise, non-compliance with our contractual or other legalobligations regarding such data or a violation of our privacy and security policies with respect to such data could result in loss of confidential information, damage to our reputation,early termination of our service provider contracts, significant costs, fines, litigation, regulatory investigations or actions and other liabilities or actions against us. Moreover, to theextent that any such exposure leads to credit card fraud or identity theft, we may experience a general decline in consumer confidence in our business, which may lead to an increasein attrition rates or may make it more difficult to attract new subscribers. Such an event could additionally result in adverse publicity and therefore adversely affect the market'sperception of the security and reliability of our services. Security breaches of, or sustained attacks against, this infrastructure could create system disruptions and shutdowns that couldresult in disruptions to our operations. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launchedagainst a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. We cannot be certain that advances in cyber-capabilities or other developments will not compromise or breach the technology protecting the networks that access our platform and solutions. If any one of these risks materializesour business, financial condition, results of operations and cash flows could be materially and adversely affected. Our strategy includes pursuing acquisitions, and our potential inability to successfully integrate newly-acquired technologies, assets or businesses may harm ourfinancial results. Future acquisitions of technologies, assets or businesses, which are paid for partially or entirely through the issuance of stock or stock rights, coulddilute the ownership of our existing stockholders.We have acquired businesses in the past. For example, we acquired EnergyHub, Inc. in 2013 and we acquired the assets of Horizon Analog, Inc. and Secure-i, Inc., respectively,in December 2014, and of HiValley Technology Inc. in March 2015. We also believe part of our growth will be driven by acquisitions of other companies or their technologies, assetsand businesses. Any acquisitions we complete will give rise to risks, including: • incurring higher than anticipated capital expenditures and operating expenses; • failing to assimilate the operations and personnel or failing to retain the key personnel of the acquiredcompany or business; • failing to integrate the acquired technologies, or incurring significant expense to integrate acquiredtechnologies into our platform and solutions; • disrupting our ongoing business; • diverting our management’s attention and other company resources; • failing to maintain uniform standards, controls and policies; • incurring significant accounting charges; • impairing relationships with employees, service providers or subscribers; 22Table of Contents • finding that the acquired technology, asset or business does not further our business strategy, that weoverpaid for the technology, asset or business or that we may be required to write off acquired assets orinvestments partially or entirely; • failing to realize the expected synergies of the transaction; • being exposed to unforeseen liabilities and contingencies that were not identified prior to acquiring thecompany; and • being unable to generate sufficient revenue and profits from acquisitions to offset the associated acquisitioncosts.Fully integrating an acquired technology, asset or business into our operations may take a significant amount of time. We may not be successful in overcoming these risks or anyother problems encountered with acquisitions. To the extent we do not successfully avoid or overcome the risks or problems related to any such acquisitions, our results of operationsand financial condition could be harmed. Acquisitions also could impact our financial position and capital requirements, or could cause fluctuations in our quarterly and annual resultsof operations. Acquisitions could include significant goodwill and intangible assets, which may result in future impairment charges that would reduce our stated earnings. We may incursignificant costs in our efforts to engage in strategic transactions and these expenditures may not result in successful acquisitions.We expect that the consideration we might pay for any future acquisitions of technologies, assets or businesses could include stock, rights to purchase stock, cash or somecombination of the foregoing. If we issue stock or rights to purchase stock in connection with future acquisitions, net income per share and then-existing holders of our common stockmay experience dilution. We may pursue business opportunities that diverge from our current business model, which may cause our business to suffer.We may pursue business opportunities that diverge from our current business model, including expanding our platform and solutions and investing in new and unproventechnologies. For example, in 2013, we entered the energy management market through our acquisition of EnergyHub. We can offer no assurance that any such new businessopportunities will prove to be successful. Among other negative effects, our pursuit of such business opportunities could reduce operating margins and require more working capital,materially and adversely affect our business, financial condition, results of operations and cash flows.Evolving government and industry regulation and changes in applicable laws relating to the Internet and data privacy may increase our expenditures related tocompliance efforts or otherwise limit the solutions we can offer, which may harm our business and adversely affect our financial condition.As Internet commerce continues to evolve, federal, state or foreign agencies have adopted and could in the future adopt regulations covering issues such as user privacy andcontent. We are particularly sensitive to these risks because the Internet is a critical component of our SaaS business model. In addition, taxation of products or services provided overthe Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may be imposed. Any regulation imposing greater fees for Internetuse or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business.Our platform and solutions enable us to collect, manage and store a wide range of data related to our subscribers’ interactive security, intelligent automation, video monitoring andenergy management systems. A valuable component of our platform and solutions is our ability to analyze this data to present the user with actionable business intelligence. Weobtain our data from a variety of sources, including our service providers, our subscribers and third-party providers. We cannot assure you that the data we require for our proprietarydata sets will be available from these sources in the future or that the cost of such data will not increase. The United States federal gove rnment and various state governments haveadopted or proposed limitations on the collection, distribution, storage and use of personal information. Several foreign jurisdictions, including the European Union and the UnitedKingdom, have adopted legislation (including directives or regulations) that is more rigorous governing data collection and storage than in the United States. On October 6, 2015, theEuropean Court of Justice issued a ruling that calls into question the continued availability of all provisions of the United States-European Union Safe Harbor Framework, a privacyprotection mechanism that facilitated the transfer of personal data to the United States in compliance with the European Commission’s Directive on Data Protection, and there issignificant regulatory uncertainty surrounding the future of data transfers from the European Union to the United States. If our privacy or data security measures fail to comply, or areperceived to fail to comply, with current or future laws and regulations, we may be subject to litigation, regulatory investigations or other liabilities. Further, in the event of a breach ofpersonal information that we hold, we may be subject to governmental fines, individual claims, remediation expenses, and/or harm to our reputation. Moreover, if future laws andregulations limit our ability to use and share this data or our ability to store, process and share data over the Internet, demand for our platform and solutions could decrease, our costscould increase, and our results of operations and financial condition could be harmed.23Table of ContentsAlthough we are not currently subject to the Health Insurance Portability and Accountability Act of 1996, and its implementing regulations, or HIPAA, which regulates the use,storage, and disclosure of personally identifiable health information, we may modify our platform and solutions to become HIPAA compliant. Becoming fully HIPAA compliant involvesadopting and implementing privacy and security policies and procedures as well as administrative, physical and technical safeguards. Additionally, HIPAA compliance requires certainagreements with contracting partners to be in place and the appointment of a Privacy and Security Officer. Endeavoring to become HIPAA compliant may be costly both financially andin terms of administrative resources. It may take substantial time and require the assistance of external resources, such as attorneys, information technology, and/or other consultants.We would have to be HIPAA compliant to provide services for or on behalf of a health care provider or health plan pursuant to which patient information was exchanged. Thus, if we donot become fully HIPAA compliant, our expansion opportunities may be limited. Furthermore, it is possible that HIPAA may be expanded in the future to apply to certain of our platformand/or solutions as currently constituted.We rely on the performance of our senior management and highly skilled personnel, and if we are unable to attract, retain and motivate well-qualified employees, ourbusiness and results of operations could be harmed.We believe our success has depended, and continues to depend, on the efforts and talents of senior management and key personnel, including Stephen Trundle, our ChiefExecutive Officer, and our senior information technology managers. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified andskilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract them. In addition, the loss of any of our senior management or key personnelcould interrupt our ability to execute our business plan, as such individuals may be difficult to replace. If we do not succeed in attracting well-qualified employees or retaining andmotivating existing employees, our business and results of operations could be harmed.We provide minimum service level commitments to certain of our service providers, and our failure to meet them could cause us to issue credits for future services or paypenalties, which could harm our results of operations.Certain of our service provider agreements currently, and may in the future, provide minimum service level commitments regarding items such as uptime, functionality orperformance. If we are unable to meet the stated service level commitments for these service providers or suffer extended periods of service unavailability, we are or may becontractually obligated to provide these service providers with credits for future services, provide services at no cost or pay other penalties, which could adversely impact our revenue.We do not currently have any reserves on our balance sheet for these commitments.We have already incurred and expect to incur a material amount of indebtedness, which could adversely affect our financial health.We are party to a senior line of credit with Silicon Valley Bank, or SVB, and a syndicate of lenders, which we refer to as our 2014 Facility, that allows us to draw down anaggregate amount equal to $50.0 million. As of December 31, 2015, we had an outstanding balance of $6.7 million under our 2014 Facility. This indebtedness and certain covenantsand obligations contained in the related documentation could adversely affect our financial health and business and future operations by, among other things: • making it more difficult for us to satisfy our obligations, including with respect to our indebtedness; • increasing our vulnerability to adverse economic and industry conditions; and • limiting our flexibility in planning for, or reacting to, changes in our business and in the industry in which weoperate.Furthermore, substantially all of our assets, including our intellectual property, secure our 2014 Facility. If an event of default under the credit agreement occurs and is continuing,SVB may request the acceleration of the related indebtedness and foreclose on the security interests. In addition, our 2014 Facility restricts our ability to make dividend payments and requires us to maintain a certain leverage ratio, which may restrict our ability to invest in futuregrowth. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may determine to engage in equityor debt financings or enter into credit facilities for other reasons. In the future, we may not be able to timely secure debt or equity financing on favorable terms or at all. Any debtfinancing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it moredifficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we raise additional funds through further issuances of equity,convertible debt securities or other24Table of Contentssecurities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue couldhave rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in our initial public offering. If we are unable to obtainadequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could belimited.Goodwill and other identifiable intangible assets represent a significant portion of our total assets, and we may never realize the full value of our intangible assets.As of December 31, 2015, we had $31.0 million of goodwill and identifiable intangible assets. Goodwill and other identifiable intangible assets are recorded at fair value on thedate of acquisition. We review such assets for impairment at least annually. Impairment may result from, among other things, deterioration in performance, adverse market conditions,adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the solutions we offer, challenges to the validity of certain registeredintellectual property, reduced sales of certain products or services incorporating registered intellectual property, increased attrition and a variety of other factors. The amount of anyquantified impairment must be expensed immediately as a charge to results of operations. Depending on future circumstances, it is possible that we may never realize the full value ofour intangible assets. Any future determination of impairment of goodwill or other identifiable intangible assets could have a material adverse effect on our financial position and resultsof operations.We may be subject to additional tax liabilities, which would harm our results of operations.We are subject to income, sales, use, value added and other taxes in the United States and other countries in which we conduct business, which laws and rates vary greatly byjurisdiction. Certain jurisdictions in which we do not collect sales, use, value added or other taxes on our sales may assert that such taxes are applicable, which could result in taxassessments, penalties and interest, and we may be required to collect such taxes in the future. Significant judgment is required in determining our worldwide provision for incometaxes. These determinations are highly complex and require detailed analysis of the available information and applicable statutes and regulatory materials. In the ordinary course ofour business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the finaldetermination of tax audits and any related litigation could be different from our historical tax practices, provisions and accruals. If we receive an adverse ruling as a result of an audit,or we unilaterally determine that we have misinterpreted provisions of the tax regulations to which we are subject, our tax provision, results of operations or cash flows could beharmed. In addition, liabilities associated with taxes are often subject to an extended or indefinite statute of limitations period. Therefore, we may be subject to additional tax liability(including penalties and interest) for a particular year for extended periods of time.Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by manmade problems such asterrorism or global or regional economic, political and social conditions.A significant natural disaster, such as an earthquake, fire or a flood, or a significant power outage could harm our business, results of operations and financial condition. Naturaldisasters could affect our hardware vendors, our wireless carriers or our network operations centers. Further, if a natural disaster occurs in a region from which we derive a significantportion of our revenue, such as metropolitan areas in North America, consumers in that region may delay or forego purchases of our platform and solutions from service providers inthe region, which may harm our results of operations for a particular period. In addition, terrorist acts or acts of war could cause disruptions in our business or the business of ourhardware vendors, service providers, subscribers or the economy as a whole. More generally, these geopolitical, social and economic conditions could result in increased volatility inworldwide financial markets and economies that could harm our sales. Given our concentration of sales during the second and third quarters, any disruption in the business of ourhardware vendors, service providers or subscribers that impacts sales during the second or third quarter of each year could have a greater impact on our annual results. All of theaforementioned risks may be augmented if the disaster recovery plans for us, our service providers and our suppliers prove to be inadequate. To the extent that any of the aboveresults in delays or cancellations of orders, or delays in the manufacture, deployment or shipment of our platform and solutions, our business, financial condition and results ofoperations would be harmed.Downturns in general economic and market conditions and reductions in spending may reduce demand for our platform and solutions, which could harm our revenue,results of operations and cash flows.Our revenue, results of operations and cash flows depend on the overall demand for our platform and solutions. Concerns about the systemic impact of a potential widespreadrecession, energy costs, geopolitical issues, the availability and cost of credit and the global housing and mortgage markets have contributed to increased market volatility, decreasedconsumer confidence and diminished growth expectations in the U.S. economy and abroad. The current unstable general economic and market conditions have been characterized bya dramatic decline in consumer discretionary spending and have disproportionately affected providers of solutions that represent discretionary purchases. While the decline inconsumer spending has recently moderated, these economic conditions could still lead to continued declines in consumer spending over the foreseeable future, and may haveresulted in a resetting of consumer spending habits that may make it unlikely that such spending will return to prior levels for the foreseeable future.25Table of ContentsDuring weak economic times, the available pool of service providers may decline as the prospects for home building and home renovation projects diminish, which may have acorresponding impact on our growth prospects. In addition, there is an increased risk during these periods that an increased percentage of our service providers will file for bankruptcyprotection, which may harm our reputation, revenue, profitability and results of operations. In addition, we may determine that the cost of pursuing any claim may outweigh therecovery potential of such claim. Likewise, consumer bankruptcies can detrimentally affect the business stability of our service providers. Prolonged economic slowdowns andreductions in new home construction and renovation projects may result in diminished sales of our platform and solutions. Further worsening, broadening or protracted extension of theeconomic downturn could have a negative impact on our business, revenue, results of operations and cash flows. Failure to comply with laws and regulations could harm our business.We conduct our business in the United States and are expanding internationally in various other countries. We are subject to regulation by various federal, state, local and foreigngovernmental agencies, including, but not limited to, agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, product safety, environmentallaws, consumer protection laws, federal securities laws and tax laws and regulations.We are subject to the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. Travel Act, and possiblyother anti-bribery laws, including those that comply with the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and otherinternational conventions. Anti-corruption laws are interpreted broadly and prohibit our company from authorizing, offering, or providing directly or indirectly improper payments orbenefits to recipients in the public or private-sector. Certain laws could also prohibit us from soliciting or accepting bribes or kickbacks. Our company has direct governmentinteractions and in several cases uses third-party representatives, including dealers, for regulatory compliance, sales and other purposes in a variety of countries. These factorsincrease our anti-corruption risk profile. We can be held liable for the corrupt activities of our employees, representatives, contractors, partners and agents, even if we did not explicitlyauthorize such activity. Although we have implemented policies and procedures designed to ensure compliance with anti-corruption laws, there can be no assurance that all of ouremployees, representatives, contractors, partners, and agents will comply with these laws and policies.We are also subject to data privacy and security laws, anti-money laundering laws (such as the USA PATRIOT Act), and import/export laws and regulations in the United Statesand in other jurisdictions.Our global operations require us to import from and export to several countries, which geographically stretches our compliance obligations. Our platform and solutions are subjectto export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctionsregulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our platform and solutions must be made in compliance with these laws andregulations. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss ofexport or import privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees ormanagers. In addition, if our service providers fail to obtain appropriate import, export or re-export licenses or authorizations, we may also be adversely affected through reputationalharm and penalties. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming, is not guaranteed and may result in the delayor loss of sales opportunities. In addition, changes in our platform or solutions or changes in applicable export or import laws and regulations may create delays in the introduction andsale of our platform and solutions in international markets, prevent our service providers with international operations from deploying our platform and solutions or, in some cases,prevent the export or import of our platform and solutions to certain countries, governments or persons altogether. Any change in export or import laws and regulations, shift in theenforcement or scope of existing laws and regulations, or change in the countries, governments, persons or technologies targeted by such laws and regulations, could also result indecreased use of our platform and solutions, or in our decreased ability to export or sell our platform and solutions to existing or potential service providers with internationaloperations. Any decreased use of our platform and solutions or limitation on our ability to export or sell our platform and solutions would likely adversely affect our business, financialcondition and results of operations. In addition, our software contains encryption technologies, certain types of which are subject to U.S. and foreign export control regulations and, in some foreign countries,restrictions on importation and/or use. Any failure on our part to comply with encryption or other applicable export control requirements could result in financial penalties or othersanctions under the U.S. export regulations, including restrictions on future export activities, which could harm our business and operating results. Regulatory restrictions could impairour access to technologies needed to improve our platform and solutions and may also limit or reduce the demand for our platform and solutions outside of the United States.Furthermore, U.S. export control laws and economic sanctions programs prohibit the shipment of certain products and services to countries, governments and persons that aresubject to U.S. economic embargoes and trade sanctions. Even though we take precautions to prevent our platform and solutions from being shipped or provided to U.S. sanctionstargets, our platform and solutions could be shipped to those targets or provided by third-parties despite such precautions. Any such shipment could have negative consequences,including government investigations, penalties and reputational harm. Furthermore, any new embargo or sanctions program, or any change in the countries, governments, persons oractivities targeted by such programs,26Table of Contentscould result in decreased use of our platform and solutions, or in our decreased ability to export or sell our platform and solutions to existing or potential service providers, which wouldlikely adversely affect our business and our financial condition.Changes in laws that apply to us could result in increased regulatory requirements and compliance costs which could harm our business, financial condition and results ofoperations. In certain jurisdictions, regulatory requirements may be more stringent than in the United States. Noncompliance with applicable regulations or requirements could subjectus to whistleblower complaints, investigations, sanctions, settlements, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminalpenalties or injunctions, suspension or debarment from contracting with certain governments or other customers, the loss of export privileges, multi-jurisdictional liability, reputationalharm, and other collateral consequences. If any governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results ofoperations and financial condition could be materially harmed. In addition, responding to any action will likely result in a materially significant diversion of management’s attention andresources and an increase in defense costs and other professional fees. Enforcement actions and sanctions could further harm our business, results of operations, and financialcondition.From time to time, we are involved in legal proceedings as to which we are unable to assess our exposure and which could become significant liabilities in the event of anadverse judgment.We are involved and have been involved in the past in legal proceedings from time to time. For example, on June 2, 2015, Vivint filed a lawsuit against us alleging that ourtechnology directly and indirectly infringes six patents owned by Vivint. See the section of this Annual Report titled "Legal Proceedings" for additional information on this matter.Companies in our industry have been subject to claims related to patent infringement and product liability, as well as contract and employment-related claims. We may not be able toaccurately assess the risks related to these suits, and we may be unable to accurately assess our level of exposure. As a result of these proceedings, we have, and may be required toseek in the future, licenses under patents or intellectual property rights owned by third parties, including open-source software and other commercially available software, which can becostly. For example, we have initiated and been involved with intellectual property litigation as a result of which we have entered into cross-license agreements relating to our andthird-party intellectual property, and in one such case we initiated in 2013 and settled in January 2014, we incurred $11.2 million of legal expense in 2013.Our business operates in a regulated industry.Our business, operations and service providers are subject to various U.S. federal, state and local consumer protection laws, licensing regulation and other laws and regulations,and, to a lesser extent, similar Canadian laws and regulations. Our advertising and sales practices and that of our service provider network are subject to regulation by the U.S.Federal Trade Commission, or the FTC, in addition to state consumer protection laws. The FTC and the Federal Communications Commission have issued regulations that placerestrictions on, among other things, unsolicited automated telephone calls to residential and wireless telephone subscribers by means of automatic telephone dialing systems and theuse of prerecorded or artificial voice messages. If our service providers were to take actions in violation of these regulations, such as telemarketing to individuals on the “Do Not Call”registry, we could be subject to fines, penalties, private actions or enforcement actions by government regulators. Although we have taken steps to insulate ourselves from any suchwrongful conduct by our service providers, and to require our service providers to comply with these laws and regulations, no assurance can be given that we will not be exposed toliability as result of our service providers’ conduct. Further, to the extent that any changes in law or regulation further restrict the lead generation activity of our service providers, theserestrictions could result in a material reduction in subscriber acquisition opportunities, reducing the growth prospects of our business and adversely affecting our financial condition andfuture cash flows. In addition, most states in which we operate have licensing laws directed specifically toward the monitored security services industry. Our business relies heavilyupon cellular telephone service to communicate signals. Cellular telephone companies are currently regulated by both federal and state governments. Changes in laws or regulationscould require us to change the way we operate, which could increase costs or otherwise disrupt operations. In addition, failure to comply with any such applicable laws or regulationscould result in substantial fines or revocation of our operating permits and licenses, including in geographic areas where our services have substantial penetration, which couldadversely affect our business and financial condition. Further, if these laws and regulations were to change or if we fail to comply with such laws and regulations as they exist today orin the future, our business, financial condition and results of operations could be materially and adversely affected.If the U.S. insurance industry were to change its practice of providing incentives to homeowners for the use of alarm monitoring services, we could experience areduction in new subscriber growth or an increase in our subscriber attrition rate.It has been common practice in the U.S. insurance industry to provide a reduction in rates for policies written on homes that have monitored alarm systems. There can be noassurance that insurance companies will continue to offer these rate reductions. If these incentives were reduced or eliminated, new homeowners who otherwise may not feel the needfor alarm monitoring services would be removed from our potential subscriber pool, which could hinder the growth of our business, and existing subscribers may choose to disconnector not renew their service contracts, which could increase our attrition rates. In either case, our results of operations and growth prospects could be adversely affected.27Table of ContentsWe face many risks associated with our plans to expand internationally, which could harm our business, financial condition, and operating results.We anticipate that our efforts to expand internationally will entail the marketing and advertising of our platform, solutions and brand. While our platform and solutions are designedfor ease of localization, revenue in countries outside of the United States and Canada accounted f or less than 1% of our revenue for the year ended December 31, 2015. We also donot have substantial experience in selling our platform and solutions in international markets outside of the United State s and Canada or in conforming to the local cultures, standards,or policies necessary to successfully compete in those markets, and we may be required to invest significant resources in order to do so. We may not succeed in these efforts orachieve our consumer acquisition, service provider expansion or other goals. In some international markets, consumer preferences and buying behaviors may be different, and wemay use business or pricing models that are different from our traditional model to provide our platform and solutions to consumers in those markets or we may be unsuccessful inimplementing the appropriate business model. Our revenue from new foreign markets may not exceed the costs of establishing, marketing, and maintaining our international offerings.In addition, the current instability in the eurozone could have many adverse consequences on our international expansion, including sovereign default, liquidity and capital pressureson eurozone financial institutions, reducing the availability of credit and increasing the risk of financial sector failures and the risk of one or more eurozone member states leaving theeuro, resulting in the possibility of capital and exchange controls and uncertainty about the impact of contracts and currency exchange rates.In addition, conducting expanded international operations subjects us to new risks that we have not generally faced in our current markets. These risks include: • localization of our solutions, including the addition of foreign languages and adaptation to new localpractices and regulatory requirements; • lack of experience in other geographic markets; • strong local competitors; • the cost and burden of complying with, lack of familiarity with, and unexpected changes in, foreign legaland regulatory requirements, including more stringent privacy regulations; • difficulties in managing and staffing international operations; • fluctuations in currency exchange rates or restrictions on foreign currency; • potentially adverse tax consequences, including the complexities of transfer pricing, value added or othertax systems, double taxation and restrictions and/or taxes on the repatriation of earnings; • dependence on third parties, including commercial partners with whom we do not have extensiveexperience; • increased financial accounting and reporting burdens and complexities; • political, social, and economic instability, terrorist attacks, and security concerns in general; and • reduced or varied protection for intellectual property rights in some countries.Operating in international markets also requires significant management attention and financial resources. The investment and additional resources required to establishoperations and manage growth in other countries may not produce desired levels of revenue or profitability.Our software contains encryption technologies, certain types of which are subject to U.S. and foreign export control regulations and, in some foreign countries, restrictions onimportation and/or use. Any failure on our part to comply with encryption or other applicable export control requirements could result in financial penalties or other sanctions under theU.S. export regulations, including restrictions on future export activities, which could harm our business and operating results. Regulatory restrictions could impair our access totechnologies needed to improve our platform and solutions and may also limit or reduce the demand for our platform and solutions outside of the United States.Risks Related to Our Intellectual PropertyIf we fail to protect our intellectual property and proprietary rights adequately, our business could be harmed.28Table of ContentsWe believe that our proprietary technology is essential to establishing and maintaining our leadership position. We seek to protect our intellectual property through trade secrets,copyrights, confidentiality, non-compete and nondisclosure agreements, patents, trademarks, domain names and other measures, some of which afford only limited protection. Wealso rely on patent, trademark, trade secret and copyright laws to protect our intellectual property. Despite our efforts to protect our proprietary rights, unauthorized parties may attemptto copy aspects of our technology or to obtain and use information that we regard as proprietary. Our means of protecting our proprietary rights may not be adequate or ourcompetitors may independently develop similar or superior technology, or design around our intellectual property. In addition, the laws of some foreign countries do not protect ourproprietary rights to as great an extent as the laws of the United States. Intellectual property protections may also be unavailable, limited or difficult to enforce in some countries, whichcould make it easier for competitors to capture market share. Our failure or inability to adequately protect our intellectual property and proprietary rights could harm our business,financial condition and results of operations.To prevent substantial unauthorized use of our intellectual property rights, it may be necessary to prosecute actions for infringement and/or misappropriation of our proprietaryrights against third parties. Any such action could result in significant costs and diversion of our resources and management's attention, and we cannot assure you that we will besuccessful in such action. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual propertyrights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.An assertion by a third party that we are infringing its intellectual property could subject us to costly and time-consuming litigation or expensive licenses that could harmour business and results of operations.The industries in which we compete are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets, and by frequent litigation based onallegations of infringement or other violations of intellectual property rights. We have been involved with patent litigation suits in the past and we may be involved with and subject tosimilar litigation in the future to defend our intellectual property position. For example, on June 2, 2015, Vivint filed a lawsuit against us in U.S. District Court, District of Utah, allegingthat our technology directly and indirectly infringes six patents that Vivint purchased. Vivint is seeking preliminary and permanent injunctions, enhanced damages and attorney’s fees.We answered the complaint on July 23, 2015. Among other things, we asserted defenses based on non-infringement and invalidity of the patents in question. Should Vivint prevail onits claims that one or more elements of our solution infringe one or more of its patents, we could be required to pay damages of Vivint’s lost profits and/or a reasonable royalty for salesof our solution, enjoined from making, using, and selling our solution if a license or other right to continue selling such elements is not made available to us or we are unable to designaround such patents, and required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us. While we believe we have valid defenses toVivint’s claims, any of these outcomes could result in a material adverse effect on our business. Even if we were to prevail, this litigation could be costly and time-consuming, divert theattention of our management and key personnel from our business operations and dissuade potential customers from purchasing our solution, which would also materially harm ourbusiness. During the course of litigation, we anticipate announcements of the results of hearings and motions, and other interim developments related to the litigation. If securitiesanalysts or investors regard these announcements as negative, the market price of our common stock may decline. We might not prevail in any intellectual property infringement litigation given the complex technical issues and inherent uncertainties in such litigation and our service providercontracts may require us to indemnify them against certain liabilities they may incur as a result of our infringement of any third party intellectual property. Defending such claims,regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause development delays or require us to enter into royaltyor licensing agreements. For example, in 2013, we incurred $11.2 million in legal fees associated with intellectual property litigation that we asserted against a third party and therelated counterclaims and in 2014, we incurred $1.4 million of costs related to intellectual property claims. In addition, we currently have a limited portfolio of issued patents comparedto our larger competitors, and therefore may not be able to effectively utilize our intellectual property portfolio to assert defenses or counterclaims in response to patent infringementclaims or litigation brought against us by third parties. Further, litigation may involve patent holding companies or other adverse patent owners who have no relevant products orrevenues and against which our potential patents provide no deterrence, and many other potential litigants have the capability to dedicate substantially greater resources to enforcetheir intellectual property rights and to defend claims that may be brought against them. Given that our platform and solutions integrate with all aspects of the home, the risk that ourplatform and solutions may be subject to these allegations is exacerbated. As we seek to extend our platform and solutions, we could be constrained by the intellectual property rightsof others. If our platform and solutions exceed the scope of in-bound licenses or violate any third-party proprietary rights, we could be required to withdraw those solutions from themarket, re-develop those solutions or seek to obtain licenses from third parties, which might not be available on reasonable terms or at all. Any efforts to re-develop our platform andsolutions, obtain licenses from third parties on favorable terms or license a substitute technology might not be successful and, in any case, might substantially increase our costs andharm our business, financial condition and results of operations. If we were compelled to withdraw any of our platform and solutions from the market, our business, financial conditionand results of operations could be harmed.We have indemnity obligations to certain of our service providers for certain expenses and liabilities resulting from intellectual property infringement claims regardingour platform and solutions, which could force us to incur substantial costs.29Table of ContentsWe have indemnity obligations to certain of our service providers for intellectual property infringement claims regarding our platform and solutions. As a result, in the case ofinfringement claims against these service providers, we could be required to indemnify them for losses resulting from such claims or to refund amounts they have paid to us. Weexpect that some of our service providers may seek indemnification from us in connection with infringement claims brought against them. In addition, we may elect to indemnify serviceproviders where we have no contractual obligation to indemnify them and we will evaluate each such request on a case-by-case basis. If a service provider elects to invest resourcesin enforcing a claim for indemnification against us, we could incur significant costs disputing it. If we do not succeed in disputing it, we could face substantial liability.The use of open source software in our platform and solutions may expose us to additional risks and harm our intellectual property.Some of our platform and solutions use or incorporate software that is subject to one or more open source licenses and we may incorporate open source software in the future.Open source software is typically freely accessible, usable and modifiable. Certain open source software licenses require a user who intends to distribute the open source software asa component of the user's software to disclose publicly part or all of the source code to the user's software. In addition, certain open source software licenses require the user of suchsoftware to make any derivative works of the open source code available to others on potentially unfavorable terms or at no cost. The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and accordingly there is a risk that those licenses could beconstrued in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our platform and solutions. In that event, we could be required to seeklicenses from third parties in order to continue offering our platform and solutions, to re-develop our platform and solutions, to discontinue sales of our platform and solutions or torelease our proprietary software code under the terms of an open source license, any of which could harm our business. Further, given the nature of open source software, it may bemore likely that third parties might assert copyright and other intellectual property infringement claims against us based on our use of these open source software programs. Litigationcould be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources tochange our solutions.Although we are not aware of any use of open source software in our platform and solutions that would require us to disclose all or a portion of the source code underlying ourcore solutions, it is possible that such use may have inadvertently occurred in deploying our platform and solutions. Additionally, if a third-party software provider has incorporatedcertain types of open source software into software we license from such third party for our platform and solutions without our knowledge, we could, under certain circumstances, berequired to disclose the source code to our platform and solutions. This could harm our intellectual property position as well as our business, results of operations and financialcondition.Risks Related to Ownership of Our Common StockAn active trading market for our common stock may not continue to develop or be sustained.Prior to our recently completed initial public offering, there was no public market for our common stock. Although our common stock is listed on The NASDAQ Global SelectMarket, we cannot assure you that an active trading market for our shares will continue to develop or be sustained. If an active market for our common stock does not continue todevelop or is not sustained, it may be difficult for investors in our common stock to sell shares without depressing the market price for the shares or to sell the shares at all.The market price of our common stock has been and is likely to continue to be volatile.The market price of our common stock may be highly volatile and may fluctuate substantially as a result of a variety of factors, some of which are related in complex ways. Sinceshares of our common stock were sold in our initial public offering in June 2015 at a price of $14.00 per share, our stock price has ranged from an intraday low of $10.26 to an intradayhigh of $20.25 through December 31 , 2015. Factors that may affect the market price of our common stock include: • actual or anticipated fluctuations in our financial condition and operating results; • variance in our financial performance from expectations of securities analysts; • changes in the prices of our platform and solutions; • changes in our projected operating and financial results; • changes in laws or regulations applicable to our platform and solutions or marketing techniques; 30Table of Contents • announcements by us or our competitors of significant business developments, acquisitions or newsolutions; • our involvement in any litigation; • our sale of our common stock or other securities in the future; • changes in senior management or key personnel; • trading volume of our common stock; • changes in the anticipated future size and growth rate of our market; and • general economic, regulatory and market conditions.Recently, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of manycompanies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry fluctuations, as well asgeneral economic, political, regulatory and market conditions, may negatively impact the market price of our common stock. In the past, companies that have experienced volatility inthe market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantialcosts and divert our management’s attention.We are an “emerging growth company,” and as a result of the reduced disclosure requirements applicable to emerging growth companies, our common stock may beless attractive to investors.We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or JOBS Act. For as long as we qualify as an emerging growth company, weintend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” includingnot being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligationsregarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding an annual non-binding advisory vote on executivecompensation and non-binding stockholder approval of any golden parachute payments not previously approved. As we have elected to take advantage of the exemption fromcompliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, our auditors will not be required to attest to the effectiveness of our internal control overfinancial reporting. As a result, investors may become less comfortable with the effectiveness of our internal controls and the risk that material weaknesses or other deficiencies in ourinternal controls go undetected may increase. As we intend to provide reduced disclosures in our periodic reports and proxy statements regarding executive compensation while weare an emerging growth company, investors will have access to less information and analysis about our executive compensation, which may make it difficult for investors to evaluateour executive compensation practices. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions and provide reduceddisclosure. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be harmed.We will remain an “emerging growth company” for up to five years or such earlier time that we no longer qualify as an emerging growth company. We will remain an emerging growthcompany until the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large accelerated filer,” with atleast $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; or the last day ofthe fiscal year ending after the fifth anniversary of our initial public offering.In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of theSecurities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until thosestandards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revisedaccounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that ourdecision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.We are obligated to develop and maintain a system of effective internal controls over financial reporting. We may not complete our analysis of our internal control overfinancial reporting in a timely manner, or these internal controls may not be determined to be effective, which may harm investor confidence in our company and, as aresult, the value of our common stock.We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control overfinancial reporting in the 2016 annual report we file with the U.S. Securities31Table of Contentsand Exchange Commission, or the SEC. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control overfinancial reporting. However, our auditors are not required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404 until we no longer qualifyas an “emerging growth company” as defined in the JOBS Act.We are in the very early stages of the costly and challenging process of compiling the system and process documentation necessary to perform the evaluation needed to complywith Section 404. In this regard, we will need to continue to dedicate internal resources, engage outside consultants and adopt a detailed work plan to assess and document theadequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documentedand implement a continuous reporting and improvement process for internal control over financial reporting. As we continue to transition to the requirements of reporting as a publiccompany, we may need to add additional finance staff. We may not be able to remediate any future material weaknesses, or to complete our evaluation, testing and any requiredremediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will beunable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to express anopinion on the effectiveness of our internal controls when they are required to issue such opinion, investors could lose confidence in the accuracy and completeness of our financialreports, which could harm our stock price.If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and tradingvolume could decline.The trading market for our common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have anycontrol over these analysts. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade our shares or change their opinion ofour shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in thefinancial markets, which could cause our share price or trading volume to decline. We have incurred and we will continue to incur increased costs as a result of being a public company.We completed our initial public offering on July 1, 2015. As a new public company, we have incurred and we will continue to incur increased legal, accounting and other costs notincurred as a private company. The Sarbanes-Oxley Act and related rules and regulations of the SEC regulate the corporate governance practices of public companies. We expectthat compliance with these requirements will continue to increase certain of our expenses and make some activities more time-consuming than they have been in the past when wewere a private company. Such additional costs going forward could negatively affect our financial results.We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the priceof our common stock.We do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and forgeneral corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of theircommon stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.Our future depends in part on the interests and influence of key stockholders.As of December 31, 2015, our directors, executive officers and holders of more tha n 5% of our common stock, all of whom are represented on our board of directors, togetherwith their affiliates beneficially own 78.5% of the voting power of our outstanding capital stock. As a result, these stockholders are able to determine the outcome of matters submittedto our stockholders for approval. This ownership could affect the value of your shares of common stock by, for example, these stockholders electing to delay, defer or prevent achange in corporate control, merger, consolidation, takeover or other business combination. This concentration of ownership may also adversely affect the market price of our commonstock.Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace orremove our current management and limit the market price of our common stock.Provisions in our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing a change in control or changes in our management.Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that: • authorize our board of directors to issue preferred stock, without further stockholder action and with votingliquidation, dividend and other rights superior to our common stock; 32Table of Contents • require that any action to be taken by our stockholders be effected at a duly called annual or specialmeeting and not by written consent, and limit the ability of our stockholders to call special meetings; • establish an advance notice procedure for stockholder proposals to be brought before an annual meeting,including proposed nominations of persons for director nominees; • establish that our board of directors is divided into three classes, with directors in each class serving three-year staggered terms; • require the approval of holders of two-thirds of the shares entitled to vote at an election of directors toadopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporationregarding the election and removal of directors and the ability of stockholders to take action by writtenconsent or call a special meeting; • prohibit cumulative voting in the election of directors; and • provide that vacancies on our board of directors may be filled only by the vote of a majority of directors thenin office, even though less than a quorum.These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replacemembers of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed bythe provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of businesscombinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any of the foregoingprovisions could limit the price that investors might be willing to pay in the future for shares of our common stock, and they could deter potential acquirers of our company, therebyreducing the likelihood that you would receive a premium for your common stock in an acquisition.Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may beinitiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.Pursuant to our amended and restated certificate of incorporation, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State ofDelaware is the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any ofour directors, officers or other employees to us or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, ouramended and restated certificate of incorporation or our amended and restated bylaws or (4) any action asserting a claim governed by the internal affairs doctrine. Our amended andrestated certificate of incorporation provides that any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have notice of andconsented to the foregoing provision. The forum selection clause in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorablejudicial forum for disputes with us. Future sales of our common stock in the public market could cause our share price to decline.Sales of a substantial number of shares of our common stock in the public market could occur at any time. As of December 31, 2015, 45,581,662 shares of our common stockwere issued and 45,485,294 shares of our common stock were outstanding. The majority of these shares were acquired prior to our initial public offering and were subject to lock-upagreements prohibiting holders of these shares from selling any of their shares for a period of 180 days following our initial public offering. These lock-up agreements have expiredand, as a result, a substantial number of our shares are now generally freely tradable, subject, in the case of sales by our affiliates, to the volume limitations and other provisions ofRule 144 under the Securities Act. If holders of these shares sell, or indicate an intent to sell, substantial amounts of our common stock in the public market, the trading price of ourcommon stock could decline significantly. Furthermore, shares of our common stock subject to outstanding awards under our Amended and Restated 2009 Equity Incentive Plan, aswell as the shares of our common stock reserved for future issuance under our 2015 Equity Incentive Plan, under our 2015 Employee Stock Purchase Plan and upon exercise ofoutstanding warrants, will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. If these additional shares are sold, or if it isperceived that they will be sold, in the public market, the trading price of our common stock could decline substantially.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIES33Table of ContentsOur FacilitiesWe relocated our corporate headquarters to Tysons, Virginia in February 2016. Our principal offices occupy approximately 106,251 square feet of commercial space under a leasethat we entered into in August 2014 and expires in 2026. We use this facility for sales and marketing, research and development, customer service and administrative purposes.Prior to February 2016, our corporate headquarters was located in Vienna, Virginia. This facility consists of approximately 36,400 square feet of commercial space under a leasethat expires in August 2016. We do not intend to renew this lease.We also have offices in Bloomington, Minnesota; Centennial, Colorado; Brooklyn, New York; Boston and Needham, Massachusetts; Wilsonville, Oregon; Lawrence, Kansas andFort Lauderdale, Florida, and own a demonstration home in Falls Church, Virginia. We and our subsidiaries use these properties for sales and training, research and development,technical support and administrative purposes.ITEM 3. LEGAL PROCEEDINGSOn June 2, 2015, Vivint, Inc., or Vivint, filed a lawsuit against us in U.S. District Court, District of Utah, alleging that our technology directly and indirectly infringes six patents thatVivint purchased. Vivint is seeking preliminary and permanent injunctions, enhanced damages and attorney’s fees. We answered the complaint on July 23, 2015. Among other things,we asserted defenses based on non-infringement and invalidity of the patents in question. Should Vivint prevail on its claims that one or more elements of our solution infringe one ormore of its patents, we could be required to pay damages of Vivint’s lost profits and/or a reasonable royalty for sales of our solution, enjoined from making, using, and selling oursolution if a license or other right to continue selling such elements is not made available to us or we are unable to design around such patents, and required to pay ongoing royaltiesand comply with unfavorable terms if such a license is made available to us. While we believe we have valid defenses to Vivint’s claims, any of these outcomes could result in amaterial adverse effect on our business. Even if we were to prevail, this litigation could be costly and time-consuming, divert the attention of our management and key personnel fromour business operations and dissuade potential customers from purchasing our solution, which would also materially harm our business. During the course of litigation, we anticipateannouncements of the results of hearings and motions, and other interim developments related to the litigation. If securities analysts or investors regard these announcements asnegative, the market price of our common stock may decline.On February 9, 2016, we were sued along with one of our service providers in the Circuit Court for the City of Virginia Beach, Virginia by the estate of a deceased service providercustomer alleging wrongful death, among other claims. The suit seeks a total of $7 million in compensatory damages and $350,000 in punitive damages. We are currently reviewingthis matter and have made no determination yet regarding the merits of the case.From time to time, we may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predictedwith certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the outcome, litigationcan have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.34Table of ContentsPART II.ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket InformationOur common stock commenced trading on The NASDAQ Global Select Market on June 26, 2015 and trades under the symbol “ALRM.” Prior to June 26, 2015, there was nopublic market for our common stock. The following table sets forth the high and low reported sales prices per share of our common stock for the periods indicated. High LowYear Ended December 31, 2015 Second Quarter (beginning June 26, 2015) $17.88 $14.71Third Quarter $19.15 $10.26Fourth Quarter $20.25 $11.45On February 1, 2016, the closing price of our common stock on The NASDAQ Global Select Market was $16.28.HoldersAs of February 1, 2016, there were approximately 124 stockholders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company, orDTC. All of the shares of common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts atDTC, and are considered to be held of record by Cede & Co. as one stockholder.DividendsOn June 12, 2015, our board of directors declared a cash dividend on our common and preferred stock in the amount of (1) $0.36368 per share of common stock and Series Apreferred stock and (2) $0.72736 per share of Series B preferred stock and Series B-1 preferred stock or $20.0 million in the aggregate. We paid these dividends on June 26, 2015 toour stockholders of record as of June 12, 2015.We cannot provide any assurance that we will declare or pay cash dividends on our common stock in the future. We currently anticipate that we will retain all of our futureearnings, if any, for use in the operation and expansion of our business and we do not anticipate paying cash dividends in the foreseeable future. Additionally, our ability to paydividends on our common stock is limited by restrictions under the terms of the agreements governing our 2014 Facility with SVB, as further disclosed under "Sources of Liquidity" inPart II Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Payment of future cash dividends, if any, will be at the discretion of the boardof directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existingdebt instruments and other factors the board of directors deems relevant.Use of Proceeds from Initial Public Offering of Common StockOn July 1, 2015, we closed our initial public offering, or IPO, in which we issued and sold 7,000,000 shares of common stock at a public offering price of $14.00 per share,resulting in gross proceeds of $98 million. On July 8, 2015, pursuant to the underwriters’ exercise of their over-allotment option to purchase up to an additional 525,000 shares from usand up to an additional 525,000 shares from the selling stockholders, we issued and sold an additional 525,000 additional shares of our common stock and certain selling stockholdersaffiliated with ABS Capital Partners sold 525,000 shares of our common stock, resulting in additional gross proceeds to us of $7.4 million. We did not receive any proceeds from thesale of shares by the selling stockholders. All of the shares issued and sold in our IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (FileNo. 333-204428), which was declared effective by the SEC on June 25, 2015. Goldman, Sachs & Co., Credit Suisse Securities (USA) LLC, and BofA Merrill Lynch acted as joint book-running managers of our IPO, which has now terminated, and Stifel, Raymond James & Associates, Inc., William Blair & Company, LLC and Imperial Capital, LLC acted as co-managers.The net proceeds to us, after deducting underwriting discounts and commission of approximately $7.4 million and offering expenses of approximately $5.0 million, wereapproximately $93.0 million. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of anyclass of our equity securities or to any other affiliates. We have invested a portion of the net offering proceeds into money market securities. There has been no material change in theplanned use of proceeds from our IPO from those disclosed in the final prospectus for our IPO dated June 25, 2015 and filed with the SEC pursuant to Rule 424(b)(4) of the SecuritiesAct on June 26, 2015. As of September 30, 2015, all expenses incurred in connection with our IPO have been paid.35Table of ContentsStock Performance GraphThe following graph shows a comparison from June 26, 2015 (the date our common stock commenced trading on The NASDAQ Global Select Market) through December 31,2015 of the cumulative total return for (i) our common stock, (ii) the NASDAQ Composite Index and (iii) S&P 500 Index. The graph assumes an initial investment of $100 on June 26,2015 and reinvestment of dividends. The comparisons in the graph are not intended to forecast or be indicative of possible future performance of our common stock. 6/26/2015 6/30/2015 7/31/2015 8/31/2015 9/30/2015 10/31/2015 11/30/2015 12/31/2015Alarm.com Holdings, Inc.$100 $91 $110 $101 $69 $75 $104 $99NASDAQ Composite100 98 101 94 91 99 101 99S&P 500100 98 100 94 91 99 99 97 Recent Sales of Unregistered SecuritiesNone.Issuer Purchases of Equity SecuritiesNone.36Table of ContentsItem 6. Se lected Consolidated Financial DataSELECTED CONSOLIDATED FINANCIAL AND OTHER DATAThe selected consolidated statements of operations data for the years ended December 31, 2015, 2014 and 2013 and the selected consolidated balance sheet data as ofDecember 31, 2015 and 2014 are derived from our audited consolidated financial statements included elsewhere in this Annual Report. The following selected consolidatedstatements of operations data for the years ended December 31, 2012 and 2011 and the selected consolidated balance sheet data as of December 31, 2013, 2012 and 2011 arederived from our audited consolidated financial statements not included in this Annual Report. Our historical results are not necessarily indicative of the results to be expected in thefuture. The selected consolidated financial data should be read together with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and inconjunction with our consolidated financial statements, related notes, and other financial information included elsewhere in this Annual Report. The following tables set forth ourselected consolidated financial and other data for the years ended and as of December 31, 2015, 2014, 2013, 2012 and 2011 (in thousands, except share and per share data). Year Ended December 31,Consolidated Statements of Operations Data: 2015 2014 2013 2012 2011Revenue: SaaS and license revenue $140,936 $111,515 $82,620 $55,655 $32,161 Hardware and other revenue 67,952 55,797 47,602 40,820 32,898Total revenue 208,888 167,312 130,222 96,475 65,059Cost of revenue: (1) Cost of SaaS and license revenue 25,722 23,007 16,476 12,681 8,051 Cost of hardware and other revenue 51,652 44,172 38,482 28,773 21,102Total cost of revenue 77,374 67,179 54,958 41,454 29,153Operating expenses: Sales and marketing (2) 32,240 25,836 21,467 13,232 5,819 General and administrative (2) 35,473 26,113 29,928 14,099 6,817 Research and development (2) 40,002 23,193 13,085 8,944 5,613 Amortization and depreciation 5,808 3,991 3,360 2,230 1,988Total operating expenses 113,523 79,133 67,840 38,505 20,237Operating income 17,991 21,000 7,424 16,516 15,669 Interest expense (178) (196) (269) (312) (9) Other (expense) / income, net (348) (485) 57 5 10Income before income taxes 17,465 20,319 7,212 16,209 15,670 Provision for income taxes 5,697 6,817 2,688 7,280 6,015Net income 11,768 13,502 4,524 8,929 9,655Dividends paid to participating securities (18,987) — — (8,182) (18,998)Cumulative dividend on redeemable convertible preferred stock — — — (1,855) (3,317)Deemed dividend to redeemable convertible preferred stock uponrecapitalization — — — (138,727) — Income allocated to participating securities — (12,939) (4,402) — —Net (loss) / income attributable to common stockholders $(7,219) $563 $122 $(139,835) $(12,660)37Table of Contents Year Ended December 31, 2015 2014 2013 2012 2011Per share information attributable to common stockholders: Net (loss) / income per share: Basic $(0.30) $0.25 $0.08 $(108.55) $(19.76) Diluted $(0.30) $0.14 $0.04 $(108.55) $(19.76)Weighted average common shares outstanding: Basic 24,108,362 2,276,694 1,443,469 1,288,162 640,850 Diluted 24,108,362 3,890,121 2,795,345 1,288,162 640,850Cash dividends declared per share $0.36 $— $— $0.26 $0.60 Year Ended December 31, 2015 2014 2013 2012 2011Other Financial and Operating Data: SaaS and license revenue renewal rate (3) 93% 93% 93% 94% 94% Adjusted EBITDA (4) $34,270 $28,321 $28,259 $20,505 $17,839 As of December 31, 2015 2014 2013 2012 2011Balance sheet and other data: Cash and cash equivalents $128,358 $42,572 $33,583 $41,920 $16,817Working capital, excluding deferred revenue (5) 134,260 47,553 32,762 38,756 15,262Total assets 226,095 120,932 99,487 87,545 58,507Redeemable convertible preferred stock — 202,456 202,456 202,456 35,117Total long-term obligations 26,885 17,572 14,923 15,352 14,377Total stockholders' equity / (deficit) 170,131 (121,844) (140,690) (147,051) (3,188)_____________________(1) Excludes amortization and depreciation.(2) Includes stock-based compensation expense as follows: Year Ended December 31, 2015 2014 2013 2012 2011Stock-based Compensation Expense Data: Sales and marketing $372 $338 $102 $196 $39 General and administrative 2,486 1,862 495 418 89 Research and development 1,266 1,067 244 1,145 54 Total stock-based compensation expense $4,124 $3,267 $841 $1,759 $182(3) We measure our SaaS and license revenue renewal rate on a trailing 12-month basis by dividing (a) the total SaaS and license revenue recognized during the trailing 12-month period from oursubscribers who were subscribers on the first day of the period, by (b) total SaaS and license revenue we would have recognized during the period from those same subscribers assuming noterminations, or service level upgrades or downgrades. The SaaS and license revenue renewal rate represents both residential and commercial properties. Our SaaS and license revenue renewalrate is expressed as an annualized percentage. Our service providers, who resell our services to our subscribers, have indicated that they typically have three to five-year service contracts withour subscribers. Our SaaS and license revenue renewal rate is calculated across our entire subscriber base, including subscribers whose contract with their service provider reached the end of itscontractual term during the measurement period, as well as subscribers whose contract with their service provider has not reached the end of its contractual term during the measurement period,and is not intended to estimate the rate at which our subscribers renew their contracts with our service providers. We believe that our SaaS and license revenue renewal rate allows us to measureour ability to retain and grow our SaaS and license revenue and serves as an indicator of the lifetime value of our subscriber base.(4) We define Adjusted EBITDA as our net income before interest and other (expense) / income, net, provision for income taxes, amortization and depreciation expense, stock-based compensationexpense, goodwill and intangible impairment charges, changes38Table of Contentsin fair value of acquisition related contingent liabilities and legal costs incurred in connection with certain intellectual property litigation. We do not consider these items to be indicative of our coreoperating performance. The non-cash items include amortization and depreciation expense, the stock-based compensation expense related to stock options and the sale of common stock,goodwill and intangible impairment charges and gain from the release of an acquisition-related contingent liability. Included in 2015 stock-based compensation expense is $0.8 million related tothe repurchase of an employee's stock awards. See the following table for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated andpresented in accordance with GAAP.We have included Adjusted EBITDA in this report because it is a key measure that our management uses to understand and evaluate our core operating performance and trends, togenerate future operating plans, to make strategic decisions regarding the allocation of capital and to make investments in initiatives that are focused on cultivating new markets for our solutions.In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion ofhistorical legal expenses, excludes items that we do not consider to be indicative of our core operating performance. Accordingly, we believe that Adjusted EBITDA provides useful information toinvestors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some ofthese limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDAdoes not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirementsfor, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that mayrepresent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reducesits usefulness as a comparative measure.Because of these and other limitations, you should consider Adjusted EBITDA alongside our other GAAP-based financial performance measures, net income and our other GAAP financial results.The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, for each of the periods indicated (in thousands). Year Ended December 31, 2015 2014 2013 2012 2011Adjusted EBITDA Net income $11,768 $13,502 $4,524 $8,929 $9,655 Adjustments: Interest expense and other (expense) / income, net 526 681 212 307 (1) Income tax expense 5,697 6,817 2,688 7,280 6,015 Amortization and depreciation 5,808 3,991 3,360 2,230 1,988 Stock-based compensation expense 4,124 3,267 841 1,759 182 Goodwill and intangible asset impairment — — 11,266 — — Release of acquisition related contingent liability — — (5,820) — — Litigation expense 6,347 63 11,188 — —Total adjustments 22,502 14,819 23,735 11,576 8,184Adjusted EBITDA $34,270 $28,321 $28,259 $20,505 $17,839(5) In the fourth quarter of 2015, we retrospectively adopted ASU 2015-17, “Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes" which simplifies the presentation of deferredincome taxes and requires entities to classify deferred income tax liabilities and assets for each jurisdiction as noncurrent on the balance sheet. To adopt this pronouncement, we reclassified thepreviously reported $3.2 million current portion of deferred tax assets to long-term deferred tax assets on our balance sheet as of December 31, 2014 in this annual report. In addition, weretrospectively reclassified the previously reported current portion of deferred tax assets to long-term deferred tax assets for the balance sheet and other data table above resulting in a change inworking capital as of December 31, 2014, 2013, 2012 and 2011.39Table of ContentsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notesand other financial information included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this AnnualReport, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review Item1A. “Risk Factors” and “Special Note Regarding Forward-Looking Statements” in this Annual Report for a discussion of important factors that could cause actual results to differmaterially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.OverviewWe are the leading platform solution for the connected home. Through our cloud-based services, we make connected home technology broadly accessible to millions of home andbusiness owners. Our multi-tenant software-as-a-service, or SaaS, platform enables home and business owners to intelligently secure their properties and automate and control abroad array of connected devices through a single, intuitive user interface.Our connected home platform currently has more than 2.6 million residential and business subscribers and connects to tens of millions of devices. More than 20 billion data pointswere generated and processed by those subscribers and devices in the last year alone. We believe that this scale of subscribers, devices and data makes us the leader in smart homeservices market.Our solutions are delivered through an established network of over 5,000 trusted service providers, who are experts at designing, selling, installing and supporting our solutions.Our technology platform was purpose-built for the entire connected home ecosystem, including the consumers who use it, the service providers who deliver it and the hardwarepartners whose devices are enabled by the platform. We power four primary solutions, which can be used individually or combined and integrated within a single user interfaceaccessible through the web and mobile apps: interactive security, intelligent automation, video monitoring and energy management.Our solutions are used by both homeowners and businesses and are delivered through our cloud-based platform enabling a breadth of connected home solutions, which can beintegrated together or provided on a standalone basis. We enable quick, intuitive access to the consumer through our mobile app as well as enabling new ways to engage with thehome through wearables like the Apple Watch, the TV through Apple TV and Amazon Fire TV and voice control through Amazon Echo.We were founded in 2000 to revolutionize home security and improve the way people secure and interact with their homes and businesses. We identified an opportunity to applynew technology - in this case two-way wireless data transmission, cloud computing technologies and the rapid growth of Internet usage - to disrupt legacy security applications. Webelieve we were the first company to launch a SaaS platform providing an interactive home security solution.We primarily generate revenue through our service providers who resell our services and pay us monthly fees, which comprises our SaaS revenue. Our service providers sell,install and support Alarm.com solutions that enable home and business owners to intelligently secure, connect, control and automate their properties. Our service providers haveindicated that they typically have three to five-year service contracts with home or business owners, whom we refer to as our subscribers. We derive a small portion of our revenuefrom licensing our intellectual property to service providers on a per customer basis. SaaS and license revenue represented 67% , 67% and 63% of our revenue in 2015, 2014 and2013. As of December 31, 2015, we had more than 2.6 million subscribers, a substantial majority of which were residential.We also generate revenue from the sale of hardware that enables our solutions, including cellular radio modules, video cameras, image sensors and peripherals. We have a richhistory of innovation in cellular technology that enables our robust SaaS offering. Hardware and other revenue represented 33% , 33% and 37% of our revenue in 2015, 2014 and2013.With less than one percent of our total revenues from customers located outside the United States and Canada in the year ended December 31, 2015, we believe there issignificant opportunity to expand our international business. Our products are currently localized and available in 21 countries outside of the United States and Canada.To date, nearly all of our revenue growth has been organic. We have completed small acquisitions, but those acquisitions have been related to technology or servicescomplementary to our core offerings and have not contributed materially to our revenue. We have focused on growing our business and plan to continue to invest in growth. We expectour cost of revenue and operating expenses to continue to increase in absolute dollars in future periods. Marketing and sales expenses are expected to increase as we continue toexpand our sales teams, increase our marketing activities and grow our international operations. Research and development expenses are expected to increase to support theenhancement of our existing products and the development of new products, including our enterprise management solutions. We also expect to incur additional general andadministrative expenses as a result of both our growth and the infrastructure required to be a public company.Highlights of our financial performance for the periods covered in this report include:•Revenue increased 25% from $167.3 million in 2014 to $208.9 million in 2015. Revenue increased 28% from $130.2 million in 2013 to $167.3 million in 2014.40Table of Contents•SaaS and license revenue increased 26% from $111.5 million in 2014 to $140.9 million in 2015. SaaS and license revenue increased 35% from $82.6 million in 2013 to$111.5 million in 2014.•Net income decreased from $13.5 million in 2014 to $11.8 million in 2015. Net income increased from $4.5 million in 2013 to $13.5 million in 2014.•Adjusted EBITDA, a non-GAAP measurement of operating performance, increased from $28.3 million in 2014 to $34.3 million in 2015. Adjusted EBITDA was $28.3 million in2013.Please see Non-GAAP Measures below in this section of the report for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income,the most comparable GAAP measurement, for 2015, 2014 and 2013.Key MetricsWe use the following key business metrics to help us monitor the performance of our business and to identify trends affecting our business (dollars in thousands): Year Ended December 31, 2015 2014 2013SaaS and license revenue$140,936 $111,515 $82,620Adjusted EBITDA34,270 28,321 28,259 Twelve Months EndedDecember 31, 2015 2014 2013SaaS and license revenue renewal rate93% 93% 93%SaaS and License RevenueWe believe that increasing SaaS and license revenue is an indicator of the productivity of our existing service providers and their ability to increase the number of subscribersusing the Alarm.com connected home solutions, our ability to add new service providers reselling the Alarm.com solutions, the demand for our connected home solutions, and thepace at which the market for connected home solutions is growing.Adjusted EBITDAAdjusted EBITDA represents our net income before interest and other (expense) / income, net, provision for income taxes, amortization and depreciation expense, stock-basedcompensation expense, goodwill and intangible impairment charges and legal costs incurred in connection with certain intellectual property litigation. We do not consider these items tobe indicative of our core operating performance. The non-cash items include amortization and depreciation expense and stock-based compensation expense.Adjusted EBITDA is a key measure that our management uses to understand and evaluate our core operating performance and trends to generate future operating plans, to makestrategic decisions regarding the allocation of capital, and to make investments in initiatives that are focused on cultivating new markets for our solutions. In particular, the exclusion ofcertain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of acquisition-relatedadjustments and certain historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance. Adjusted EBITDA is not a measurecalculated in accordance with GAAP. Please see Non-GAAP Measures in this section for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA tonet income, the most comparable GAAP measurement, for 2015, 2014 and 2013.SaaS and License Revenue Renewal RateWe measure our SaaS and license revenue renewal rate on a trailing 12-month basis by dividing (a) the total SaaS and license revenue recognized during the trailing 12-monthperiod from our subscribers who were subscribers on the first day of the period, by (b) total SaaS and license revenue we would have recognized during the period from those samesubscribers assuming no terminations, or service level upgrades or downgrades. The SaaS and license revenue renewal rate represents both residential and commercial properties.Our SaaS and license revenue renewal rate is expressed as an annualized percentage. Our service providers, who resell our services to our subscribers, have indicated that theytypically have three to five year service contracts with our subscribers. Our SaaS and license revenue renewal rate is calculated across our entire subscriber base, includingsubscribers whose contract with their service provider reached the end of its contractual term during the measurement period, as well as subscribers whose contract with their serviceprovider has not reached the end of its contractual term during the measurement period, and is not intended to estimate the rate at which our subscribers renew their contracts with ourservice providers. We believe that our SaaS and license revenue renewal rate allows us to measure our ability to retain and grow our SaaS and license revenue and serves as anindicator of the lifetime value of our subscriber base.41Table of ContentsComponents of Operating ResultsRevenueWe generate revenue primarily through the sale of our software-as-a-service, or SaaS, over our cloud-based connected home platform through our service provider channel. Wealso generate revenue from the sale of hardware products that enable our solutions.SaaS and License RevenueWe generate the majority of our SaaS and license revenue primarily from monthly recurring fees charged to our service providers sold on a per subscriber basis for access to ourcloud-based connected home platform and related solutions. Our fees per subscriber vary based upon the service plan and features utilized. We enter into contracts with our serviceproviders that establish our pricing as well as other business terms and conditions. These contracts typically have an initial term of one year, with subsequent annual renewal terms.Our service providers typically enter into underlying contracts with their end-user customers, which we refer to as our subscribers, for their engagement with our solutions. Our serviceproviders have indicated that those contracts generally range from three to five years in length.We offer multiple service level packages for our solutions, including integrated solutions and a range of a la carte add-ons for additional features. The price paid by our serviceproviders each month for the delivery of our solutions is based on the combination of packages and add-ons enabled for each subscriber. We use tiered pricing plans where ourservice providers may receive prospective pricing discounts driven by volume. We recognize our SaaS and license revenue on a monthly basis as we deliver our solutions to oursubscribers.We also generate SaaS and license revenue from the fees paid to us when we license our intellectual property to service providers on a per customer basis for use of our patents.In November 2013, we entered into a license agreement with Vivint Inc., or Vivint, who represented at least 10% but not more than 15% of our revenue in 2013 and 2014, pursuant towhich we granted Vivint a license to use the intellectual property associated with our connected home solutions. Vivint began generating customers and paying us license revenue inthe second quarter of 2014. Pursuant to this arrangement, Vivint has transitioned from selling our SaaS solutions directly to its customers to selling its own home automation product toits new customers, and we receive less revenue from Vivint from license fees as compared to its subscribers that continue to utilize our SaaS platform. Additionally, in some markets,our EnergyHub subsidiary sells its demand response software with an annual service fee, with pricing based on the number of subscribers or amount of aggregate electricity demandmade available for a utility’s or market’s control.Hardware and Other RevenueWe generate hardware and other revenue primarily from the sale of cellular radio modules that provide access to our cloud-based platform, video cameras and the sale of otherdevices, including image sensors and other peripherals. We sell hardware to our service providers as well as distributors. The purchase of hardware occurs in a transaction that isseparate and typically in advance of the purchase of our platform services. We recognize hardware and other revenue when the hardware is delivered to our service providers ordistributors, net of a reserve for estimated returns. Our terms for hardware sales typically allow service providers to return hardware up to one year past the date of original sale. Weexpect hardware and other revenue to decrease as a percentage of total revenue as we anticipate such revenue to grow at a lower rate than SaaS and license revenue.Hardware and other revenue also includes activation fees charged to service providers for activation of a subscriber’s account on our platform. We record activation fees initiallyas deferred revenue and we recognize these fees on a straight-line basis over an estimated life of the subscriber relationship, which is currently ten years. Hardware and otherrevenue also includes fees paid by service providers for our marketing services.Cost of RevenueOur cost of SaaS and license revenue primarily includes the amounts paid to wireless network providers and, to a lesser extent, the costs of running our network operatingcenters. Our cost of hardware and other revenue primarily includes cost of raw materials and amounts paid to our third-party manufacturer for production and fulfillment of our cellularradio modules and image sensors, and procurement costs for our video cameras, which we purchase from an original equipment manufacturer, and other devices.We record the cost of SaaS and license revenue as expenses are incurred, which corresponds to the delivery period of our services to our subscribers. We record the cost ofhardware and other revenue when the hardware and other services are delivered to the service provider, which is when title transfers. Our cost of revenue excludes amortization anddepreciation.We expect our cost of revenue to increase on an absolute dollar basis primarily from growth in SaaS and license revenue.Operating Expenses42Table of ContentsOur operating expenses consist of sales and marketing, general and administrative, research and development, and amortization and depreciation expenses. Salaries, bonuses,stock-based compensation, benefits and other personnel related costs are the most significant components of each of these expense categories, excluding amortization anddepreciation. We include stock-based compensation expense in connection with the grant of stock options in the applicable operating expense category based on the respective equityaward recipient’s function (sales and marketing, general and administrative or research and development). We grew from 165 employees at January 1, 2013 to 507 employees atDecember 31, 2015, and we expect to continue to hire new employees to support future growth of our business.Sales and Marketing Expense. Sales and marketing expense consists primarily of personnel and related expenses for our sales and marketing teams, including salaries,bonuses, stock-based compensation, benefits, travel, and commissions. Our sales and marketing teams engage in sales, account management, service provider and sales support,advertising, promotion of our products and services and marketing.The number of employees in sales and marketing functions grew from 67 at January 1, 2013 to 188 at December 31, 2015. We expect to continue to invest in our sales andmarketing activities to expand our business both domestically and internationally and, as a result, expect our sales and marketing expense to increase on an absolute dollar basis andas a percentage of our total revenue in the short term. We intend to increase the size of our sales force to provide additional support to our existing service provider base to drive theirproductivity in selling our solutions as well as to enroll new service providers in North America and in international markets. We also intend to increase our marketing investments in theform of marketing programs and customer lead generation to support our service providers’ efforts to enroll new subscribers and expand the adoption of our solutions.General and Administrative Expense. General and administrative expense consists primarily of personnel and related expenses for our administrative, legal, informationtechnology, human resources, finance and accounting personnel, including salaries, bonuses, stock-based compensation, benefits and other personnel costs. Additional expensesincluded in this category are legal costs incurred to defend and license our intellectual property and non-personnel costs, such as travel related expenses, rent, subcontracting andprofessional fees, audit fees, tax services, and insurance expenses. Also included in general and administrative expenses are valuation gains or losses on acquisition relatedcontingent liabilities and goodwill and intangible asset impairment.The number of employees in general and administrative functions grew from 20 at January 1, 2013 to 58 at December 31, 2015. We expect our general and administrativeexpense in 2016 to increase on an absolute dollar basis primarily from the inclusion of incremental intellectual property litigation expenses. We anticipate that we will incur additionalcosts for personnel and professional services as we continue to operate as a public company. These costs include increases in our finance and legal personnel, additional externallegal and audit fees and expenses associated with compliance with the Sarbanes-Oxley Act of 2002 and other regulations governing public companies. We also expect to incurincreased costs for directors’ and officers’ liability insurance and an enhanced investor relations function.Research and Development Expense . Research and development expense consists primarily of personnel and related expenses for our employees working on our productdevelopment and software and device engineering teams, including salaries, bonuses, stock-based compensation, benefits and other personnel costs. Also included are non-personnel costs such as consulting and professional fees paid to third-party development resources.The number of employees in research and development functions grew from 78 at January 1, 2013 to 261 at December 31, 2015. Our research and development efforts arefocused on innovating new features and enhancing the functionality of our platform and the solutions we offer to our service providers and subscribers. We will also continue to investin efforts to extend our platform to adjacent markets and internationally. We expect research and development expenses to continue to increase on an absolute dollar basis and as apercentage of revenue in the short term to maintain our leadership position in the development of smart home and enterprise technology, and continued enhancement of ourEnterprise Tools platform for our service provider partners.Amortization and Depreciation . Amortization and depreciation consists of amortization of intangible assets originating from our acquisitions as well as our internally-developedcapitalized software. Our depreciation expense is related to investments in property and equipment. Acquired intangible assets include developed technology, customer relatedintangibles, trademarks and trade names. We expect in the near term that amortization and depreciation may fluctuate based on our acquisition activity, development of our platformand capitalized expenditures.Interest ExpenseInterest expense consists of interest expense associated with our debt facilities.Other (Expense) / Income, NetOther (expense) / income, net consists of our portion of the income or loss from our minority investments in other businesses accounted for under the equity method, interestincome earned on our cash and cash equivalents and our notes receivable and gain or loss on the fair value of derivative instruments.43Table of ContentsProvision for Income TaxesWe are subject to U.S. federal, state and local income taxes as well as foreign income taxes. During the ordinary course of business, there are many transactions and calculationsfor which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes will be due. Our effective tax rate differsfrom the statutory rate primarily due to the tax impact of state taxes, goodwill impairment, non-deductible transaction costs, non-deductible meals and entertainment and the impact ofresearch and development tax credits.Results of OperationsThe following table sets forth our selected consolidated statements of operations and data as a percentage of revenue for the periods presented (in thousands):Consolidated Statements of Operations Year Ended December 31, 2015 2014 2013 $ % $ % $ %Revenue: SaaS and license revenue$140,936 67 % $111,515 67 % $82,620 63 % Hardware and other revenue67,952 33 55,797 33 47,602 37Total revenue208,888 100 167,312 100 130,222 100Cost of revenue: (1) Cost of SaaS and license revenue25,722 12 23,007 14 16,476 13 Cost of hardware and other revenue51,652 25 44,172 26 38,482 30Total cost of revenue77,374 37 67,179 40 54,958 42Operating expenses: Sales and marketing (2)32,240 15 25,836 15 21,467 16 General and administrative (2)35,473 17 26,113 16 29,928 23 Research and development (2)40,002 19 23,193 14 13,085 10 Amortization and depreciation5,808 3 3,991 2 3,360 3Total operating expenses113,523 54 79,133 47 67,840 52Operating income17,991 9 21,000 13 7,424 6 Interest expense(178) — (196) — (269) — Other (expense) / income, net(348) — (485) — 57 —Income before income taxes17,465 8 20,319 12 7,212 6 Provision for income taxes5,697 3 6,817 4 2,688 2Net income$11,768 6 % $13,502 8 % $4,524 3 %_______________(1) Excludes amortization and depreciation.(2) Operating expenses include stock-based compensation expense as follows (in thousands): Year Ended December 31, 2015 2014 2013Stock-based compensation expense data: Sales and marketing$372 $338 $102General and administrative2,486 1,862 495Research and development1,266 1,067 244Total stock-based compensation expense$4,124 $3,267 $841The following table sets forth the components of cost of revenue as a percentage of revenue:44Table of Contents Year Ended December 31, 2015 2014 2013Components of cost of revenue as a percentage of revenue: Cost of SaaS and license revenue as a percentage of SaaS andlicense revenue18% 21% 20%Cost of hardware and other revenue as a percentage of hardwareand other revenue76% 79% 81%Total cost of revenue as a percentage of total revenue37% 40% 42%Comparison of Years Ended December 31, 2015 to December 31, 2014 and December 31, 2014 to December 31, 2013Revenue Year Ended December 31, % Change 2015 2014 2013 2015 vs. 2014 2014 vs. 2013 (in thousands) Revenue SaaS and license revenue$140,936 $111,515 $82,620 26% 35%Hardware and other revenue67,952 55,797 47,602 22% 17%Total revenue$208,888 $167,312 $130,222 25% 28%2015 Compared to 2014The $41.6 million increase in total revenue from 2014 to 2015 was the result of a $29.4 million , or 26% , increase in SaaS and license revenue and a $12.2 million , or 22% ,increase in hardware and other revenue. The increase in SaaS and license revenue from 2014 to 2015 was primarily due to growth in our subscriber base, including the revenueimpact from subscribers we added in 2014, as well as the increase of our subscriber base during 2015. To a lesser extent, SaaS and license revenue increased from 2014 to 2015 dueto an increase in fees paid to us for licenses to use our intellectual property. Hardware and other revenue from 2014 to 2015 increased $4.5 million from a 45% increase in the volumeof video cameras sold, $1.1 million from a 36% increase in the volume of image sensors sold, $1.1 million from a 7% increase in volume of cellular radio modules sold and $1.4 millionfrom an increase in the volume of peripherals sold, including our new thermostat. Our Other segment contributed $0.9 million of the increase in SaaS and license revenue and $3.9million of the increase in hardware and other revenue from 2014 to 2015.2014 Compared to 2013The increase in total revenue from 2013 to 2014 was the result of a $28.9 million, or 35%, increase in SaaS and license revenue and an $8.2 million, or 17%, increase in hardwareand other revenue. The increase in SaaS and license revenue from 2013 to 2014 was primarily attributable to growth in our subscriber base, including the full year revenue impactfrom subscribers we added in 2013, as well as the increase of our subscriber base during 2014. The increase in hardware and other revenue from 2013 to 2014 was primarilyattributable to a $3.6 million increase in revenue from sales of our video cameras as a result of a 36% increase in the volume of video cameras sold and a $1.9 million increase inrevenue from sales of our cellular radio modules as a result of an increase in volume.45Table of ContentsCost of Revenue Year Ended December 31, % Change 2015 2014 2013 2015 vs. 2014 2014 vs. 2013 (in thousands) Cost of revenue (1) Cost of SaaS and license revenue$25,722 $23,007 $16,476 12% 40%Cost of hardware and other revenue51,652 44,172 38,482 17% 15%Total cost of revenue$77,374 $67,179 $54,958 15% 22% % of total revenue37% 40% 42% ________________(1) Excludes amortization and depreciation.2015 Compared to 2014The $10.2 million increase in cost of revenue from 2014 to 2015 was the result of a $2.7 million , or 12% , increase in cost of SaaS and license revenue and a $7.5 million , or 17%, increase in cost of hardware and other revenue. The increase in cost of SaaS and license revenue related primarily to the growth in our subscribers driving an increase in the costs tomake our SaaS platform available to our service providers and subscribers. Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 18% , 21% and 20%for 2015, 2014 and 2013. This decrease in cost of sales relative to revenue growth was driven by achieving economies of scale from growth in our subscriber base. The increase incosts of hardware and other revenue related primarily to our increase in hardware and other revenue. Cost of hardware and other revenue as a percentage of hardware and otherrevenue was 76% for 2015 and 79% for 2014. These cost savings came from a reduction in the cost of certain hardware SKUs realized from an increase in sales volume andimprovements to our supply chain logistics which reduced the carrying cost of some of our hardware products. Total cost of revenue as percent to total revenue was 37% for 2015 and40% for 2014.2014 Compared to 2013The increase in cost of revenue from 2013 to 2014 was the result of a $6.5 million, or 40%, increase in SaaS and license costs and a $5.7 million, or 15%, increase in hardwarecosts. The increase in SaaS and license costs from 2013 to 2014 related primarily to the growth in our subscribers driving an increase in the costs to make our SaaS platform availableto our service providers and subscribers. The increase in hardware and other costs from 2013 to 2014 related primarily to our higher hardware and other revenue.Sales and Marketing Expense Year Ended December 31, % Change 2015 2014 2013 2015 vs. 2014 2014 vs. 2013 (in thousands) Sales and marketing$32,240 $25,836 $21,467 25% 20% % of total revenue15% 15% 16% 2015 Compared to 2014The $6.4 million increase in sales and marketing expense from 2014 to 2015 was primarily due to an increase in our sales force and our marketing team to support our growth andfor international expansion. Our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $4.9million from 2014 to 2015. Our consulting fees increased $1.0 million from 2014 to 2015. These increases were partially offset by a $2.1 million decrease in marketing and advertisingexpenses from 2014 to 2015 related to the timing of our marketing initiatives. Our Other segment contributed $2.2 million of the increase in sales and marketing expense from 2014 to2015 primarily due to personnel and related costs. The number of employees in our sales and marketing teams increased from 159 at December 31, 2014 to 188 at December 31,2015.2014 Compared to 201346Table of ContentsThe increase in sales and marketing expense from 2013 to 2014 was due to an increase in our sales force and our marketing team, partially offset by a $1.7 million decrease inmarketing and advertising expenses. Our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses,increased by $3.5 million compared to the same period in the prior year. Sales and marketing expense for 2014 also increased by $2.0 million primarily due to personnel and relatedexpense for our Other segment. The number of employees in our sales and marketing teams increased from 102 at December 31, 2013 to 159 at December 31, 2014.General and Administrative Expense Year Ended December 31, % Change 2015 2014 2013 2015 vs. 2014 2014 vs. 2013 (in thousands) General and administrative$35,473 $26,113 $29,928 36% (13)% % of total revenue17% 16% 23% 2015 Compared to 2014The $9.4 million increase in general and administrative expense from 2014 to 2015 was primarily due to $6.3 million of legal expenses related to intellectual property litigation andto a lesser extent, an increase in employees and facilities to support our growth and an increase in personnel and professional services as we continue to operate as a publiccompany. Our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $2.6 million for 2015compared to 2014. Included in this increase is $0.8 million of stock-based compensation for the repurchase of a former employee's awards and also increases in professional servicesto implement public company compliance measures including Sarbanes-Oxley Act of 2002. Our rent expense increased $1.9 million in 2015 compared to 2014 due to new facilitiesincluding our new corporate headquarters. General and administrative expense from our Other segment decreased $0.3 million from a $0.6 million reduction in consulting fees andexternal legal fees partially offset by a $0.2 million increase in rent to support growth in 2015 compared to 2014. Overall, the total number of employees in general and administrativefunctions increased from 54 at December 31, 2014 to 58 at December 31, 2015.2014 Compared to 2013The decrease in general and administrative expense from 2013 to 2014 was primarily due to a decrease in legal expenses of $7.8 million compared to the prior year due tointellectual property litigation we initiated in 2013 and settled in early 2014. This decrease was partially offset by an increase in employees and consultants to support our growth. Ourpersonnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $3.0 million compared to the sameperiod in the prior year. Professional services fees including accounting and audit services increased by $1.4 million. Our rent expense increased $1.4 million in 2014 compared to2013 due to new facilities to support our growth. General and administrative expense from our Other segment decreased by $3.2 million compared to the same period in the prior yearas a result of a decrease in acquisition-related charges, offset by a $2.3 million increase in personnel and related costs. During the third quarter of 2013, we recorded a $11.3 millionloss on goodwill and intangible asset impairment related to our EnergyHub acquisition, partially offset by a $5.8 million gain on the release of an acquisition related contingent liability.The number of employees in general and administrative functions increased from 34 at December 31, 2013 to 54 at December 31, 2014.Research and Development Expense Year Ended December 31, % Change 2015 2014 2013 2015 vs. 2014 2014 vs. 2013 (in thousands) Research and development$40,002 $23,193 $13,085 72% 77% % of total revenue19% 14% 10% 2015 Compared to 2014The $16.8 million increase in research and development expense for 2015 compared to 2014 was primarily due to an increase in employees in research and developmentfunctions. Our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $8.8 million for 2015compared to 2014. In addition, research and development expenses, including those performed by external consultants, increased by $0.8 million for 2015 compared to 2014. OurOther segment contributed $6.4 million of the increase in research and development expense47Table of Contentsfrom 2014 to 2015. Research and development expenses, including those performed by external consultants for our Other segment, increased by $4.9 million and included chargeswe recorded related to the renegotiation of a contract with a manufacturer. The manufacturer was working with our Other segment business focused on the retail channel and wereduced the scale of that initiative. In addition, personnel and related expense for our Other segment increased by $1.6 million compared to 2014. Overall, the total number ofemployees in research and development functions increased from 187 at December 31, 2014 to 261 at December 31, 2015.2014 Compared to 2013The increase in research and development expense from 2013 to 2014 was primarily due to an increase in employees in research and development functions. Our personnel andrelated costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $5.7 million compared to the prior year. In addition,research and development performed by external consultants increased by $1.4 million compared to 2013. Research and development expense for 2014 also increased by $2.7million primarily due to personnel and related expense for our Other segment. The number of employees in research and development functions increased from 117 at December 31,2013 to 187 at December 31, 2014.Amortization and Depreciation Year Ended December 31, % Change 2015 2014 2013 2015 vs. 2014 2014 vs. 2013 (in thousands) Amortization and depreciation$5,808 $3,991 $3,360 46% 19% % of total revenue3% 2% 3% 2015 Compared to 2014The increase in amortization and depreciation from 2014 to 2015 was primarily due to a $1.2 million increase in depreciation of computer and network equipment to accommodateour growth in headcount, additional facilities and for our network operations centers. In addition, depreciation from internally developed capitalized software increased $0.2 million inthe same period. The acquired intangibles for our Secure-i and SecurityTrax acquisitions, which occurred in the fourth quarter of 2014 and the first quarter of 2015, contributed to the$0.6 million increase in amortization from 2014 to 2015.2014 Compared to 2013The increase in amortization and depreciation expense from 2013 to 2014 was primarily due to a $1.1 million increase in depreciation expense primarily due to additionalcomputer equipment and from the expansion of our headquarters to accommodate our growth in headcount, as well as the purchase of equipment for our network operations centers.This increase was partially offset by a $0.5 million decrease in amortization of intangibles.Interest Expense Year Ended December 31, % Change 2015 2014 2013 2015 vs. 2014 2014 vs. 2013 (in thousands) Interest expense$(178) $(196) $(269) (9)% (27)% % of total revenue— % — % — % 2015 Compared to 2014The decrease in interest expense from 2014 to 2015 was due to lower average borrowings outstanding and a more favorable interest rate on our revolving line of credit than onour prior debt facility, which was replaced in May 2014.2014 Compared to 201348Table of ContentsThe decrease in interest expense was due to lower average borrowings outstanding and a more favorable interest rate on our revolving line of credit.Other (Expense) / Income, Net Year Ended December 31, % Change 2015 2014 2013 2015 vs. 2014 2014 vs. 2013 (in thousands) Other (expense) / income, net$(348) $(485) $57 (28)% (951)% % of total revenue— % — % —% 2015 Compared to 2014Included in other (expense) / income, net are losses of an equity method investment that is in the start-up phase of its operations. We expect that this investment will continue toincur losses in the near term. These losses are partially offset by interest income earned on notes receivable.2014 Compared to 2013The change in other (expense) / income, net was due to $0.5 million in losses of an equity method investment that is in the start-up phase of its operations. We expect that thisinvestment will continue to incur losses in the near term. We also recorded a $0.2 million impairment loss on a cost method investment and a $0.1 million loss on a derivative, whichwas offset by $0.3 million of interest income earned on note receivables.Provision for Income Taxes Year Ended December 31, % Change 2015 2014 2013 2015 vs. 2014 2014 vs. 2013 (in thousands) Provision for Income Taxes$5,697 $6,817 $2,688 (16)% 154% % of total revenue3% 4% 2% 2015 Compared to 2014Our effective tax rate decreased from 34% in 2014 to 33% in 2015, primarily related to the increase in the amount of research and development tax credits recorded for 2015 andprior years during each of the periods, offset to a lesser extent, by an increase in state income tax expense due to expanding our operations to additional states.2014 Compared to 2013Our effective tax rate decreased from 37% in 2013 to 34% in 2014, primarily due to the impact of research and development tax credits claimed for the current and prior yearsrecorded in 2014. These decreases were partially offset by the non-recurring benefit provided by the net of the non-deductible goodwill impairment and the non-taxable gain on therelease of an acquisition liability which were recorded in 2013.Quarterly Results of OperationsThe following tables show selected unaudited quarterly consolidated statement of operations data for each of our eight most recently completed quarters, as well as thepercentage of revenue for each line item. In the opinion of management, the information for each of these quarters has been prepared on the same basis as our audited financialstatements and include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair statement of financial information in accordance with generallyaccepted accounting principles. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this report.Historical results are not necessarily indicative of results that may be achieved in future periods, and operating results for quarterly periods are not necessarily indicative of operatingresults for a full year. The selected consolidated statements of operation data in amounts and as a percentage of total revenue are presented below (amounts in thousands):49Table of Contents Three Months EndedSelected Consolidated Statement ofOperations Data: March 31, 2014 June 30, 2014 September 30, 2014 December 31, 2014 March 31, 2015 June 30, 2015 September 30, 2015 December 31, 2015 (unaudited)Revenue: SaaS and license revenue $25,204 $26,975 $28,473 $30,863 $31,955 $34,134 $36,158 $38,689Hardware and other revenue 11,647 15,103 14,359 14,688 14,056 17,815 17,849 18,232Total revenue 36,851 42,078 42,832 45,551 46,011 51,949 54,007 56,921 Cost of revenue: Cost of SaaS and license revenue 5,008 5,669 6,002 6,328 6,033 6,297 6,764 6,628Cost of hardware and other revenue 8,993 12,354 11,546 11,279 10,776 14,190 13,205 13,481Total cost of revenue 14,001 18,023 17,548 17,607 16,809 20,487 19,969 20,109 Total operating expenses 1 $15,732 $20,493 $22,005 $20,903 $24,076 $27,185 $30,177 $32,085 Net income 1 $4,273 $2,076 $2,667 $4,486 $3,041 $2,509 $2,943 $3,275Dividends paid to participating securities — — — — — (18,987) — Income allocated to participating securities1 (4,125) (1,988) (2,549) (4,284) (2,895) — (45) (8)Net income / (loss) attributable to commonstockholders 1 $148 $88 $118 $202 $146 $(16,478) $2,898 $3,267Per share information attributable to commonstockholders 1 : Net income / (loss) per share: Basic $0.08 $0.04 $0.05 $0.08 $0.06 $(6.09) $0.06 $0.07Diluted $0.04 $0.02 $0.03 $0.05 $0.04 $(6.09) $0.06 $0.07 As a percent of total revenue: Revenue: SaaS and license revenue 68% 64% 66% 68% 69% 66% 67% 68%Hardware and other revenue 32% 36% 34% 32% 31% 34% 33% 32%Total revenue 100% 100% 100% 100% 100% 100% 100% 100% Cost of revenue: Cost of SaaS and license revenue 14% 13% 14% 14% 13% 12% 13% 12%Cost of hardware and other revenue 24% 29% 27% 25% 23% 27% 24% 24%Total cost of revenue 38% 43% 41% 39% 37% 39% 37% 35% Total operating expenses 43% 49% 51% 46% 52% 52% 56% 56% Net income 12% 5% 6% 10% 7% 5% 5% 6%1 See Note 23 to our consolidated financial statements for a discussion of immaterial adjustments we recorded after the third quarter of 2015.Quarterly TrendsOur quarterly SaaS and license revenue has increased sequentially for all periods presented due to growth in our subscriber base driven by the effectiveness of our serviceproviders’ ability to resell our services. Hardware and other revenue fluctuates from quarter to quarter based on the timing of hardware orders from our service providers and hardwaredistributors.The cost of revenue, in absolute dollars, has increased over time due to the increase in revenue. The cost of revenue as a percent of revenue is lower in quarters when SaaS andlicense revenue represents a greater percentage of total revenue. The cost of SaaS and license revenue as a percentage of SaaS and license revenue has declined over time due toefficiencies of scale as our subscriber base has grown.50Table of ContentsOur most significant operating expenses are employee-related costs, including salaries, benefits and stock-based compensation, which have increased in each of the quarterspresented. The increase in employee-related costs was primarily related to research and development, as our headcount has grown to support the growth in our core operations andalso from business acquisitions. Our headcount has also increased in our investments in businesses we are developing in adjacent markets. Amortization and depreciation has alsoincreased due to our growth in headcount and expansion of facilities to support our growth, as well as from business acquisitions. The quarters ended September 30, 2015 andDecember 31, 2015 included $3.0 million and $2.8 million of legal expenses related to intellectual property litigation.Segment InformationWe have two reportable segments: Alarm.com and Other. Our Alarm.com segment represents our cloud-based platform for the connected home and related connected homesolutions. Our Alarm.com segment also includes the results of Horizon Analog, a research company that focuses on cost-effective collection and analysis of data relating energy usageand consumer behavior and energy disaggregation, Secure-i, a commercial video as a service provider, and SecurityTrax, a provider of SaaS-based, customer relationshipmanagement software tailored for security system dealers. This segment contributed over 96% of our revenue for the years ended December 31, 2015, 2014 and 2013. Our Othersegment is focused on researching and developing home and commercial automation and energy management products and services in adjacent markets. The consolidatedsubsidiaries that make up our Other segment are in the investment stage and have incurred significant operating expenses relative to their revenue. Our Other segment grew from 12employees at January 1, 2013 to 83 employees at December 31, 2015.The following table sets forth our revenue, inter-segment revenue and operating expenses by segment for the periods presented (in thousands):Segment InformationYear Ended December 31, 2015 2014 2013 Revenue Operating Expenses Revenue Operating Expenses Revenue Operating ExpensesAlarm.com$202,752 $91,544 $165,603 $65,566 $129,222 $55,340Other9,052 21,979 2,388 13,567 1,208 12,500Inter-segment Alarm.com(952) — (646) — (208) —Inter-segment Other(1,964) — (33) — — —Total$208,888 $113,523 $167,312 $79,133 $130,222 $67,840Critical Accounting Policies and Significant Judgments and EstimatesOur management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimatesand assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and thereported amounts of revenue, costs and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and on various otherassumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, and to the extent thatthere are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Ourmost critical accounting policies are summarized below. See Note 2 to our consolidated financial statements for a description of our other significant accountingpolicies.Revenue Recognition and Deferred RevenueWe derive our revenue from two primary sources: the sale of software-as-a-service, or SaaS, cloud-based connected home platform and the sale of hardware products thatenable our solutions. We sell our hardware and platform solutions to service providers that resell our hardware and solutions to home and business owners, who are the serviceproviders’ customers, and whom we refer to as our subscribers. We also sell our hardware to distributors who resell the hardware to service providers. We enter into contracts with ourservice providers that establish pricing for access to our connected home platform solutions and for the sale of hardware. These contracts typically have an initial term of one year, withsubsequent renewal terms of one year. Our service providers typically enter into underlying contracts with our subscribers, which our service providers have indicated range from threeto five years in length.51Table of ContentsOur hardware includes cellular radio modules that enable access to our cloud-based platform, as well as video cameras, image sensors and other peripherals. Our serviceproviders purchase our hardware in anticipation of installing the hardware in a home or business when they create a new subscriber account, or for use in an existing subscriber’sproperty. The purchase of hardware occurs in a transaction that is separate and typically in advance of the purchase of our platform services. Service providers transact with us topurchase our platform solutions and resell our solutions to a new subscriber, or to upgrade or downgrade the solutions of an existing subscriber, at which time the subscriber’s accessto our platform solutions is enabled and the delivery of the services commences. The purchase of hardware and the purchase of our platform solutions are separate transactions as, atthe point of sale of the hardware, the service provider is not obligated to purchase a platform solution for the hardware sold, and the level and duration of platform solutions, if any, tobe provided through the hardware sold cannot be determined.We recognize revenue with respect to our solutions when all of the following conditions are met: •Persuasive evidence of an arrangement exists;•Delivery to the customer, which may be either a service provider, distributor or a subscriber, has occurred or service has been rendered;•Fees are fixed or determinable; and•Collection of the fees is reasonably assured.We consider a signed contract with a service provider to be persuasive evidence that an agreement exists, and the fees to be fixed or determinable if the fees are contractuallyagreed to with our service providers. Collectability is evaluated based on a number of factors, including a credit review of new service providers, and the payment history of existingservice providers. If collectability is not reasonably assured, revenue is deferred until collection becomes reasonably assured, which is generally upon the receipt of payment.SaaS and License RevenueWe generate the majority of our SaaS and license revenue primarily from monthly fees charged to our service providers sold on a per subscriber basis for access to our cloud-based connected home platform and the related solutions. Our fees per subscriber vary based upon the service plan and features utilized.Under negotiated terms in our contractual arrangements with our service providers, we are entitled to, and recognize revenue based on a monthly fee that is billed in advance ofthe month of service. We have demonstrated that we can sell our SaaS offering on a stand-alone basis, as it can be sold separately from hardware and activation services. As there isno minimum required initial service term nor is there a stated renewal term in our contractual arrangements, we recognize revenue over the period of service, which is monthly. Ourservice providers typically incur and pay the same monthly fee per subscriber account for the entire period a subscriber account is active.We offer multiple service level packages for our solutions including a range of solutions and a range of a la carte add-ons for additional features. The fee paid by our serviceproviders each month for the delivery of our solutions is based on the combination of packages and add-ons enabled for each subscriber. We utilize tiered pricing plans where ourservice providers may receive prospective pricing discounts driven by volume.We also generate SaaS and license revenue from the fees paid to us when we license our intellectual property to service providers on a per customer basis for use of our patents.In addition, in some markets our EnergyHub subsidiary sells its demand response software with an annual service fee, with pricing based on the number of subscribers or amount ofaggregate electricity demand made available for a utility’s or market’s control.Hardware and Other RevenueWe generate hardware and other revenue primarily from the sale of cellular radio modules that provide access to our cloud-based platform and, to a lesser extent, the sale ofother devices, including video cameras, image sensors and peripherals. We recognize hardware and other revenue when the hardware is received by our service provider ordistributor, net of a reserve for estimated returns. Amounts due from the sale of hardware are payable in accordance with the terms of our agreements with our service providers ordistributors, and are not contingent on resale to end-users, or to service providers in the case of sales of hardware to distributors. Our terms for hardware sales sold directly to eitherservice providers or distributors typically allow for the return of hardware up to one year past the date of sale. Our distributors sell directly to our service providers under terms betweenthe two parties. We record a percentage of hardware and other revenue of approximately 2 to 4%, based on historical returns, as a reserve against revenue for hardware returns. Weevaluate our hardware reserve on a quarterly basis or if there is an indication of significant changes in return experience. Historically, our returns of hardware have not significantlydiffered from our estimated reserve.Hardware and other revenue also includes activation fees charged to service providers for activation of a new subscriber account on our platform, as well as fees paid by serviceproviders for our marketing services. Our service providers use services on our platform to assist in the installation of our solutions in a subscriber’s property. This installation marksthe beginning of the52Table of Contentsservice period on our platform and on occasion, we earn activation revenue for fees charged for this service. The activation fee is non-refundable, separately negotiated and specifiedin our contractual arrangements with our service providers and is charged to the service provider for each subscriber activated on our platform. Activation fees are not offered on astand-alone basis separate from our SaaS offering and are billed and received at the beginning of the arrangement. We record activation fees initially as deferred revenue and werecognize these fees ratably over the expected term of the subscribers’ account which we estimate is ten years based on our annual attrition rate. The portion of these activation feesincluded in current and long-term deferred revenue as of our balance sheet date represents the amounts that will be recognized ratably as revenue over the following twelve months,or longer as appropriate, until the ten-year expected term is complete.Business CombinationsWe are required to allocate the purchase price of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed at the acquisition datebased upon their estimated fair values. Goodwill as of the acquisition date represents the excess of the purchase consideration of an acquired business over the fair value of theunderlying net tangible and intangible assets acquired net of liabilities assumed. This allocation and valuation require management to make significant estimates and assumptions,especially with respect to long-lived and intangible assets.Critical estimates in valuing intangible assets include but are not limited to estimates about future expected cash flows from customer contracts, customer lists, proprietarytechnology and non-competition agreements, the acquired company’s brand awareness and market position, assumptions about the period of time the brand will continue to be usedin our solutions, as well as expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects whencompleted, and discount rates. Our estimates of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable.Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.Other estimates associated with the accounting for these acquisitions may change as additional information becomes available regarding the assets acquired and liabilitiesassumed.Goodwill and Intangible AssetsGoodwill represents the excess of (1) the aggregate of the fair value of consideration transferred in a business combination, over (2) the fair value of assets acquired, net ofliabilities assumed. Goodwill is allocated to our reporting units, which are our operating segments or one level below our operating segments. Goodwill is not amortized, but is subjectto annual impairment tests. We perform our annual impairment review of goodwill on October 1 and when a triggering event occurs between annual impairment tests. We test ourgoodwill at the reporting unit level. We perform a quantitative analysis every three years. We review goodwill for impairment using the two-step process if, based on our assessment ofthe qualitative factors, we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value.For our 2015 annual impairment review, we performed a qualitative assessment for our Alarm.com reporting unit, our only reporting unit with a goodwill balance. This reportingunit had a fair value that exceeded its carrying value by more than 100% in the last quantitative assessment performed in 2014. We first assessed qualitative factors to determinewhether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Qualitative factors we consider include, but are not limited to, macroeconomicconditions, industry and market conditions, company specific events, changes in circumstances and market capitalization. For the year ended December 31, 2015, we assessed thequalitative factors and determined that it was more likely than not that the fair value of the reporting unit exceeded the carrying value and that the two-step impairment test was notrequired.If a two-step impairment test is required, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less thanits carrying value, an indication of goodwill impairment exists for the reporting unit and step two is required to measure the amount of the impairment, if any. Under step two, animpairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill isdetermined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value ofthe reporting unit goodwill. If the carrying value of goodwill exceeds the implied fair value, an impairment charge would be recorded to operating expenses in the period thedetermination is made. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives areamortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. The fair value of the intangible assets is compared with their carryingvalue and an impairment loss would be recognized for the amount by which the carrying amount exceeds the fair value. For the year ended December 31, 2015, we determined therewere no indicators of impairment of our definite-lived intangible assets.Accounting for Income TaxesWe account for income taxes under the asset and liability method as required by accounting standards codification, or ASC 740, “Income Taxes,” which requires the recognition ofdeferred tax assets and liabilities for the expected future tax consequences of events that are included in the financial statements. Under this method, deferred tax assets and liabilitiesare53Table of Contentsdetermined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences areexpected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.We record deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such a determination, we consider all available positive andnegative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.During 2013, in connection with the EnergyHub acquisition, we acquired significant net operating losses, a deferred tax asset, which we recorded at its expected realizable value.Based on our historical and expected future taxable earnings, we believe it is more likely than not that we will realize all of the benefit of the existing deferred tax assets atDecember 31, 2015, 2014 and 2013. Accordingly, we have not recorded a valuation allowance in any of those years.We are subject to income taxes in the U.S. and other foreign jurisdictions. Significant judgment is required in evaluating uncertain tax positions. We record uncertain tax positionsin accordance with ASC 740-10 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on thetechnical merits of the position and (2) with respect to those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that isgreater than 50% likely to be realized upon ultimate settlement with the related tax authority.Recent Accounting PronouncementsAdoptedOn November 20, 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes," which simplifies the presentation of deferredincome taxes and requires entities to classify deferred income tax liabilities and assets as noncurrent on the balance sheet. Prior to this accounting standard update, Topic 740,Income Taxes, required an entity to separate deferred income tax liabilities and assets for each jurisdiction into current and noncurrent amounts on the balance sheets. Theamendments in this update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The amendment is effective forannual periods, including periods within those annual periods beginning after December 15, 2016 with early adoption permitted. In the fourth quarter of 2015, we early adopted andretrospectively applied this update for all periods presented. To retrospectively adopt this pronouncement, we reclassified the previously reported $3.2 million current portion ofdeferred tax assets to long-term deferred tax assets on our balance sheet as of December 31, 2014.On August 18, 2015, the FASB issued ASU 2015-15, “Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance CostsAssociated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015, EITF Meeting,” which clarifies the application ofASU 2015-03 related to presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements to allow for an entity to defer and present debtissuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the line-of-credit arrangement, regardless of whether there are any outstandingborrowings. ASU 2015-03, “ Simplifying the Presentation of Debt Issuance Costs,” otherwise requires debt issuance costs to be presented in the balance sheet as a direct deductionfrom the carrying value of the associated debt liability, consistent with the presentation of a debt discount. We adopted these pronouncements in the third quarter of 2015. Theadoption did not have an impact on our financial statements. We continue to present the debt issuance costs associated with our revolving credit facility as an asset that is amortizedratably over the term of the agreement.On April 10, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, “ Reporting Discontinued Operations andDisclosures of Disposals of Components of an Entity,” which amends the definition of a discontinued operation in ASC 205-20 and requires entities to provide additional disclosuresabout discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The guidance narrowed the definition of discontinued operationsfor disposal of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. The guidancealso expands the scope to include equity method investments and businesses that, upon initial acquisition, qualify as held for sale. The expanded disclosure requirements includestatement of financial position and statement of cash flows disclosures for all comparative periods. The ASU 2014-08 is effective prospectively for all disposals (or classifications asheld for sale) in periods beginning on or after December 15, 2014 with early adoption permitted. We adopted this pronouncement in the first quarter of 2015, and it did not have amaterial impact on our financial statements.Not yet adoptedOn February 25, 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” which requires lessees to recognize assets and liabilities for operating leases with lease termsgreater than twelve months in the balance sheet. The update also requires improved disclosures to help users of financial statement better understand the amount, timing anduncertainty of cash flows arising from leases. The update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlyadoption permitted. We are required to adopt ASU 2016-02 in the first quarter of 2019, and we are currently assessing the impact of this pronouncement on our financial statements.54Table of ContentsOn January 5, 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10)” which requires all equity investments to be measured at fair value withchanges in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). Theamendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change orupon identification of an impairment. The amendments also require enhanced disclosures about those investments. The amendments improve financial reporting by providing relevantinformation about an entity’s equity investments and reducing the number of items that are recognized in other comprehensive income. The amendments in this update also simplifythe impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period, similar to thequalitative assessment for long-lived assets, goodwill, and indefinite lived intangible assets. Upon determining that impairment exists, an entity should calculate the fair value of thatinvestment and recognize as an impairment in net income any amount by which the carrying value exceeds the fair value of the investment. This impairment assessment reduces thecomplexity of the other-than-temporary impairment guidance entities were required to follow before the issuance of this update. In addition, the amendments require entities that arerequired to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using exit price notion consistent with Topic 820,Fair Value Measurement and supersedes the requirement to disclose the methods and significant assumptions used in calculating the fair value of financial instruments. Theamendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted underearly application guidance outlined in the update. We are required to adopt this pronouncement in the first quarter of 2018, and we do not anticipate that adoption of thepronouncement will have a material impact on our financial statements.On September 25, 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which requiresentities to apply the guidance prospectively to adjustments to provisional amounts that occur after the effective date. Under current guidance, the acquirer retrospectively adjustsprovisional amounts recognized as of the acquisition date with a corresponding adjustment to goodwill. Adjustments are required when new information is obtained about facts andcircumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognitionof additional assets or liabilities. The amendments in ASU 2015-16 eliminate the requirement to retrospectively account for those adjustments. The amendment is effective for annualperiods, including periods within those annual periods beginning after December 15, 2015 with early adoption permitted. We are required to adopt this pronouncement prospectively inthe first quarter of 2016, and we do not anticipate that adoption of the pronouncement will have a material impact on our financial statements.On August 12, 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers the effective date for allentities for one year of ASU 2014-09, “ Revenue from Contracts with Customers (Topic 606),” issued on May 28, 2014. ASU 2014-09 affects any entity that either enters into contractswith customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. Theguidance supersedes the revenue recognition guidance in Topic 605, “Revenue Recognition,” and most industry-specific guidance throughout the Industry Topics of the FASBAccounting Standards Codification. The guidance also supersedes some cost guidance included in Subtopic 605-35, “ Revenue Recognition - Contract-Type and Production-TypeContracts." ASU 2014-9, as amended, is effective for annual periods, and interim periods within those years, beginning after December 31, 2017. An entity is required to apply theamendments using one of the following two methods: (1) retrospectively to each prior period presented with three possible expedients: (a) for completed contracts that begin and endin the same reporting period no restatement is required; (b) for completed contract with variable consideration an entity may use the transaction price at completion rather thanrestating estimated variable consideration amounts in comparable reporting periods; and (c) for comparable reporting periods before date of initial application reduced disclosurerequirements related to transaction price; (2) retrospectively with the cumulative effect of initially applying the amendment recognized at the date of initial application with additionaldisclosures for the differences of the prior guidance to the reporting periods compared to the new guidance and an explanation of the reasons for significant changes. We are requiredto adopt ASU 2014-09 in the first quarter of 2018, and we are currently assessing the impact of this pronouncement on our financial statements.On July 22, 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which requires entities to measure most inventory "at the lower of cost and netrealizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of threedifferent measures). The guidance does not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. Under current guidance,an entity subsequently measures inventory at the lower of cost or market, with market defined as replacement cost provided that it is not above the ceiling (net realizable value) orbelow the floor (net realizable value less an approximately normal profit margin) which is unnecessarily complex. The amendment does not change other guidance on measuringinventory. The amendment is effective for annual periods, including periods within those annual periods beginning after December 15, 2016 with early adoption permitted. We arerequired to adopt this pronouncement prospectively in the first quarter of 2017, and we are currently assessing the impact of this pronouncement on our financial statements.On April 15, 2015, the FASB issued ASU 2015-05, “ Intangibles - Goodwill and Other - Internal- Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a CloudComputing Arrangement,” which clarifies the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includesthe sale or license of software. The amendment requires a customer to determine whether a cloud computing arrangement contains a55Table of Contentssoftware license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in a manner consistent with how theacquisition of other software licenses is accounted for under ASC 350-40; if the arrangement does not contain a software license, the customer would account for the arrangement asa service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. The amendment is effective for annual periods, including periods within thoseannual periods beginning after December 31, 2015 with early adoption permitted. We can elect to adopt the amendments either prospectively to all arrangements entered into ormaterially modified after the effective date or retrospectively. We are required to adopt this pronouncement in the first quarter of 2016, and we do not anticipate that adoption of thepronouncement will have a material effect on our financial statements.On February 18, 2015, the FASB issued ASU 2015-02, “ Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which requires an entity to evaluate whether itshould consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The amendment modifies the evaluation of whether limitedpartnerships and similar legal entities are variable interest entities ("VIEs"). The amendment eliminates the presumption that a general partner should consolidate a limited partnership.The amendment affects the consolidation analysis of reporting entities that are involved with VIEs particularly those that have fee arrangements and related party relationships. Theamendment also provides a scope exception from consolidation guidance for reporting entities that comply with the requirements for registered money market funds. We are requiredto adopt ASU 2015-02 in the first quarter of 2016, and we do not anticipate that adoption of the pronouncement will have a material effect on our financial statements.On August 27, 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements — Going Concern (Subtopic 205-4 0),” which requires management to perform interimand annual assessments regarding conditions or events that raise substantial doubt about a company’s ability to continue as a going concern and to provide related disclosures, ifapplicable. We are required to adopt ASU 2014-15 in the first quarter of 2017, with early adoption permitted. We do not anticipate that the adoption of this standard will have a materialeffect on our financial statements.On June 19, 2014, the FASB issued ASU 2014-12, “ Compensation - Stock Compensation (Topic 718),” which affects any entity that grants its employees share-based paymentsin which the terms of the award stipulate that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that aperformance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should notbe reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target willbe achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomesprobable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remainingrequisite service period. We are required to adopt ASU 2014-12 in the first quarter of 2016 and the adoption of this standard is not expected to have a material effect on our financialstatements.Liquidity and Capital ResourcesWorking Capital and Capital Expenditure RequirementsThe following table summarizes our cash, cash equivalents, accounts receivable and working capital, which we define as current assets minus current liabilities excluding deferredrevenue, for the periods indicated (in thousands): As of December 31, 2015 2014 2013Cash and cash equivalents$128,358 $42,572 $33,583Accounts receivable, net21,348 17,259 16,579Working capital, excluding deferred revenue134,260 47,553 32,762Our cash and cash equivalents as of December 31, 2015 are available for working capital purposes. We do not enter into investments for trading purposes, and our investmentpolicy is to invest any excess cash in short term, highly liquid investments that limit the risk of principal loss; therefore, our cash and cash equivalents are held in demand depositaccounts that generate very low returns. In the fourth quarter of 2015, we retrospectively adopted ASU 2015-17, “Income Taxes (Topic 740) Balance Sheet Classification of DeferredTaxes" which simplifies the presentation of deferred income taxes and requires entities to classify deferred income tax liabilities and assets as noncurrent on the balance sheets. Toadopt this pronouncement, we reclassified the previously reported $3.2 million current portion of deferred tax assets to long-term deferred tax assets on our balance sheet as ofDecember 31, 2014, which is included in this Annual Report. In addition, we retrospectively reclassified the previously reported current portion of deferred tax assets to long-termdeferred tax assets resulting in a change in working capital as of December 31, 2014 and 2013, in the table above.As of December 31, 2015, we had $128.4 million in cash and cash equivalents. We consider all highly liquid instruments purchased with an original maturity from the date ofpurchase of three months or less to be cash equivalents.56Table of ContentsWe believe our existing cash and cash equivalents and our future cash flows from operating activities will be sufficient to meet our anticipated cash needs for at least the next 12months. Over the next twelve months, we expect our capital expenditure requirements to be approximately $10 million, including approximately $4.4 million anticipated to be incurredfor leasehold improvements related to the relocation of our corporate headquarters, of which, $2.4 million will be funded by tenant improvement allowances. Included in the terms ofour new office lease, the landlord provided us with an $8.0 million tenant improvement allowance. As of December 31, 2015, we have used $5.6 million of this allowance. Our futureworking capital and capital expenditure requirements will depend on many factors, including the rate of our revenue growth, the amount and timing of our investments in humanresources and capital equipment, future acquisitions and investments, and the timing and extent of our introduction of new solutions and platform and solution enhancements. To theextent our cash and cash equivalents and cash flows from operating activities are insufficient to fund our future activities, we may need to borrow additional funds through our bankcredit arrangements or raise funds from public or private equity or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would likelyhave rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing would be dilutive to ourstockholders.Sources of LiquidityTo date, we have principally financed our operations through cash generated by operating activities and, to a lesser extent, from the sale of capital stock. We have raised $121.4million in net cash, primarily from our initial public offering and also the sale of our preferred stock and to a lesser extent, from the proceeds of sales of common stock and stock optionexercises.In May 2014, we entered into a $50 million revolving credit facility, or the 2014 Facility, with Silicon Valley Bank, or SVB, as administrative agent, and a syndicate of lenders tofinance working capital and certain permitted acquisitions and investments. As of December 31, 2015, $6.7 million was outstanding, no letters of credit were utilized and $43.3 millionremained available for borrowing under the 2014 Facility. The 2014 Facility contains various financial and other covenants that require us to maintain a maximum consolidatedcoverage ratio and a fixed charge coverage ratio, and limit our capacity to incur other indebtedness, liens, make certain payments including dividends, and enter into othertransactions. The 2014 Facility is secured by substantially all of our assets, including our intellectual property. As of December 31, 2015, we were in compliance with all covenantsunder the 2014 Facility. The 2014 Facility is discussed in more detail below under “Debt Obligations.”DividendsOn June 12, 2015, our board of directors declared a cash dividend on our common and preferred stock in the amount of (1) $0.36368 per share of common stock and Series Apreferred stock and (2) $0.72736 per share of Series B preferred stock and Series B-1 preferred stock or $20.0 million in the aggregate. We paid these dividends on June 26, 2015 toour stockholders of record as of June 12, 2015.We cannot provide any assurance that we will declare or pay cash dividends on our common stock in the future. We currently anticipate that we will retain all of our futureearnings, if any, for use in the operation and expansion of our business and we do not anticipate paying cash dividends in the foreseeable future. Additionally, our ability to paydividends on our common stock is limited by restrictions under the terms of the agreements governing the 2014 Facility. Payment of future cash dividends, if any, will be at thediscretion of the board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements ofcurrent or then-existing debt instruments and other factors the board of directors deems relevant.Initial Public OfferingOn July 1, 2015, we closed our initial public offering, or IPO, in which we issued and sold 7,000,000 shares of common stock at a public offering price of $14.00 per share,resulting in gross proceeds of $98.0 million. In addition, on July 8, 2015, we closed the underwriters' exercise of their over-allotment option to purchase 525,000 additional shares ofour common stock from us, resulting in additional gross proceeds to us of $7.4 million. In total, we issued 7,525,000 shares of common stock and raised $105.4 million in grossproceeds, or $93.0 million in net proceeds after deducting underwriting discounts and commissions of $7.4 million and offering costs of $5.0 million.The principal purposes of the IPO were to increase our financial flexibility, create a public market for our common stock, and facilitate our future access to the capital markets. Wehave used and expect to continue to use the net proceeds of the IPO for working capital and other general corporate purposes. We may use a portion of the proceeds from the IPO foracquisitions or strategic investments in complementary businesses or technologies. These expectations are subject to change.57Table of ContentsHistorical Cash FlowsThe following table sets forth our cash flows for the year ended December 31, 2015, 2014 and 2013 (in thousands): Year Ended December 31, 2015 2014 2013Cash flows from operating activities$27,137 $15,635 $10,654Cash flows used in investing activities(18,049) (6,288) (18,431)Cash flows from / (used in) financing activities76,698 (358) (560)Operating ActivitiesCash flows from operating activities have typically been generated from our net income and by changes in our operating assets and liabilities, particularly from accountsreceivable and accounts payable, accrued expenses and other current liabilities, adjusted for non-cash expense items such as amortization and depreciation, and stock-basedcompensation.For 2015, cash flows from operating activities were $27.1 million, an increase of $11.5 million from 2014, as the result of a $15.0 million increase in cash from operating assetsand liabilities partially offset by $1.7 million decrease in net income and a $1.7 million decrease in adjustments for non-cash items.The $15.0 million increase in cash from operating assets and liabilities was due to the following:•The year over year increase in cash flows of $8.5 million provided by an increase in other liabilities balances was primarily the result of our new lease which expires in 2026and utilizing tenant improvement allowances for our corporate headquarters. These terms increased the long-term deferred rent balance to $8.4 million as of December 31,2015 from $1.0 million balance as of December 31, 2014.•Our accounts payable, accrued expenses and other current liabilities balance increased primarily from the increase in operating expenses and timing of payables resulting ina year over year increase in cash flows of $5.5 million.•From December 31, 2015 to 2014 inventory balances were $6.5 million as of December 31, 2015 and $6.9 million as of December 31, 2014 resulting in $0.4 million of cashflows from inventory in 2015, or a $4.7 million year over year increase in cash flows from fluctuations in our inventory balances. During 2014, cash used for inventory was$4.3 million which resulted from an increase in our investment in video camera inventory.•Our accounts receivable balance increased primarily from our increase in sales and timing of payments resulting in a year over year decrease in cash flows of $2.0 million.•Cash flows related to a change in other assets balances decreased $1.6 million year over year primarily from an increase in pre-payments relating to the timing of inventoryand also meetings and events.For 2015, cash flows from operating activities consisted of cash generated by our $11.8 million of net income and $8.1 million of adjustments for non-cash items and $7.2 millionof changes in operating assets and liabilities. Adjustments for non-cash items in 2015 included $5.8 million for amortization and depreciation, $3.6 million for deferred income taxes,$3.3 million for stock-based compensation, $1.6 million for reserve for product returns, and $0.3 million for provision for doubtful accounts. Adjustments for non-cash items in 2014included $4.0 million for amortization and depreciation, $3.3 million for stock-based compensation, and $1.9 million for reserve for product returns.For 2014, cash flows from operating activities were $15.6 million, an increase of $5.0 million from 2013, and resulted primarily from an increase in net income as adjusted for non-cash items. Our inventory balance increased due to an increase in the quantity of video cameras needed to meet our fulfillment requirements. As our revenue increased in 2014, ouraccounts receivable balance increased but to a lesser extent than accounts receivable balances grew in the prior period. The cash flows from operating activities consisted of cashgenerated by our $13.5 million of net income and $9.9 million of adjustments for non-cash items offset by $7.7 million of changes in operating assets and liabilities. Adjustments fornon-cash items in 2014 included $4.0 million for amortization and depreciation, $1.9 million for reserve for product returns, $1.7 million benefit for deferred income taxes, $1.4 millionfor provision for doubtful accounts and $3.3 million for stock-based compensation.For 2013, cash flows from operating activities were $10.7 million primarily from cash generated by our $4.5 million of net income and $10.5 million of adjustments for non-cashitems. This decrease in cash flows from operating assets and liabilities was primarily the result of increases in accounts receivable due to an increase in sales and higher balances ofinventory and other long-term assets at year end. Adjustments for non-cash items included $3.4 million for amortization and depreciation, $1.8 million for reserve for product returnsand $11.3 million impairment for goodwill and intangible assets from our EnergyHub acquisition, partially offset by a $5.8 million gain from the release of the contingent liability from theEnergyHub acquisition related earn-out in 2013.58Table of ContentsInvesting ActivitiesOur investing activities include acquisitions, capital expenditures, minority equity investments in companies, notes receivable issued to companies with offerings complementary toours and payments made to license intellectual property. Our capital expenditures have primarily been for general business use, including leasehold improvements as we haveexpanded our office space to accommodate our growth in headcount, computer equipment used internally, and expansion of our network operations centers.During 2015, our cash used in investing activities was $18.0 million primarily from $10.3 million of capital expenditures related to leasehold improvements for our new corporateheadquarters and expansion of our network operations centers. In addition, we purchased certain assets of SecurityTrax for $5.6 million and paid $0.4 million of cash holdbackpayments related to two of our previous acquisitions. We also paid $1.0 million to purchase licenses to patents.During 2014, our cash used in investing activities totaled $6.3 million. Of that amount, we paid $6.9 million for capital expenditures and advanced $0.8 million in loans to a serviceprovider and an installation partner to finance the creation of new subscriber accounts. We purchased certain assets of two businesses in 2014, Secure-i, Inc. and Horizon Analog,Inc., for $3.2 million. We also received a $2.0 million repayment of a note receivable from a platform partner and a $2.5 million distribution representing a partial return of a costmethod investment.During 2013, our cash used in investing activities totaled $18.4 million. Of that amount, we paid $8.1 million, net of cash received, to acquire EnergyHub. Additionally, we investedin companies that are complementary, consisting of $4.5 million in investments and $1.5 million in loans. We made these investments to create solutions that will leverage our cloudplatform in adjacent markets, to invest in the development of devices that may connect to our cloud based platform, or in a service provider to finance the creation of new subscriberaccounts. We also paid $2.3 million for capital expenditures.Financing ActivitiesCash generated by financing activities include proceeds from the sale of common stock, borrowings under credit facilities, and proceeds from the issuance of common stock fromemployee option exercises. Cash used in financing activities includes repurchases of common stock, dividends paid on our preferred stock and common stock and payments ofoffering costs in connection with our IPO.On July 1, 2015, we closed our IPO of 7,000,000 shares of common stock at an offering price of $14.00 per share, resulting in gross proceeds of $98.0 million. In addition, on July8, 2015, we closed the underwriters exercise of their over-allotment option to purchase 525,000 additional shares of our common stock from us, resulting in additional gross proceedsof $7.4 million. We raised a total of $105.4 million in gross proceeds from the IPO, or $98.0 million in net proceeds after deducting underwriting discounts and commissions of $7.4million.During 2015, our cash from financing activities was $76.7 million primarily from $98.0 million of net proceeds received from the sale of our common stock in our IPO. We paid a$20.0 million dividend in June 2015. In connection with our preparation for our IPO, we incurred and paid $2.6 million of deferred offering costs in 2015 and $2.4 million in 2014,primarily for legal and accounting fees. The total of these offering costs was $5.0 million and was netted against additional paid-in-capital upon the close of the IPO. We also recordeda $0.9 million tax windfall benefit from stock-based awards.During 2014, our cash used in financing activities totaled $0.4 million. We utilized borrowings of $6.7 million under our new 2014 Facility to extinguish and repay $7.5 million ofdebt outstanding and paid $0.3 million of related debt issuance costs. In connection with our preparation for our initial public offering, we paid $2.4 million of deferred offering costs,primarily for legal and accounting fees. These payments were partially offset by $1.5 million of proceeds from the early exercise of employee stock-based awards. These proceeds arerecorded as liabilities until the underlying equity award is vested as we have the ability to buy back unvested equity awards from employees that terminate service. We also received$0.6 million in proceeds from the exercise of vested employee stock options and recorded a $1.1 million tax windfall benefit from stock-based awards.During 2013, net cash used in financing activities totaled $0.6 million, primarily consisting of $1.5 million in repayments on our prior credit facility, partially offset by $0.8 million inaggregate proceeds from sales of common stock and stock option exercises.59Table of ContentsContractual ObligationsThe following table presents our aggregate contractual obligations and the periods in which future payments are due as of December 31, 2015. Future events could cause actualpayments to differ from these estimates.Contractual Obligations Total Less Than1 Year 1 to 3 Years 3 to 5 Years More Than5 YearsDebt: (in thousands)Principal payments $6,700 $— $6,700 $— $—Interest payments 241 178 63 — —Unused line fee payments 118 87 31 — —Operating lease commitments 40,378 3,221 8,196 7,889 21,072Other long-term liabilities 2,045 — 1,533 328 184Total contractual obligations $49,482 $3,486 $16,523 $8,217 $21,256The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed orminimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations underagreements that we can cancel without a significant penalty.As of December 31, 2015, we have no outstanding letters of credit under our 2014 Facility.Off-Balance Sheet ArrangementsWe do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entitiesthat were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financingarrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts.Debt ObligationsIn 2011, we entered into a Loan & Security Agreement with SVB. We borrowed $10.0 million under a term loan. On May 8, 2014, we repaid all of the outstanding principal andinterest under that term loan and replaced it with a $50.0 million revolving credit facility, or the 2014 Facility, with SVB, as administrative agent, and a syndicate of lenders. We utilized$6.7 million under the 2014 Facility to repay in full our indebtedness under our previous term loan. The 2014 Facility includes an option to increase the borrowing capacity to $75.0million with the consent of the lenders. The 2014 Facility is available to us to finance working capital and certain permitted acquisitions and investments, and is secured by substantiallyall of our assets, including intellectual property. The 2014 Facility matures in May 2017.The outstanding principal balance on the 2014 Facility accrues interest at a rate equal to either (1) the Eurodollar Base Rate, or LIBOR, plus an applicable margin based on ourconsolidated leverage ratio, or (2) the higher of (a) the Wall Street Journal prime rate and (b) the Federal Funds rate plus 0.50% plus an applicable margin based on our consolidatedleverage ratio, or ABR, at our option. Borrowings under LIBOR rates accrue interest at LIBOR plus 2.25%, LIBOR plus 2.5%, and LIBOR plus 2.75% when our consolidated leverageratio is less than 1.00:1.00, greater than or equal to 1.00:1.00 but less than 2.00:1.00, and greater than or equal to 2.00:1.00, respectively. Borrowings under ABR rates accrue interestat ABR plus 1.25%, ABR plus 1.5%, and ABR plus 1.75% when our consolidated leverage ratio is less than 1.00:1.00, greater than or equal to 1.00:1.00 but less than 2.00:1.00, andgreater than or equal to 2.00:1.00, respectively. The 2014 Facility also carries an unused line commitment fee of 0.20% to 0.25% depending on our consolidated leverage ratio. For theyear ended December 31, 2015 , the effective interest rate on the 2014 Facility was 2.63% .On December 7, 2015, we amended the 2014 Facility. The amendment reduces the rate at which borrowings under LIBOR rates accrue interest to LIBOR plus 2.00% , LIBORplus 2.25% , and LIBOR plus 2.50% when our consolidated leverage ratio is less than 1.00 :1.00, greater than or equal to 1.00 :1.00 but less than 2.00 :1.00, and greater than or equalto 2.00 :1.00, respectively. Borrowings under ABR rates accrue interest at ABR plus 1.00% , ABR plus 1.25% , and ABR plus 1.50% when our consolidated leverage ratio is less than1.00 :1.00, greater than or equal to 1.00 :1.00 but less than 2.00 :1.00, and greater than or equal to 2.00 :1.00, respectively. The 2014 Facility contains various financial and other covenants that require us to maintain a maximum consolidated leverage ratio not to exceed 2.50:1.00 and a consolidatedfixed charge coverage ratio of at least 1.25:1.00. As of December 31, 2015, we were in compliance with all covenants under the 2014 Facility.60Table of ContentsNon-GAAP MeasuresWe define Adjusted EBITDA as our net income before interest and other (expense) / income, net, provision for income taxes, amortization and depreciation expense, stock-basedcompensation expense, goodwill and intangible impairment charges, changes in fair value of acquisition related contingent liabilities and legal costs incurred in connection with certainintellectual property litigation. We do not consider these items to be indicative of our core operating performance. The non-cash items include amortization and depreciation expense,the stock-based compensation expense related to stock options and the sale of common stock, goodwill and intangible impairment charges and gain from the release of an acquisition-related contingent liability. See the following table for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented inaccordance with GAAP.We have included Adjusted EBITDA in this report because it is a key measure that our management uses to understand and evaluate our core operating performance and trends,to generate future operating plans, to make strategic decisions regarding the allocation of capital and to make investments in initiatives that are focused on cultivating new markets forour solutions. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, inthe case of exclusion of historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance. Accordingly, we believe that AdjustedEBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported underGAAP. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in thefuture, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does notreflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) AdjustedEBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate AdjustedEBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.Because of these and other limitations, you should consider Adjusted EBITDA alongside our other GAAP-based financial performance measures, net income and our other GAAPfinancial results. The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, for each of the periods indicated. Year Ended December 31, 2015 2014 2013Adjusted EBITDA Net income$11,768 $13,502 $4,524 Adjustments: Interest expense and other (expense) / income, net526 681 212 Income tax expense5,697 6,817 2,688 Amortization and depreciation5,808 3,991 3,360 Stock-based compensation expense4,124 3,267 841 Goodwill and intangible asset impairment— — 11,266 Release of acquisition related contingent liability— — (5,820) Litigation expense6,347 63 11,188Total adjustments22,502 14,819 23,735Adjusted EBITDA$34,270 $28,321 $28,259ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKMarket risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily theresult of fluctuations in interest rates, as well as to a lesser extent, foreign exchange rates and inflation.Interest Rate RiskWe are primarily exposed to changes in short-term interest rates with respect to our cost of borrowing under our credit facilities with SVB. We monitor our cost of borrowing underour various facilities, taking into account our funding requirements, and our expectation for short-term rates in the future. As of December 31, 2015, an increase or decrease in theinterest rate on61Table of Contentsour 2014 Facility with SVB by 100 basis points would increase or decrease our annual interest expense by approximately $67,000, respectively.Foreign Currency Exchange RiskBecause substantially all of our revenue and operating expenses are denominated in U.S. dollars, we do not believe that our exposure to foreign currency exchange risk ismaterial to our business, financial condition or results of operations. If a significant portion of our revenue and operating expenses becomes denominated in currencies other than U.S.dollars, we may not be able to effectively manage this risk, and our business, financial condition and results of operations could be adversely affected by translation and bytransactional foreign currency conversions.Inflation RiskWe do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs become subject to significant inflationarypressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results ofoperations.62Table of ContentsALARM.COM HOLDINGS, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm 64Consolidated Financial Statements Consolidated Statements of Operations 65Consolidated Statements of Comprehensive Income 66Consolidated Balance Sheets 67Consolidated Statements of Cash Flows 68Consolidated Statements of Equity 70Notes to the Consolidated Financial Statements 71Schedule II - Valuation and Qualifying Accounts 10563Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholders ofAlarm.com Holdings, Inc.:In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Alarm.com Holdings, Inc. and itssubsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformitywith accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presentsfairly, in all material respects, the information set forth therein when read in conjunction with the consolidated financial statements. These financial statements and financial statementschedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on ouraudits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it presents deferred income taxes in 2015./s/ PricewaterhouseCoopers LLPMcLean, VirginiaFebruary 29, 201664Table of ContentsALARM.COM HOLDINGS, INC.Consolidated Statements of Operations(in thousands, except share and per share data) Year Ended December 31, 2015 2014 2013Revenue: SaaS and license revenue$140,936 $111,515 $82,620 Hardware and other revenue67,952 55,797 47,602Total revenue208,888 167,312 130,222Cost of revenue: (1) Cost of SaaS and license revenue25,722 23,007 16,476 Cost of hardware and other revenue51,652 44,172 38,482Total cost of revenue77,374 67,179 54,958Operating expenses: Sales and marketing32,240 25,836 21,467 General and administrative35,473 26,113 29,928 Research and development40,002 23,193 13,085 Amortization and depreciation5,808 3,991 3,360Total operating expenses113,523 79,133 67,840Operating income17,991 21,000 7,424 Interest expense(178) (196) (269) Other (expense) / income, net(348) (485) 57Income before income taxes17,465 20,319 7,212 Provision for income taxes5,697 6,817 2,688Net income11,768 13,502 4,524 Dividends paid to participating securities(18,987) — — Income allocated to participating securities— (12,939) (4,402)Net (loss) / income attributable to common stockholders$(7,219) $563 $122 Per share information attributable to common stockholders: Net (loss) / income per share: Basic$(0.30) $0.25 $0.08 Diluted$(0.30) $0.14 $0.04Weighted average common shares outstanding: Basic24,108,362 2,276,694 1,443,469 Diluted24,108,362 3,890,121 2,795,345Cash dividends declared per share$0.36 $— $—_______________(1)Exclusive of amortization and depreciation shown in operating expenses below.See accompanying notes to the consolidated financial statements.65Table of ContentsALARM.COM HOLDINGS, INC.Consolidated Statements of Comprehensive Income(in thousands) Year Ended December 31, 2015 2014 2013Net income11,768 13,502 4,524Other comprehensive income, net of tax: Change in unrealized (losses) / gains on marketable securities— (56) 56Comprehensive income$11,768 $13,446 $4,580See accompanying notes to the consolidated financial statements.66Table of ContentsALARM.COM HOLDINGS, INC.Consolidated Balance Sheets(in thousands, except share and per share data) December 31,Assets2015 2014Current assets: Cash and cash equivalents$128,358 $42,572Accounts receivable, net21,348 17,259Inventory6,474 6,852Other current assets4,870 1,919Total current assets161,050 68,602Property and equipment, net15,446 8,130Intangible assets, net6,318 5,092Goodwill24,723 21,374Deferred tax assets11,915 8,363Other assets6,643 9,371Total Assets$226,095 $120,932Liabilities, redeemable convertible preferred stock and stockholders’ equity / (deficit) Current liabilities: Accounts payable, accrued expenses and other current liabilities$19,276 $15,233Accrued compensation7,514 5,816Deferred revenue2,289 1,699Total current liabilities29,079 22,748Deferred revenue9,701 9,202Long-term debt6,700 6,700Other liabilities10,484 1,670Total Liabilities55,964 40,320Commitments and contingencies (Note 12) Redeemable convertible preferred stock Series B redeemable convertible preferred stock, $0.001 par value, 0 and 1,809,685 shares authorized; 0 and 1,809,685 shares issuedand outstanding as of December 31, 2015 and 2014, liquidation preference of $0 and $191,132 as of December 31, 2015 and 2014.— 136,523Series B-1 redeemable convertible preferred stock, $0.001 par value, 0 and 1,669,680 shares authorized; 0 and 82,934 shares issued andoutstanding as of December 31, 2015 and 2014, liquidation preference of $0 and $8,759 as of December 31, 2015 and 2014.— 6,265Series A redeemable convertible preferred stock, $0.001 par value, 0 and 3,511,725 shares authorized; 0 and 1,998,257 shares issuedand outstanding as of December 31, 2015 and 2014, liquidation preference of $0 and $24,309 as of December 31, 2015 and 2014.— 59,668Stockholders’ equity / (deficit) Preferred stock, $0.001 par value, 10,000,000 and 0 shares authorized; 0 shares issued and outstanding as of December 31, 2015 and2014.— —Common stock, $0.01 par value, 300,000,000 and 100,000,000 shares authorized; 45,581,662 and 2,823,816 shares issued; and45,485,294 and 2,614,444 shares outstanding as of December 31, 2015 and 2014.455 26Additional paid-in capital297,781 7,168Treasury stock (35,523 shares at cost of $1.20 per share)(42) (42)Accumulated other comprehensive income— —Accumulated deficit(128,063) (128,996)Total Stockholders’ Equity / (Deficit)170,131 (121,844)Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity / (Deficit)$226,095 $120,932See accompanying notes to the consolidated financial statements.67Table of ContentsALARM.COM HOLDINGS, INC.Consolidated Statements of Cash Flows(in thousands) Year Ended December 31,Cash flows from operating activities:2015 2014 2013Net income$11,768 $13,502 $4,524Adjustments to reconcile net income to net cash from operating activities: Provision for doubtful accounts276 1,371 592Reserve for product returns1,559 1,863 1,781Amortization on patents391 201 201Amortization and depreciation5,808 3,991 3,360Amortization of debt issuance costs108 70 —Deferred income taxes(3,552) (1,735) (2,164)Change in fair value of contingent liability(470) — —Undistributed losses from equity investees681 514 112Stock-based compensation3,347 3,267 841Impairment of cost method investment— 200 —Goodwill and intangible asset impairment— — 11,266Gain on release of contingent liability— — (5,820)Other, net— 129 330Changes in operating assets and liabilities (net of business acquisitions): Accounts receivable(5,910) (3,898) (8,678)Inventory378 (4,334) (1,412)Other assets(2,725) (1,136) (1,038)Accounts payable, accrued expenses and other current liabilities5,966 444 5,169Deferred revenue1,081 1,234 1,618Other liabilities8,431 (48) (28)Cash flows from operating activities27,137 15,635 10,654Cash flows used in investing activities: Business acquisitions, net of cash acquired(6,049) (3,186) (8,148)Additions to property and equipment(10,347) (6,892) (2,275)Investment in cost and equity method investees(247) — (4,516)Distribution from cost method investee— 2,545 —Issuances of notes receivable(406) (755) (1,492)Purchases of licenses to patents(1,000) — —Purchases of marketable securities— — (2,000)Disposition of marketable securities— 2,000 —Cash flows used in investing activities(18,049) (6,288) (18,431)Cash flows from / (used in) financing activities: Proceeds from issuance of common stock from initial public offering, net of underwriting discount andcommission97,976 — —Proceeds from issuance of debt, net of debt issuance costs— 6,376 —Repayments of term loan— (7,500) (1,500)Dividends paid to common stockholders(1,013) — —Dividends paid to employees for unvested shares(57) — —Dividends paid to redeemable convertible preferred stockholders(18,930) — —Payments of offering costs(2,632) (2,399) —Repurchases of common stock(1) (7) (5)Proceeds from early exercise of stock-based awards129 1,548 —Issuances of common stock from equity based plans344 554 785Tax windfall benefit from stock-based awards882 1,070 160Cash flows from / (used in) financing activities76,698 (358) (560)Net increase / (decrease) in cash and cash equivalents85,786 8,989 (8,337)Cash and cash equivalents at beginning of the period42,572 33,583 41,920Cash and cash equivalents at end of the period$128,358 $42,572 $33,583See accompanying notes to the consolidated financial statements.68Table of ContentsALARM.COM HOLDINGS, INC.Consolidated Statements of Cash Flows - Continued(in thousands) Year Ended December 31, 2015 2014 2013Supplemental disclosures: Cash paid for interest$175 $193 $274Cash paid for income taxes, net of refunds8,508 6,490 6,204Noncash investing and financing activities: Conversion of redeemable convertible preferred stock to common stock$202,456 $— $—Cash not yet paid for business acquisitions417 434 —Contingent liability from business acquisition230 — —Cash not yet paid for capital expenditures625 — —Reclassification of deferred offering costs to additional paid-in-capital5,024 — —Deferred offering costs in accounts payable, accrued expenses and other current liabilities— 403 —Conversion of note receivable into cost method investment— — 250See accompanying notes to the consolidated financial statements.69Table of ContentsALARM.COM HOLDINGS, INC.Consolidated Statements of Equity(in thousands) Preferred Stock Common Stock Additional Paid-In- Capital Treasury Stock Accumulated OtherComprehensive Income Accumulated Deficit Total Stockholders’ (Deficit) / Equity Shares Amount Shares Amount Balance, January 1, 2013— $— 1,251 $13 $— $(42) $— $(147,022) $(147,051)Common stock issued in connection withequity based plans— — 408 4 781 — — — 785Stock-based compensation expense— — — — 841 — — — 841Tax benefit from stock-based awards— — — — 160 — — — 160Common stock repurchased— — (2) — (5) — — — (5)Other comprehensive income— — — — — — 56 — 56Net income— — — — — — — 4,524 4,524Balance, December 31, 2013— $— 1,657 $17 $1,777 $(42) $56 $(142,498) $(140,690)Common stock issued in connection withequity based plans— — 735 7 547 — — — 554Vesting of common stock subject torepurchase— — 223 2 802 — — — 804Stock-based compensation expense— — — — 3,267 — — — 3,267Tax benefit from stock-based awards— — — — 782 — — — 782Common stock repurchased— — (1) — (7) — — — (7)Other comprehensive income— — — — — — (56) — (56)Net income— — — — — — — 13,502 13,502Balance, December 31, 2014— $— 2,614 $26 $7,168 $(42) $— $(128,996) $(121,844)Issuance of common stock from initialpublic offering, net of issuance costs— — 7,525 75 92,878 — — — 92,953Conversion of redeemable convertiblepreferred stock to common stock— — 35,018 350 202,106 — — — 202,456Common stock issued in connection withequity based plans— — 277 3 341 — — — 344Vesting of common stock subject torepurchase— — 126 2 451 — — — 453Stock-based compensation expense— — — — 3,347 — — — 3,347Tax benefit from stock-based awards, net— — — — 700 — — — 700Modification of employee stock-basedaward and repurchase of common stock— — (75) (1) (45) — — — (46)Dividends paid to common stockholders— — — — (673) — — (340) (1,013)Dividends paid to employees with unvestedcommon stock— — — — (38) — — (19) (57)Dividends paid to redeemable convertiblepreferred stockholders— — — — (8,454) — — (10,476) (18,930)Net income— — — — — — — 11,768 11,768Balance, December 31, 2015— $— 45,485 $455 $297,781 $(42) $— $(128,063) $170,131See accompanying notes to the consolidated financial statements.70Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial StatementsDecember 31, 2015, 2014 and 2013Note 1. OrganizationAlarm.com Holdings, Inc. (referred herein as “Alarm.com”, the “Company”, or “we”) is a cloud-based software platform solution for the connected home. Our multi-tenant software-as-a-service (“SaaS”) platform allows home and business owners to intelligently secure and manage their properties and remotely interact with a broad array of connected devicesthrough a single, intuitive interface. Our solution is delivered through an established network of thousands of authorized and licensed service providers. Our four primary solutions areinteractive security, intelligent automation, video monitoring and energy management, which can be used individually or integrated into a single user interface. We derive revenue fromthe sale of our software-as-a-service over our integrated platform, license fees, hardware, activation fees and other revenue. Our fiscal year ends on December 31st.Initial Public OfferingOur registration statement on Form S-1 relating to our initial public offering ("IPO") was declared effective by the Securities and Exchange Commission (the "SEC") on June 25, 2015.On July 1, 2015, we closed our IPO of 7,000,000 shares of common stock at an offering price of $14.00 per share, resulting in gross proceeds of $98.0 million . In addition, on July 8,2015, we closed the underwriters' exercise of their over-allotment option to purchase up to an additional 525,000 shares of our common stock from us and up to an additional 525,000shares from the selling stockholders. Consequently, we issued and sold an additional 525,000 additional shares of our common stock and certain selling stockholders affiliated withABS Capital Partners sold 525,000 shares of our common stock, resulting in additional gross proceeds to us of $7.4 million . We did not receive any proceeds from the sale of sharesby the selling stockholders. In total we issued 7,525,000 shares of common stock and raised $105.4 million in gross proceeds, or $93.0 million in net proceeds after deductingunderwriting discounts and commissions of $7.4 million and offering costs of $5.0 million . Upon completion of the IPO, on July 1, 2015, all outstanding shares of convertible preferredstock converted into an aggregate of 35,017,884 shares of common stock.In addition, upon the closing of the IPO, our Certificate of Incorporation was amended and restated to authorize 10,000,000 shares of undesignated preferred stock and 300,000,000shares of common stock.DividendOn June 12, 2015, our board of directors declared a cash dividend on our common and preferred stock in the amount of (1) $0.36368 per share of common stock and Series Apreferred stock and (2) $0.72736 per share of Series B preferred stock and Series B-1 preferred stock or $20.0 million in the aggregate. We paid the dividends on June 26, 2015 to ourstockholders of record as of June 12, 2015.Note 2. Summary of Significant Accounting PoliciesPrinciples of ConsolidationOur consolidated financial statements include our accounts and those of our majority-owned and controlled subsidiaries after elimination of intercompany accounts andtransactions. Equity investments over which we are able to exercise significant influence but do not control the investee are accounted for using the equity method.We determine whether we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (“VIE”). Votinginterest entities are entities that have sufficient equity and provide equity investor voting rights that give them power to make significant decisions relating to the entity’s operations. Theusual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. In VIEs, a controlling financial interest is attained through meansother than voting rights and the entities lack one or more of the characteristics of a voting entity.We account for our unconsolidated investments in businesses under the cost or equity method dependent on factors such as percent ownership and factors that would determinesignificant influence. Our cost method investments are recorded at cost. Equity method investments are recorded at cost and adjusted to record our share of the company’sundistributed gains and losses in our consolidated statements of operations. We evaluate our cost and equity method investments for impairment whenever events or circumstancesindicate that carrying amount of such investments may not be recoverable.Use of EstimatesThe preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses duringthe reporting71Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013period. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financialreporting process, actual results could differ from those estimates. Estimates are used when accounting for revenue recognition, allowances for doubtful accounts receivable,allowance for hardware returns, estimates of obsolete inventory, long-term incentive compensation, stock-based compensation, income taxes, legal reserves, contingent considerationand goodwill and intangible assets.Cash and Cash EquivalentsWe consider all highly liquid instruments purchased with an original maturity from the date of purchase of three months or less to be cash equivalents. As of December 31, 2015and 2014, we have invested approximately $122.8 million and $38.6 million in cash equivalents in the form of money market funds with one financial institution. We consider thesemoney market funds to be Level 1 financial instruments.Accounts ReceivableAccounts receivable are principally derived from sales to customers located in the United States and Canada. Substantially all of our sales in Canada are transacted in U.S.dollars. During the years ended December 31, 2015, 2014 and 2013, less than 1% of our revenue was generated outside of North America and as of December 31, 2015 and 2014,2% of accounts receivable balances were related to service providers outside of North America. Our accounts receivable are stated at estimated realizable value. We utilize theallowance method to provide for doubtful accounts based on management’s evaluation of the collectability of the amounts due. Our estimate is based on historical collectionexperience and a review of the current status of accounts receivable. Each of our service providers are evaluated for creditworthiness through a credit review process at the inceptionof the arrangement or if risk indicators arise during our arrangement at such other time. Our terms for hardware sales to our service providers and distributors typically allow for returnsfor up to one year. We apply our estimate as a percentage of sales monthly, based on historical data, as a reserve against revenue to account for our provision for returns. We havenot experienced write-offs for uncollectible accounts or sales returns that have differed significantly from our estimates.InventoryOur inventory, which is comprised of raw materials and finished goods, includes materials used to produce our wireless communications network enabled radios, video cameras,home automation system parts and peripherals, is stated at the lower of cost or market, and is charged to cost of sales on a first in, first out (“FIFO”) basis. We periodically evaluateour inventory quantities for obsolescence based on criteria such as customer demand and changing technology and record an obsolescence write down when necessary.Marketable SecuritiesIn 2013 and 2014, we had investments in marketable equity securities consisting of available for sale securities, which were stated at fair value, with unrealized gains andtemporary unrealized losses reported as a component of other comprehensive income, net of tax, until realized. When realized, we recognized gains and losses on the sales of thesecurities on a specific identification method and include the realized gains or losses in other (expense) / income, net in the consolidated statements of operations. We includedinterest, dividends, and amortization of premium or discount on securities classified as available for sale in other (expense) / income, net in the consolidated statements of operations.As of December 31, 2015 and 2014, there were no investments in marketable equity securities.Internal-Use SoftwareWe capitalize the costs related to the design of internal-use software related to the development of our platform during the application development stage of the projects. Thecosts are primarily comprised of salaries, benefits and stock-based compensation expense of the projects’ engineers and product development teams. Our internally developedsoftware is reported at cost less accumulated depreciation. Depreciation begins once the project is ready for its intended use, which is usually when the code goes into production inweekly software builds on our platform. We depreciate the asset on a straight-line basis over a period of three years, which is the estimated useful life. We utilize continuous agiledevelopment methods to update our software for our SaaS multi-tenant platform on a weekly basis, which primarily consists of bug-fixes and user interface changes. We evaluatewhether a project should be capitalized if it adds significant functionality to our platform. Maintenance activities or minor upgrades are expensed in the period performed.Revenue Recognition and Deferred RevenueWe derive our revenue from two primary sources: the sale of software-as-a-service ("SaaS") cloud-based connected home platform and the sale of hardware products that enableour solutions. We sell our hardware and platform solutions to service providers that resell our hardware and solutions to home and business owners, who are the service providers’customers, and72Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013whom we refer to as our subscribers. We also sell our hardware to distributors who resell the hardware to service providers. We enter into contracts with our service providers thatestablish pricing for access to our connected home platform solutions and for the sale of hardware. These contracts typically have an initial term of one year, with subsequent renewalterms of one year. Our service providers typically enter into underlying contracts with our subscribers, which our service providers have indicated range from three to five years inlength.Our hardware includes cellular radio modules that enable access to our cloud-based platform, as well as video cameras, image sensors and other peripherals. Our serviceproviders purchase our hardware in anticipation of installing the hardware in a home or business when they create a new subscriber account, or for use in an existing subscriber’sproperty. The purchase of hardware occurs in a transaction that is separate and typically in advance of the purchase of our platform services. Service providers transact with us topurchase our platform solutions and resell our solutions to a new subscriber, or to upgrade or downgrade the solutions of an existing subscriber, at which time the subscriber’s accessto our platform solutions is enabled and the delivery of the services commences. The purchase of hardware and the purchase of our platform solutions are separate transactions as, atthe point of sale of the hardware, the service provider is not obligated to purchase a platform solution for the hardware sold, and the level and duration of platform solutions, if any, tobe provided through the hardware sold cannot be determined.We recognize revenue with respect to our solutions when all of the following conditions are met:• Persuasive evidence of an arrangement exists;•Delivery to the customer, which may be either a service provider, distributor or a subscriber, has occurred or service has been rendered;•Fees are fixed or determinable; and•Collection of the fees is reasonably assured.We consider a signed contract with a service provider to be persuasive evidence that an agreement exists, and the fees to be fixed or determinable if the fees are contractuallyagreed to with our service providers. Collectability is evaluated based on a number of factors, including a credit review of new service providers, and the payment history of existingservice providers. If collectability is not reasonably assured, revenue is deferred until collection becomes reasonably assured, which is generally upon the receipt of payment.SaaS and License RevenueWe generate the majority of our SaaS and license revenue primarily from monthly fees charged to our service providers sold on a per subscriber basis for access to our cloud-based connected home platform and the related solutions. Our fees per subscriber vary based upon the service plan and features utilized.Under negotiated terms in our contractual arrangements with our service providers, we are entitled to, and recognize revenue based on a monthly fee that is billed in advance ofthe month of service. We have demonstrated that we can sell our SaaS offering on a stand-alone basis, as it can be sold separately from hardware and activation services. As there isno minimum required initial service term nor is there a stated renewal term in our contractual arrangements, we recognize revenue over the period of service, which is monthly. Ourservice providers typically incur and pay the same monthly fee per subscriber account for the entire period a subscriber account is active.We offer multiple service level packages for our solutions including a range of solutions and a range of a la carte add-ons for additional features. The fee paid by our serviceproviders each month for the delivery of our solutions is based on the combination of packages and add-ons enabled for each subscriber. We utilize tiered pricing plans where ourservice providers may receive prospective pricing discounts driven by volume.We also generate SaaS and license revenue from the fees paid to us when we license our intellectual property to service providers on a per customer basis for use of our patents.In addition, in some markets our EnergyHub subsidiary sells its demand response software with an annual service fee, with pricing based on the number of subscribers or amount ofaggregate electricity demand made available for a utility’s or market’s control.Hardware and Other RevenueWe generate hardware and other revenue primarily from the sale of cellular radio modules that provide access to our cloud-based platform and, to a lesser extent, the sale ofother devices, including video cameras, image sensors and peripherals. We recognize hardware and other revenue when the hardware is received by our service provider ordistributor, net of a reserve for estimated returns. Amounts due from the sale of hardware are payable in accordance with the terms of our agreements with our service providers ordistributors, and are not contingent on resale to end-users, or to service providers in the case of sales of hardware to distributors. Our terms for hardware sales sold directly to eitherservice providers or distributors typically allow for73Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013the return of hardware up to one year past the date of sale. Our distributors sell directly to our service providers under terms between the two parties. We record a percentage ofhardware and other revenue of approximately 2 to 4% , based on historical returns, as a reserve against revenue for hardware returns. We evaluate our hardware reserve on aquarterly basis or if there is an indication of significant changes in return experience. Historically, our returns of hardware have not significantly differed from our estimated reserve.Hardware and other revenue also includes activation fees charged to service providers for activation of a new subscriber account on our platform, as well as fees paid by serviceproviders for our marketing services. Our service providers use services on our platform to assist in the installation of our solutions in a subscriber’s property. This installation marksthe beginning of the service period on our platform and on occasion, we earn activation revenue for fees charged for this service. The activation fee is non-refundable, separatelynegotiated and specified in our contractual arrangements with our service providers and is charged to the service provider for each subscriber activated on our platform. Activation feesare not offered on a stand-alone basis separate from our SaaS offering and are billed and received at the beginning of the arrangement. We record activation fees initially as deferredrevenue and we recognize these fees ratably over the expected term of the subscribers’ account which we estimate is ten years based on our annual attrition rate. The portion of theseactivation fees included in current and long-term deferred revenue as of our balance sheet date represents the amounts that will be recognized ratably as revenue over the followingtwelve months, or longer as appropriate, until the ten -year expected term is complete. The combined current and long-term balance for deferred revenue for activation fees was $11.0million and $10.3 million as of December 31, 2015 and 2014.Cost of RevenueOur cost of SaaS and license revenue primarily includes the amounts paid to wireless network providers and, to a lesser extent, the costs of running our network operation centerswhich are expensed as incurred. Our cost of hardware and other revenue primarily includes cost of raw materials and amounts paid to our third-party manufacturer for production andfulfillment of our cellular radio modules and image sensors, and procurement costs for our video cameras, which we purchase from an original equipment manufacturer, and otherdevices. We carry our inventory at lower cost or market and the cost is charged to cost of sales on a FIFO basis when the inventory is shipped from our manufacturer and received byour service providers. Our cost of revenue excludes amortization and depreciation.Fair Value MeasurementsThe accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value isdefined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transactionbetween market participants on the measurement date. This accounting standard established a fair value hierarchy, which requires an entity to maximize the use of observable inputs,where available. The following summarizes the three levels of inputs:Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date;Level 2 - Inputs other than quoted prices included within Level 1 that are observable for similar assets and liabilities, either directly or indirectly; quoted prices in markets that arenot active; andLevel 3 - Unobservable inputs supported by little or no market activity.The carrying amount of financial assets, including cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the short maturityand liquidity of those instruments.Assets and Liabilities Measured at Fair Value on a Recurring Basis - In 2013 and 2014, we had an available for sale investment and derivatives that were recorded at fair value ona recurring basis. In 2015, we recorded at fair value on a recurring basis a liability for two subsidiary awards and a contingent consideration liability related to an acquisition.Assets Measured at Fair Value on a Nonrecurring Basis - We measure certain assets, including property and equipment, goodwill, intangible assets, cost and equity methodinvestments at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired.Concentration of Credit RiskThe financial instruments that potentially subject us to concentrations of credit risk consists principally of cash and cash equivalents and accounts receivables. All of our cash andcash equivalents are held at financial institutions that management believes to be of high credit quality. Our cash and cash equivalent accounts may exceed federally issued limits attimes. We have not experienced any losses on cash and cash equivalents to date. To manage accounts receivable risk, we evaluate the credit worthiness of our service providers andmaintain an allowance for doubtful accounts. The majority of our accounts receivable balance is made up of our service providers in North America. We assess the concentrations ofcredit risk with respect to accounts receivables based on one industry and geographic region and feel that our reserve for uncollectible accounts is appropriate based on our historyand this concentration.74Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013Stock-Based CompensationWe compensate our executive officers, board of directors and our employees with incentive stock-based compensation plans. In June 2015, our board of directors adopted, ourstockholders approved, and we registered the shares for our 2015 Equity Incentive Plan (the "2015 Plan"), pursuant to which we reserved and registered 4,700,000 shares of commonstock for issuance to our employees, directors and non-employee directors and consultants. The registration included 141,222 shares of our common stock previously reserved forissuance under our Amended and Restated 2009 Stock Incentive Plan (the "2009 Plan") that were added to the shares reserved under the 2015 Plan upon its effectiveness.We record stock-based compensation expense based upon the award’s grant date fair value and use an accelerated attribution method, net of estimated forfeitures, in whichcompensation cost for each vesting tranche in an award is recognized ratably from the service inception date to the vesting date for that tranche. Our equity awards generally vest overfive years and are settled in shares of our common stock. During 2015, 2014 and 2013, we recognized compensation expense of $4.1 million , $3.3 million and $0.8 million , andassociated income tax benefit of $0.7 million , $0.8 million and $0.2 million , respectively, in connection with our stock-based compensation plans. We account for stock-basedcompensation arrangements with non-employees using a fair value approach. The fair value of these options is measured using the Black-Scholes option pricing model reflecting thesame assumptions as applied to employee options in each of the reported periods, other than the expected life, which is assumed to be the remaining contractual life of the option. Thecompensation costs of these arrangements are subject to remeasurement over the vesting terms, as earned.Employee Stock Purchase PlanWe adopted our Employee Stock Purchase Plan (the "2015 ESPP") in June 2015. Under the 2015 ESPP, 1,200,000 shares have been initially reserved for future grant withprovisions established to increase the number of shares available on January 1 of each subsequent year for nine years. The annual automatic increase in the number of sharesavailable for issuance under the 2015 ESPP is the lesser of 1% of each class of common stock outstanding as of December 31 of the preceding fiscal year, 1,500,000 shares ofcommon stock or such lesser number as determined by the board of directors. The 2015 ESPP allows eligible employees to purchase shares of our common stock at 90% of the fairmarket value, rounded up to the nearest cent, based on the closing price of our common stock on the purchase date. The maximum number of shares of our common stock that aparticipant may purchase during any calendar year shall not exceed such number of shares having a fair market value equal to the lesser of $15,000 or 10% of the participant's basecompensation for that year.The 2015 ESPP is considered compensatory for purposes of share-based compensation expense due to the 10% discount on the fair market value of the common stock. In 2015, there were no purchases of shares as our first offering period under the plan ended on February 15, 2016. We recognized less than $0.1 million of compensation expense in 2015.Compensation expense is recognized for the amount of the discount, net of forfeitures, over the six-month purchase period, based on the monthly closing price of our common stockas an estimate of the final purchase price for the period. This estimate is adjusted monthly until the purchase is finalized. As of December 31, 2015 , 1,200,000 shares remain availablefor future issuance.Business CombinationsThe purchase price of an acquisition is allocated to the assets acquired, including intangible assets, and liabilities assumed, based on their respective fair values at the acquisitiondate. Acquisition-related costs are expensed as incurred. The excess of the cost of an acquired entity over the net of the amounts assigned to the assets acquired and liabilitiesassumed is recognized as goodwill. The net assets and results of operations of an acquired entity are included in our consolidated financial statements from the acquisition date.Impairment of Long-Lived AssetsWe evaluate the recoverability of our long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable.Recoverability of long-lived assets are measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If theasset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.Goodwill and Intangible AssetsGoodwill represents the excess of (1) the aggregate of the fair value of consideration transferred in a business combination, over (2) the fair value of assets acquired, net ofliabilities assumed. Goodwill is allocated to our reporting units, which are our operating segments or one level below our operating segments. Goodwill is not amortized, but is subjectto annual impairment tests. We perform our annual impairment review of goodwill on October 1 and when a triggering event occurs between annual impairment tests. We test ourgoodwill at the reporting unit level. We review goodwill for impairment using the two-step process if, based on our assessment of the qualitative factors, we determine that it is morelikely than not that the fair value of a reporting unit is less than its carrying value.75Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013For our 2015 annual impairment review, we performed a qualitative assessment for our Alarm.com reporting unit, our only reporting unit with a goodwill balance. This reportingunit had a fair value that exceeded its carrying value by more than 100% in the last quantitative assessment performed in 2014. We perform a quantitative analysis every three years.We first assessed qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Qualitative factors we considerinclude, but are not limited to, macroeconomic conditions, industry and market conditions, company specific events, changes in circumstances and market capitalization. For the yearended December 31, 2015, we assessed the qualitative factors and determined that it was more likely than not that the fair value of the reporting unit exceeded the carrying value andthat the two-step impairment test was not required.If a two-step impairment test is required, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less thanits carrying value, an indication of goodwill impairment exists for the reporting unit and step two is required to measure the amount of the impairment, if any. Under step two, animpairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill isdetermined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value ofthe reporting unit goodwill. If the carrying value of goodwill exceeds the implied fair value, an impairment charge would be recorded to operating expenses in the period thedetermination is made. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives areamortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. The fair value of the intangible assets is compared with their carryingvalue and an impairment loss would be recognized for the amount by which the carrying amount exceeds the fair value. For the year ended December 31, 2015, we determined therewere no indicators of impairment of our definite-lived intangible assets.Advertising CostsWe expense advertising costs as incurred. Advertising costs totaled $3.7 million, $5.9 million and $8.2 million for the years ended December 31, 2015, 2014 and 2013. Advertisingcosts are included within sales and marketing expenses on our consolidated statements of operations.Accounting for Income TaxesWe account for income taxes under the asset and liability method as required by accounting standards codification, or ASC 740, “Income Taxes,” which requires the recognition ofdeferred tax assets and liabilities for the expected future tax consequences of events that are included in the financial statements. Under this method, deferred tax assets and liabilitiesare determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differencesare expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such a determination, we consider all available positiveand negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.We are subject to income taxes in the United States. Significant judgment is required in evaluating uncertain tax positions. We record uncertain tax positions in accordance withASC 740-10 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of theposition, and (2) with respect to those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50%likely to be realized upon ultimate settlement with the related tax authority. We record interest and penalties as a component of our income tax provision.Earnings per Share (“EPS”)Our basic net (loss) / income per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted-averagenumber of shares of common stock outstanding for the period.Our diluted net (loss) / income per share attributable to common stockholders is calculated by giving effect to all potentially dilutive common stock when determining the weighted-average number of common shares outstanding. For purposes of the diluted net (loss) / income per share calculation, options to purchase common stock, redeemable convertiblepreferred stock, and unvested shares issued upon the early exercise of options that are subject to repurchase are considered to be potential common stock.We have issued securities other than common stock that participate in dividends (“participating securities”), and therefore utilize the two-class method to calculate net (loss) /income per share. These participating securities include redeemable convertible preferred stock and unvested shares issued upon the early exercise of options that are subject torepurchase, both of which have non-forfeitable rights to participate in any dividends declared on our common stock. The two-class method requires a76Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013portion of net income to be allocated to the participating securities to determine the net (loss) / income attributable to common stockholders. Net (loss) / income attributable to thecommon stockholders is equal to the net income less dividends paid on preferred stock and unvested shares with any remaining earnings allocated in accordance with the bylawsbetween the outstanding common and preferred stock as of the end of each period.Recent Accounting PronouncementsAdoptedOn November 20, 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes," which simplifies the presentation of deferredincome taxes and requires entities to classify deferred income tax liabilities and assets as noncurrent on the balance sheet. Prior to this accounting standard update, Topic 740,Income Taxes, required an entity to separate deferred income tax liabilities and assets for each jurisdiction into current and noncurrent amounts on the balance sheets. Theamendments in this update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The amendment is effective forannual periods, including periods within those annual periods beginning after December 15, 2016 with early adoption permitted. In the fourth quarter of 2015, we early adopted andretrospectively applied this update for all periods presented. To retrospectively adopt this pronouncement, we reclassified the previously reported $3.2 million current portion ofdeferred tax assets to long-term deferred tax assets on our balance sheet as of December 31, 2014.On August 18, 2015, the FASB issued ASU 2015-15, “Interest- Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance CostsAssociated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015, EITF Meeting,” which clarifies the application ofASU 2015-03 related to presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements to allow for an entity to defer and present debtissuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the line-of-credit arrangement, regardless of whether there are any outstandingborrowings. ASU 2015-03, “ Simplifying the Presentation of Debt Issuance Costs,” otherwise requires debt issuance costs to be presented in the balance sheet as a direct deductionfrom the carrying value of the associated debt liability, consistent with the presentation of a debt discount. We adopted these pronouncements in the third quarter of 2015. Theadoption did not have an impact on our financial statements. We continue to present the debt issuance costs associated with our revolving credit facility as an asset that is amortizedratably over the term of the agreement.On April 10, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, “ Reporting Discontinued Operations andDisclosures of Disposals of Components of an Entity,” which amends the definition of a discontinued operation in ASC 205-20 and requires entities to provide additional disclosuresabout discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The guidance narrowed the definition of discontinued operationsfor disposal of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. The guidancealso expands the scope to include equity method investments and businesses that, upon initial acquisition, qualify as held for sale. The expanded disclosure requirements includestatement of financial position and statement of cash flows disclosures for all comparative periods. The ASU 2014-08 is effective prospectively for all disposals (or classifications asheld for sale) in periods beginning on or after December 15, 2014 with early adoption permitted. We adopted this pronouncement in the first quarter of 2015, and it did not have amaterial impact on our financial statements.Not yet adoptedOn February 25, 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” which requires lessees to recognize assets and liabilities for operating leases with lease termsgreater than twelve months in the balance sheet. The update also requires improved disclosures to help users of financial statement better understand the amount, timing anduncertainty of cash flows arising from leases. The update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlyadoption permitted. We are required to adopt ASU 2016-02 in the first quarter of 2019, and we are currently assessing the impact of this pronouncement on our financial statements.On January 5, 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10)” which requires all equity investments to be measured at fair value withchanges in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). Theamendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change orupon identification of an impairment. The amendments also require enhanced disclosures about those investments. The amendments improve financial reporting by providing relevantinformation about an entity’s equity investments and reducing the number of items that are recognized in other comprehensive income. The amendments in this update also simplifythe impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period, similar to thequalitative assessment for long-lived assets, goodwill, and indefinite lived intangible assets. Upon determining that impairment exists, an entity should calculate the fair value of thatinvestment and recognize as an impairment in net income any amount by which the carrying value exceeds the fair value77Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013of the investment. This impairment assessment reduces the complexity of the other-than-temporary impairment guidance entities were required to follow before the issuance of thisupdate. In addition, the amendments require entities that are required to disclose the fair value of financial instruments measured at amortized cost on the balance sheet to measurethat fair value using exit price notion consistent with Topic 820, Fair Value Measurement and supersedes the requirement to disclose the methods and significant assumptions used incalculating the fair value of financial instruments. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods withinthose fiscal years, with early adoption permitted under early application guidance outlined in the update. We are required to adopt this pronouncement in the first quarter of 2018, andwe do not anticipate that adoption of the pronouncement will have a material impact on our financial statements.On September 25, 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which requiresentities to apply the guidance prospectively to adjustments to provisional amounts that occur after the effective date. Under current guidance, the acquirer retrospectively adjustsprovisional amounts recognized as of the acquisition date with a corresponding adjustment to goodwill. Adjustments are required when new information is obtained about facts andcircumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognitionof additional assets or liabilities. The amendments in ASU 2015-16 eliminate the requirement to retrospectively account for those adjustments. The amendment is effective for annualperiods, including periods within those annual periods beginning after December 15, 2015 with early adoption permitted. We are required to adopt this pronouncement prospectively inthe first quarter of 2016, and we do not anticipate that adoption of the pronouncement will have a material impact on our financial statements.On August 12, 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers the effective date for allentities for one year of ASU 2014-09, “ Revenue from Contracts with Customers (Topic 606),” issued on May 28, 2014. ASU 2014-09 affects any entity that either enters into contractswith customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. Theguidance supersedes the revenue recognition guidance in Topic 605, “Revenue Recognition,” and most industry-specific guidance throughout the Industry Topics of the FASBAccounting Standards Codification. The guidance also supersedes some cost guidance included in Subtopic 605-35, “ Revenue Recognition - Contract-Type and Production-TypeContracts." ASU 2014-9, as amended, is effective for annual periods, and interim periods within those years, beginning after December 31, 2017. An entity is required to apply theamendments using one of the following two methods: (1) retrospectively to each prior period presented with three possible expedients: (a) for completed contracts that begin and endin the same reporting period no restatement is required; (b) for completed contract with variable consideration an entity may use the transaction price at completion rather thanrestating estimated variable consideration amounts in comparable reporting periods; and (c) for comparable reporting periods before date of initial application reduced disclosurerequirements related to transaction price; (2) retrospectively with the cumulative effect of initially applying the amendment recognized at the date of initial application with additionaldisclosures for the differences of the prior guidance to the reporting periods compared to the new guidance and an explanation of the reasons for significant changes. We are requiredto adopt ASU 2014-09 in the first quarter of 2018, and we are currently assessing the impact of this pronouncement on our financial statements.On July 22, 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which requires entities to measure most inventory "at the lower of cost and netrealizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of threedifferent measures). The guidance does not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. Under current guidance,an entity subsequently measures inventory at the lower of cost or market, with market defined as replacement cost provided that it is not above the ceiling (net realizable value) orbelow the floor (net realizable value less an approximately normal profit margin) which is unnecessarily complex. The amendment does not change other guidance on measuringinventory. The amendment is effective for annual periods, including periods within those annual periods beginning after December 15, 2016 with early adoption permitted. We arerequired to adopt this pronouncement prospectively in the first quarter of 2017, and we are currently assessing the impact of this pronouncement on our financial statements.On April 15, 2015, the FASB issued ASU 2015-05, “ Intangibles - Goodwill and Other - Internal- Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a CloudComputing Arrangement,” which clarifies the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includesthe sale or license of software. The amendment requires a customer to determine whether a cloud computing arrangement contains a software license. If the arrangement contains asoftware license, the customer would account for the fees related to the software license element in a manner consistent with how the acquisition of other software licenses isaccounted for under ASC 350-40; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. The guidance will notchange GAAP for a customer’s accounting for service contracts. The amendment is effective for annual periods, including periods within those annual periods beginning afterDecember 31, 2015 with early adoption permitted. We can elect to adopt the amendments either prospectively to all arrangements entered into or materially modified after the effectivedate or retrospectively. We are required to adopt this pronouncement in the first quarter of 2016, and we do not anticipate that adoption of the pronouncement will have a materialeffect on our financial statements.78Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013On February 18, 2015, the FASB issued ASU 2015-02, “ Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which requires an entity to evaluate whether itshould consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The amendment modifies the evaluation of whether limitedpartnerships and similar legal entities are variable interest entities ("VIEs"). The amendment eliminates the presumption that a general partner should consolidate a limited partnership.The amendment affects the consolidation analysis of reporting entities that are involved with VIEs particularly those that have fee arrangements and related party relationships. Theamendment also provides a scope exception from consolidation guidance for reporting entities that comply with the requirements for registered money market funds. We are requiredto adopt ASU 2015-02 in the first quarter of 2016, and we do not anticipate that adoption of the pronouncement will have a material effect on our financial statements.On August 27, 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements — Going Concern (Subtopic 205-4 0),” which requires management to perform interimand annual assessments regarding conditions or events that raise substantial doubt about a company’s ability to continue as a going concern and to provide related disclosures, ifapplicable. We are required to adopt ASU 2014-15 in the first quarter of 2017, with early adoption permitted. We do not anticipate that the adoption of this standard will have a materialeffect on our financial statements.On June 19, 2014, the FASB issued ASU 2014-12, “ Compensation - Stock Compensation (Topic 718),” which affects any entity that grants its employees share-based paymentsin which the terms of the award stipulate that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that aperformance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should notbe reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target willbe achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomesprobable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remainingrequisite service period. We are required to adopt ASU 2014-12 in the first quarter of 2016 and the adoption of this standard is not expected to have a material effect on our financialstatements.Note 3. Accounts Receivable, NetThe components of accounts receivable are as follows (in thousands): December 31, 2015 2014Accounts receivable$24,779 $20,494Allowance for doubtful accounts(1,315) (1,397)Allowance for product returns(2,116) (1,838)Accounts receivable, net$21,348 $17,259For the years ended December 31, 2015 , 2014 and 2013 , we recorded a $1.6 million , $1.9 million and $1.8 million reserve for product returns in our hardware and otherrevenue. For the years ended December 31, 2015 , 2014 and 2013 , we recorded a $0.3 million , $1.4 million and $0.6 million provision for doubtful accounts receivable. Historically,we have not experienced write-offs for uncollectible accounts or sales returns that have differed significantly from our estimates.Note 4. InventoryThe components of inventory are as follows (in thousands): December 31, 2015 2014Raw materials$3,026 $3,371Finished goods3,448 3,481Total inventory$6,474 $6,852Note 5. Property and Equipment, netFurniture and fixtures, computer software and equipment and leasehold improvements are recorded at cost and presented net of depreciation. Furniture and fixtures and computersoftware and equipment are depreciated straight-line over lives ranging from three to five years. Internally developed internal-use software is amortized on a straight-line basis over athree year period. During the application development phase we categorize capitalized costs in our construction in progress account until the build79Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013is put into production and we move the asset to internal-use software. We record land at historical cost. Leasehold improvements are amortized on a straight-line basis over the shorterof the lease terms or the asset lives.The components of property and equipment are as follows (in thousands): December 31 2015 2014Furniture and fixtures$2,257 $1,097Computer software and equipment8,297 6,524Internal-use software975 555Construction in progress8,662 2,002Leasehold improvements3,387 2,983Land398 398 Total property and equipment$23,976 $13,559Accumulated deprecation(8,530) (5,429) Property and equipment, net$15,446 $8,130Depreciation expense related to property and equipment for the years ended December 31, 2015 , 2014 and 2013 was $3.6 million , $2.4 million and $1.3 million . Included in thethose amounts, was depreciation expense related to internal-use software of $0.3 million , $0.1 million and $16,000 for the years ended December 31, 2015 , 2014 and 2013 . For theyear ended December 31, 2015, we disposed of and wrote off $0.5 million of primarily fully depreciated property and equipment.Note 6. AcquisitionsSecurityTrax AcquisitionOn March 13, 2015, in accordance with an asset purchase agreement, we completed our purchase of certain assets of HiValley Technology, Inc., (“SecurityTrax”) that constituteda business. SecurityTrax is a provider of SaaS-based, customer relationship management software tailored for security system dealers. The consideration included $ 5.6 million cashpaid at closing, $ 0.4 million of cash not yet paid and established a contingent liability of $ 0.7 million for earn-out considerations to be paid to the former owners. The agreement alsocontains $ 2.0 million in potential payments associated with the continued employment of key employees through March 31, 2018 that will be accounted for as compensation expenseover the period. We included the results of SecurityTrax’s operations since its acquisition date in the Alarm.com segment (see Note 20). During 2015, we paid $0.2 million of the cashnot yet paid and the remaining $0.2 million balance as of December 31, 2015 was included in other current liabilities on our consolidated balance sheet.The table below sets forth the consideration paid to SecurityTrax’s sellers and the estimated fair value of the tangible and intangible net assets acquired (in thousands): 2015Calculation of Consideration: Cash paid, net of working capital adjustment$5,612Cash not yet paid400Contingent consideration liability700Total consideration$6,712Estimated Tangible and Intangible Net Assets: Current assets$14Customer relationships1,699Developed technology1,407Trade name271Current liabilities(7)Goodwill3,328Total estimated tangible and intangible net assets$6,71280Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013Goodwill of $ 3.3 million reflects the value of acquired workforce and expected synergies from pairing SecurityTrax's solutions to security service providers with our offerings. Thegoodwill will be deductible for tax purposes. We developed our estimate of the fair value of intangible net assets using a multi-period excess earnings method for customerrelationships, the relief from royalty method for the developed technology, replacement cost method for the developed technology home page and the relief from royalty method for thetrade name. The purchase price allocation presented above was finalized in 2015.Fair Value of Net Assets Acquired and IntangiblesIn accordance with ASC 805, the assets and liabilities of SecurityTrax we acquired were recorded at their respective fair values as of March 13, 2015, the date of the acquisition.Customer RelationshipsWe recorded the customer relationships intangible separately from goodwill based on determination of the length, strength and contractual nature of the relationship thatSecurityTrax shared with its customers. We valued two groups of customer relationships using the multi-period excess earnings method, an income approach. We used severalassumptions in the income approach, including revenue growth, operating expenses, charge for contributory assets, and a 22.5% discount rate used to calculate the present value ofthe cash flows. For the second group of customer relationships, we used the same assumptions in addition to a customer retention rate of 90% . We are amortizing the customerrelationships, valued at $ 1.7 million , on a straight-line basis over a weighted-average estimated useful life of 7 years.Developed TechnologyDeveloped technology recorded separately from goodwill consists of intellectual property such as proprietary software used internally for revenue producing activities.SecurityTrax’s proprietary software is offered for sale on a SaaS hosted basis to customers. We valued the developed technology by applying the relief from royalty method, an incomeapproach. We used several assumptions in the relief from royalty method, which included revenue growth, a market royalty rate of 25% and a 22.5% discount rate used to thecalculate the present value of the cash flows. An additional component of the developed technology which we refer to as the "home page" organized customer data and functioned asthe billing and administration tool. We valued the home page component by applying the replacement cost model, a cost approach. We used several assumptions in the replacementcost approach, which included analyzing costs that a company would expect to incur to recreate an asset of equivalent utility. In addition, we made an adjustment for developer’s profitof 30.4% which brought the asset to fair value on an exit-price basis. We are amortizing the developed technology, valued at $ 1.4 million , on a straight-line basis over a weighted-average estimated useful life of 8 years.Contingent Consideration LiabilityThe amount of contingent consideration liability to be paid, up to a maximum of $ 2.0 million , to the former owners will be determined based on revenue and EBITDA of theacquired business for the year ended December 31, 2017. We estimated the fair value of the contingent consideration liability by using a Monte Carlo simulation model for determiningprojected revenue by using an expected distribution of potential outcomes. The fair value of contingent consideration liability is calculated with thousands of projected revenueoutcomes, the results of which are averaged and then discounted to estimate the present value. We used several assumptions including an 8.45% discount rate and a 7.5% revenuerisk adjustment. We recorded the contingent consideration, valued at $ 0.7 million , as a contingent consideration liability in other liabilities in our consolidated balance sheet. At eachreporting date, we remeasure the liability and record any changes in general and administrative expense, until we pay the contingent consideration, if any, in the first quarter of 2018.The discount rate is based on the composite B rated yield as of the valuation date and has not changed, except for the additional discount rate for the difference between composite Brated yield and the CCC credit rating, which has increased from 3.8% to 9.19% in 2015. As of December 31, 2015 , we adjusted the fair value of the contingent consideration liability to$0.2 million using the same method and an updated forecast with a 14.25% discount rate and a 4.7% revenue risk adjustment, which resulted in $0.5 million of income for the yearended December 31, 2015.Secure-i AcquisitionOn December 8, 2014, in accordance with an asset purchase agreement, we completed our purchase of certain assets of Secure-i, Inc. (“Secure-i”) that constituted a business.Secure-i is a provider of internet based remote video hosting services including off-site storage, viewing and management from web-based browsers and mobile applications. Totalconsideration included $ 2.6 million in cash and $ 0.3 million in cash not yet paid. We recorded $0.7 million of intangibles and $2.2 million of goodwill in connection with the acquisition.During the second quarter of 2015, we finalized the working capital adjustment and recorded an additional $20 thousand of goodwill. We included the results of Secure-i’s operationssince its acquisition date in the Alarm.com segment (see Note 20). During 2015, we paid $145,000 of the cash not yet paid and the remaining $145,000 balance as of December 31,2015 was included in other current liabilities on our consolidated balance sheet.81Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013The table below sets forth the consideration paid to Secure-i’s sellers and the estimated fair value of the tangible and intangible net assets received in the acquisition (inthousands): 2014Calculation of Consideration: Cash paid, net of working capital adjustment$2,610Cash not yet paid290Total consideration$2,900 Estimated Tangible and Intangible Net Assets: Current assets$16Other long-term assets43Customer relationships208Developed technology228Other intangibles262Liabilities(59)Goodwill2,202Total estimated tangible and intangible net assets$2,900Goodwill of $2.2 million reflects the value of acquired workforce and expected synergies between Secure-i's commercial video services and our offerings. The goodwill will bedeductible for tax purposes. Our estimate of the fair value of tangible and intangible net assets was developed using a multi-period excess earnings method for customer relationshipsand the replacement cost method for developed technology. Included in other intangibles is a vendor relationship valued using the relief from royalty method and best practicesmaterials valued using replacement cost method and a trade name valued using the relief from royalty method.Fair Value of Net Assets Acquired and IntangiblesIn accordance with ASC 805, the assets and liabilities of Secure-i we acquired were recorded at their respective fair values as of December 8, 2014, the date of the acquisition.Customer RelationshipsThe customer relationships intangible was recorded separate from goodwill based on determination of the length, strength and contractual nature of the relationship that Secure-ishared with its customers. We valued this customer relationship information using the multi-period excess earnings method, an income approach. We used several assumptions in theincome approach, including revenue growth, a customer retention rate of 90 percent , operating expenses, charge for contributory assets, and a 20 percent discount rate used tocalculate the present value of the cash flows. The customer relationships, valued at $0.2 million , are being amortized on a straight-line basis over the estimated useful life of 12 years.Developed TechnologyDeveloped technology recorded separately from goodwill consists of intellectual property such as proprietary software used internally for revenue producing activities. Secure-i’sproprietary software is offered for sale on a SaaS hosted basis. The developed technology was valued by applying the replacement cost model, a cost approach. We used severalassumptions in the replacement cost approach, which included analyzing costs that a company would expect to incur in order to recreate an asset of equivalent utility adjusteddownward for by 20% to account for inflation and technical, functional or economic obsolescence. In addition, there was an adjustment for developer’s profit of 35% which brought theasset to fair value on an exit-price basis. The developed technology, valued at $0.2 million , is being amortized on a straight-line basis over an estimated useful life of 3 years.Horizon Analog AcquisitionOn December 10, 2014, in accordance with an asset purchase agreement, we completed our purchase of certain assets of Horizon Analog, Inc. (“Horizon Analog”) thatconstituted a business. Horizon Analog is a producer of research that focuses on cost-effective collection and analysis of data relating to energy usage and consumer behavior andenergy disaggregation. Total consideration included $ 0.6 million in cash and $ 0.1 million in cash not yet paid. We recorded less than $ 0.1 million of property82Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013and equipment and $ 0.7 million of goodwill in connection with the acquisition, which reflects the acquired workforce and synergies expected from combining our operations with thoseof Horizon Analog. The goodwill is deductible for tax purposes. We included the results of Horizon Analog’s operations since its acquisition date in the Alarm.com segment (see Note20). During 2015, we paid $72,000 of the cash not yet paid and the remaining $72,000 balance as of December 31, 2015 was included in other current liabilities on our consolidatedbalance sheet.EnergyHub AcquisitionOn May 7, 2013, in accordance with a merger agreement, we completed our purchase of 100% of the stock of EnergyHub, Inc. (“EnergyHub”), a developer of software andhardware solutions focused on helping consumers, utilities, and service providers reduce energy consumption through EnergyHub’s demand response and energy efficiency platform.We paid $8.3 million in cash in initial consideration and established a contingent liability of $5.8 million for earn-out considerations to be paid to the former owners. We included theresults of EnergyHub’s operations since its acquisition date in the Other segment (see Note 20).The table below sets forth the consideration transferred to EnergyHub stockholders and the estimated fair value of tangible and intangible net assets received in the acquisition (inthousands): 2013Calculation of Consideration : Cash paid, net of working capital adjustment$8,263Estimated contingent consideration liability5,820 Total consideration$14,083 Estimated Tangible and Intangible Net Assets: Current assets$173Other long-term assets32Customer relationships4,420Developed technology2,320Trade name860Deferred tax asset — long-term4,755Current liabilities(337)Deferred tax liability — long-term(2,949)Goodwill4,809 Total estimated tangible and intangible net assets$14,083 Goodwill of $4.8 million represents the value of expected synergies between us and EnergyHub and is calculated as the total consideration less tangible and intangible net assets,including the value of acquired workforce. We estimate that goodwill will not be deductible for tax purposes. Our estimate of the fair value of tangible and intangible net assets wasdeveloped using a multi-period excess earnings method for customer relationships and the relief from royalty method for the developed technology intangible. Significant estimatesused in the valuation included revenue growth rates, expense and contributory asset charges, royalty rates and the discount rate.Management determined the estimated fair value of the contingent earn-out payments to be $5.8 million . Payment of the earn-out consideration was principally contingent uponEnergyHub achieving certain agreed upon revenue targets during 2013 through 2015 and, if EnergyHub achieved those targets, we would be required to make payments at the end of2013, 2014 and 2015 up to a maximum amount of $16.8 million . See “Impairment” below for a discussion of the treatment of the earn-out in 2013 through 2015.Fair Value of Net Assets Acquired and IntangiblesIn accordance with ASC 805, the assets and liabilities of EnergyHub we acquired were recorded at their respective fair values as of May 7, 2013, the date of the acquisition.Customer Relationships83Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013The customer relationships intangible was recorded separate from goodwill based on determination of the length, strength and contractual nature of the relationship thatEnergyHub shared with its customers. We valued this customer relationship information using the multi-period excess earnings method, an income approach. We used severalassumptions in the income approach, including revenue growth, a customer retention rate of 75 percent , operating expenses, charge for contributory assets and trade name, and a 24percent discount rate used to calculate the present value of the cash flows. The customer relationships, valued at $4.4 million , are being amortized on a straight-line basis over theestimated useful life of 4.5 years.Developed TechnologyDeveloped technology recorded separately from goodwill consists of intellectual property such as proprietary software used internally for revenue producing activities.EnergyHub’s proprietary software, Mercury, is offered for sale on a SaaS hosted basis to customers and has an established revenue stream. The developed technology was valued byapplying the relief from royalty method, an income approach. We used several assumptions in the relief from royalty method, including revenue growth, a royalty rate of 7 percent , anda 24 percent discount rate used to calculate the present value of cash flows. The developed technology, valued at $2.3 million , is being amortized on a straight-line basis over anestimated useful life of 7.5 years.Trade NameThe EnergyHub trade name was recorded separate from goodwill based on an evaluation of the importance of the trade name and the brand recognition in the market, theimportance of the trade name to the EnergyHub’s customers, and the amount of revenue associated with the trade name. In developing the estimated fair value, we valued the tradename utilizing the relief from royalty method, an income approach. Significant assumptions used in the relief from royalty method were revenue growth, royalty rate, and the discountrate to calculate the present value of cash flows. The trade name, valued at $0.9 million , is being amortized on a straight-line basis over the estimated useful life of 7 years.Impairment and Earn-out ObligationA triggering event occurred in September 2013 that indicated an impairment of intangibles and goodwill had occurred related to our EnergyHub reporting unit. We determined thata potential strategic partnership agreement which was expected to contribute a material amount of revenue over the earn-out period was no longer expected to be executed.Therefore, EnergyHub’s revenue over the earn-out period was expected to be materially less than originally estimated at the time of the acquisition. Revenue from this potentialstrategic partnership represented a material percentage of the revenue growth assumptions included in the forecast used to assign fair value to the customer relationships, developedtechnology and trade name. As a result, we prepared an interim review of the carrying value of goodwill and other intangible assets. The business failed step one of the goodwillimpairment test, and we performed step two to determine the amount of the impairments. Under step one of the impairment analysis, EnergyHub was valued using the discountedcash flow method. To estimate the value of our total invested capital, the debt-free after tax cash flows for EnergyHub were discounted by a 25 percent required rate of return. Weused the guideline company method to assess the reasonableness of this value. The total invested capital was compared to our carrying value to determine whether goodwill wasimpaired as indicated when the carrying value of EnergyHub is higher than the estimated value. The carrying value of the finite lived intangible assets (customer relationships,developed technology and trade name intangibles) were compared to the sum of our pre-tax and undiscounted cash flows, and we determined that the goodwill and intangible assetswere impaired. We recognized an impairment charge for goodwill of $4.8 million and intangible assets of $6.5 million , which are recorded in general and administrative expense for theyear ended December 31, 2013 in our consolidated statement of operations. Due to the triggering event, EnergyHub’s revenue results were expected to be materially less than therevenue targets established in the earn-out agreement. Therefore we determined that the earn-out fair value was zero for 2013 through 2015. We recorded a $5.8 million gain on therelease of the contingent liability in general and administrative expense for the year ended December 31, 2013 in our consolidated statement of operations. The earn-out had a fairvalue of $0 as of December 31, 2015 and 2014.Unaudited Pro Forma InformationThe following pro forma data is presented as if (1) EnergyHub was included in our historical consolidated statements of operations beginning January 1, 2012, (2) Secure-i andHorizon Analog were included in our historical consolidated statements of operations beginning January 1, 2013 and (3) SecurityTrax was included in our historical consolidatedstatements of operations beginning January 1, 2014. These pro forma results do not necessarily represent what would have occurred if all the business combinations had taken placeon January 1, 2012, 2013 and 2014, as applicable, nor do they represent the results that may occur in the future.This pro forma financial information includes our historical financial statements and those of our business combinations with the following adjustments: (1) we adjusted foramortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2012, 2013 and 2014, as applicable; (2) we adjusted fortransaction costs incurred in 2015, 2014 and 2013 and reclassified them to 2014, 2013 and 2012, respectively, as applicable, and (3) we included adjustments for income taxesassociated with these pro forma adjustments.84Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013The pro forma adjustments were based on available information and upon assumptions that we believe are reasonable to reflect the impact of these acquisitions on our historicalfinancial information on a supplemental pro forma basis, as follows (in thousands): Pro forma Year Ended December 31, 2015 2014 2013Revenue$209,110 $168,921 $131,295Net income11,722 12,476 4,794Business Combinations in OperationsThe operations of each of the business combinations discussed above were included in the consolidated financial statements as of each of their respective acquisition dates. Thefollowing table presents the revenue and earnings of the business combinations in the year of acquisition as reported within the consolidated financial statements for the years endedDecember 31, 2015 for SecurityTrax, December 31, 2014 for Secure-i and Horizon Analog and December 31, 2013 for EnergyHub (in thousands): Year Ended December 31, 2015 2014 2013Revenue$986 $41 $410Net loss(436) (140) (4,391)Note 7. Goodwill and Intangible Assets, NetThe changes in goodwill by operating segment are outlined below for the year s ended December 31, 2015 and 2014 (in thousands): Alarm.com Other TotalBalance as of January 1, 2014$18,480 $— $18,480Goodwill acquired2,894 — 2,894Balance as of December 31, 201421,374 — 21,374Goodwill acquired3,349 — 3,349Balance as of December 31, 2015$24,723 $— $24,723In March 2015, we acquired SecurityTrax and recorded $ 3.3 million of goodwill in the Alarm.com segment (See Note 6). In December 2014, we acquired Secure-i and HorizonAnalog and recorded $2.9 million of goodwill in the Alarm.com segment (See Note 6).There were no impairments of goodwill recorded during the year s ended December 31, 2015 or 2014 . In the third quarter of 2013, we experienced a triggering event related toEnergyHub, which resulted in testing goodwill for impairment and subsequently recording a $4.8 million goodwill impairment charge in general and administrative expense in theconsolidated statement of operations for the year ended December 31, 2013 (See Note 6).The following table reflects changes in the net carrying amount of the components of intangible assets for the year s ended December 31, 2015 and 2014 (in thousands):85Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013 CustomerRelationships DevelopedTechnology Trade Name Other TotalBalance as of January 1, 2014$4,571 $1,273 $118 $— $5,962Intangible assets acquired208 228 28 234 698Amortization(926) (583) (52) (7) (1,568)Balance as of December 31, 20143,853 918 94 227 5,092Intangible assets acquired1,699 1,407 271 — 3,377Amortization(1,103) (839) (92) (117) (2,151)Balance as of December 31, 2015$4,449 $1,486 $273 $110 $6,318For the years ended December 31, 2015 , 2014 and 2013 , we recorded $ 2.2 million , $ 1.6 million and $2.1 million of amortization related to our intangible assets. There were noimpairments of long-lived assets during the years ended December 31, 2015 and 2014. During the third quarter of 2013, we experienced a triggering event related to EnergyHub andrecorded an intangible asset impairment charge of $6.5 million in general and administrative expense in the consolidated statement of operations for the year ended December 31,2013 (See Note 6).The following tables reflect the weighted-average remaining life and carrying value of finite-lived intangible assets as of December 31, 2015 and 2014 (in thousands): December 31, 2015 GrossCarryingAmount AccumulatedAmortization Net CarryingValue Weighted-averageRemaining LifeCustomer relationships$10,666 $(6,217) $4,449 4.5Developed technology5,390 (3,904) 1,486 4.8Trade name914 (641) 273 4.7Other234 (124) 110 0.9Total intangible assets$17,204 $(10,886) $6,318 December 31, 2014 GrossCarryingAmount AccumulatedAmortization NetCarryingValue Weighted-averageRemaining LifeCustomer relationships$8,967 $(5,114) $3,853 4.4Developed technology3,983 (3,065) 918 1.6Trade name643 (549) 94 1.8Other234 (7) 227 1.9Total intangible assets$13,827 $(8,735) $5,092 The following table reflects the future estimated amortization expense for intangible assets (in thousands): Year ending December 31, Amortization2016 1,7262017 1,4002018 1,3292019 5792020 and thereafter 1,284Note 8. Investments in Other EntitiesCost Method Investment in Connected Home Service ProviderWe own 20,000 Series A Convertible Preferred Membership Units and 2,667 Series B Convertible Preferred Membership units of a Brazilian connected home solutions provider,which represents an interest of 12.4% on a fully diluted basis, and was purchased for $0.4 million . On April 15, 2015, we purchased an additional 2,333 of Series B-1 ConvertiblePreferred Membership Units at $23.31 per unit or $0.1 million , which increased our aggregate equity interest to 12.6% on a fully diluted basis. The entity resells our products andservices to residential and commercial customers in Brazil. Based upon the level of equity investment at86Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013risk, the connected home service provider is a VIE. We do not control the marketing, sales, installation, or customer maintenance functions of the entity and therefore do not direct theactivities of the entity that most significantly impact its economic performance. We have determined that we are not the primary beneficiary of the entity and do not consolidate itsfinancial results into ours. We account for this investment using the cost method. As of December 31, 2015 and 2014 , the fair value of this cost method investment was not estimatedas there were no events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment. The $ 0.4 million investment balance isincluded in other assets in our consolidated balance sheets as of December 31, 2015 and 2014 .Investments in and Loans to an Installation PartnerWe own 48,190 common units of an installation partner, which represents an interest of 48.2% on a fully diluted basis, and was purchased for $1.0 million . The entity performsinstallation services for security dealers, as well as subsidiaries reported in our Other segment. Based upon the level of equity investment at risk, we determined that the installationpartner was not a VIE. We accounted for this investment under the equity method because we have the ability to exercise significant influence over the operating and financial policiesof the entity. Under the equity method, we recognize our share of the earnings or losses of the installation partner in other (expense) / income, net in our consolidated statements ofoperations in the periods they are reported by the installation partner.In September 2014, we loaned $315,000 to our installation partner under a secured promissory note that accrues interest at 8.0% . The note receivable is included in other currentassets in our consolidated balance sheets. Interest is payable monthly with the entire principal balance plus accrued but unpaid interest due at maturity in September 2016. This eventdid not cause us to reconsider our conclusion that the installation partner had sufficient equity investment at risk and therefore was not a VIE. We continued to account for theinvestment under the equity method.In the fourth quarter of 2015, accumulated operating losses at our installation partner exceeded its equity contributions, and we began to record 100% of its net losses, or$230,000 , against our $315,000 note receivable.On December 11, 2015, we purchased an additional 9,290 common units of the same company for $0.2 million , which did not change our proportional share of ownershipinterest. This event caused us to reconsider our conclusions that the installation partner has sufficient equity investment at risk and we now consider the installation partner to be aVIE. We do not control the ability to obtain funding, the annual operating plan, marketing, sales or cash management functions of the entity and therefore do not direct the activities ofthe entity that most significantly impact its economic performance. We have determined that we are not the primary beneficiary of our installation partner and do not consolidate itsfinancial results into ours. We continue to account for the investment under the equity method. Due to this investment, the investment partner received additional equity contributions,and we returned to recording our share of its earnings or losses against our investment.The loss in other (expense) / income, net was $ 0.7 million , $0.5 million and $0.1 million for the years ended December 31, 2015 , 2014 and 2013 . The $ 1.2 million investment,net of equity losses, is included in other assets in our consolidated balance sheets and was $ 0.1 million and $ 0.4 million as of December 31, 2015 and 2014 . The note receivable isincluded in other current assets in our consolidated balance sheets and was $0.1 million as of December 31, 2015 . As of December 31, 2014 the note receivable was $0.3 million andwas included in other assets in our consolidated balance sheets.Investments in and Loans to a Platform PartnerWe have invested in the form of loans and equity investments in a platform partner which produces connected devices to provide it with the capital required to bring its devices tomarket and integrate them onto our connected home platform.In 2013, a previous loan to the platform partner in the form of a note of $250,000 plus accrued interest automatically converted into preferred shares during a qualified financingevent where we paid $ 3.5 million in cash to purchase 3,548,820 shares of our platform partner’s Series A convertible preferred shares, or an 18.7% interest on as-converted and fullydiluted basis. The terms of our investment in the convertible preferred shares included a freestanding option to make an additional investment in the platform partner (the "2013Option"). We also loaned the same platform partner $2.0 million in the form of a secured convertible note (the "2013 Note"). The 2013 Note converted automatically into equity at a12.5% discount from the price per share at which new shares of capital stock are issued by the platform provider in a qualified financing (the "Automatic Conversion Feature").We recorded the 2013 Option at its initial fair value of $0.2 million . The 2013 Option did not meet the definition of derivative as it was private company stock that was not readilyconvertible into cash and therefore, was not measured at fair value at each reporting period. The investment in the Series A convertible preferred shares was recorded at its initial fairvalue of $3.5 million and accounted for it as a cost method investment. The 2013 Note was accounted for as an available for sale security and was recorded at fair value in marketablesecurities at an initial fair value of $1.9 million . For the year ended December 31, 2013, we recorded an unrealized gain of $92,000 , net of tax of $36,000 , in our consolidatedstatement of comprehensive income related to change in fair value. The Automatic Conversion Feature was an embedded derivative that required bifurcation from the 2013 Note. Itwas recorded at its initial fair value of $0.1 million in other assets as a marketable security and was remeasured at fair value each reporting period with changes recorded in other(expense) / income, net. For the year ended December 31, 2013, we recorded a gain of $63,000 in other (expense) / income, net in our consolidated statement of operations.87Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013In 2014, we entered into a Series 1 Preferred Stock purchase agreement with the platform partner and another investor. The other investor invested cash to purchase shares ofthe platform partner’s Series 1 Preferred Stock. As a result of the purchase, our 3,548,820 shares of Series A convertible preferred shares converted into 3,548,820 shares of commonstock, and we hold an 8.6% interest in the platform partner on an as-converted and fully diluted basis. In conjunction with the transaction, we received a $ 2.5 million dividend that werecorded as a return of investment as it was in excess of the accumulated earnings and profits of the investee since the date of the investment. Additionally, the platform partner repaidthe $2.0 million 2013 Note and accrued interest of $0.2 million and as a result, the Automatic Conversion Feature expired. As a result of the transaction, we recorded a $62,000realized gain on the 2013 Note, our 2013 Option and Automatic Conversion feature expired and we recognized $200,000 and $125,000 of impairment losses in other (expense) /income, net in our consolidated statement of operations for the year ended December 31, 2014 .Based upon the level of equity investment at risk, the platform partner is a VIE. We have concluded that we are not the primary beneficiary of the platform partner VIE. We do notcontrol the product design, software development, manufacturing, marketing, or sales functions of the platform partner and, therefore, we do not direct the activities of the platformpartner that most significantly impact its economic performance. We account for this investment under the cost method. As of December 31, 2015 , the fair value of this cost methodinvestment was not estimated as there were no events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment.As of December 31, 2015 and 2014 , our $ 1.0 million cost method investment in a platform partner was recorded in other assets in our consolidated balance sheets.Note 9. Other AssetsPatent LicensesFrom time to time, we enter into agreements to license patents. We have $ 3.3 million in patent licenses related to two such agreements. We are amortizing the patent licensesover the estimated useful lives of the patents, which range from three to eleven years. The net balance as of December 31, 2015 and 2014 was $2.2 million and $ 1.5 million .Amortization expense on patent licenses was $0.4 million for the year ended December 31, 2015 and $0.2 million for each of the years ended December 31, 2014 and 2013 and isincluded in cost of SaaS and license revenue in our consolidated statements of operations.Loan to a Distribution PartnerIn 2013, we entered into a revolving loan agreement with a distribution partner. The distribution partner is also a service provider with whom we have a standard agreement toresell our connected home service and hardware. We evaluate the credit quality of our distribution partner for purposes of the revolving loan agreement using the same methods thatwe employ to evaluate its creditworthiness as a service provider, including a credit review at the inception of the arrangement and if risk indicators arise. At the inception of the loanagreement, we determined the credit quality of our distribution partner to be good. No risk indicators have arisen to cause us to change that assessment.Under the terms of the revolving loan agreement, we agreed to loan our distribution partner up to $ 2.8 million , with the proceeds of the loan used to finance the creation of newcustomer accounts that use our products and services. The amount that our distribution partner may draw down on the loan is based on the number of its qualifying new customeraccounts created each month. The loan bears interest at a rate of 8.0% per annum, and requires monthly interest payments, with the entire principal balance due on the loan maturitydate, July 24, 2018. The balance outstanding under the loan is collateralized by the customer accounts owned by our distribution partner, as well as all of the physical assets andaccounts receivable associated with those customer accounts. As of December 31, 2015 and 2014 , our distribution partner has borrowed $2.4 million and $ 2.0 million under this loanagreement, respectively, and this note receivable is included in other assets on our consolidated balance sheets.Deferred Offering CostsDeferred offering costs of $0 and $2.8 million , consisting primarily of legal and accounting fees, were included in other assets on the consolidated balance sheets as ofDecember 31, 2015 and 2014 . Upon the consummation of the IPO on July 1, 2015, aggregate deferred offering costs of $5.0 million were offset against the proceeds of the offering.Marketable SecuritiesWe disposed of our marketable securities during the year ended December 31, 2014 and there were no marketable securities outstanding as of December 31, 2015 and 2014 .In 2014, we received repayment of the 2013 Note (see Note 8) and recorded a $62,000 realized gain in other (expense) / income, net. Consequently, the Automatic ConversionFeature (see Note 8) expired and we recorded a $125,000 impairment loss in other (expense) / income, net. There were no other-than-temporary impairments recognized inaccumulated other comprehensive income in 2015 , 2014 , and 2013 .88Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013Note 10. Fair Value MeasurementsThe following presents our assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and December 31, 2014 (in thousands): Fair Value Measurements on a Recurring Basis as of December 31, 2015 Level 1 Level 2 Level 3 TotalAssets: Money market account$122,818 $— $— $122,818Liabilities: Subsidiary unit awards— — (532) (532)Contingent consideration liability from acquisition— — (230) (230) $122,818 $— $(762) $122,056 Fair Value Measurements on a Recurring Basis as of December 31, 2014 Level 1 Level 2 Level 3 TotalAssets: Money market account$38,578 $— $— $38,578 $38,578 $— $— $38,578The following table summarizes the change in fair value of the Level 3 liabilities for subsidiary unit awards and the contingent consideration liability from acquisition for the yearended December 31, 2015 (in thousands): Fair ValueMeasurements usingsignificantunobservable inputs(Level 3)Beginning balance - December 31, 2014$—Obligations assumed700Transfers152Payments—Realized (gain) / loss—Unrealized (gain) / loss(90)Ending Balance - December 31, 2015$762The money market account is included in our cash and cash equivalents in our consolidated balance sheets.The liability for the subsidiary unit awards relates to agreements established with the presidents of two of our subsidiaries, who are also our employees, for cash awardscontingent upon the subsidiary companies meeting certain financial milestones. Before our IPO, we used the intrinsic method available to non-public companies under ASC 718,"Compensation - Stock Compensation" to account for our liability for our subsidiary units. After our IPO, we have accounted for these subsidiary awards using fair value. The effect ofthis change had an immaterial impact to our consolidated financial statements. We established liabilities for the future payment for the repurchase of subsidiary units under the termsof the agreements based on estimating revenue, working capital, EBITDA and EBITDA margin of the subsidiary units for the periods of the two awards. We estimated the fair value ofeach liability by using a Monte Carlo simulation model for determining each of the projected measures by using an expected distribution of potential outcomes. The fair value of eachliability is calculated with thousands of projected outcomes, the results of which are averaged and then discounted to estimate the present value. At each reporting date until therespective payment dates, we will remeasure these liabilities, using the same valuation approach based on the applicable subsidiary's revenue, and we will record any changes ingeneral and administrative expense. The liability balances are included in our other liabilities in our consolidated balance sheets (See Note 12).The amount of contingent consideration liability to be paid, up to a maximum of $ 2.0 million , from our acquisition of SecurityTrax in the first quarter of 2015, will be determinedbased on revenue and adjusted EBITDA for the year ended December 31, 2017. We estimated the fair value of the contingent consideration liability by using a Monte Carlo simulationmodel for determining projected revenue by using an expected distribution of potential outcomes. The fair value of contingent consideration liability is calculated with thousands ofprojected revenue outcomes, the results of which are averaged and then89Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013discounted to estimate the present value. At each reporting date until payment in first quarter of 2018, we will remeasure the contingent consideration liability, using the same valuationapproach based on our subsidiary’s revenue, an unobservable input, and we will record any changes in general and administrative expense. The contingent consideration liabilitybalance is included in our other liabilities in our consolidated balance sheets (See Note 6).We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economicconditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at thebeginning of the reporting period. There were no transfers between Levels 1, 2 or 3 during the years ended December 31, 2015 , 2014 and 2013 . We also monitor the value of theinvestments for other-than-temporary impairment on a quarterly basis. No other-than-temporary impairments occurred during the years ended December 31, 2015 , 2014 and 2013 .For the year ended December 31, 2013 , we recorded a goodwill impairment charge of $4.8 million and other long-lived assets impairment charge of $6.5 million . Theremeasurement of the goodwill and other long-lived assets is classified as a Level 3 fair value assessment due to the significance of unobservable inputs developed in thedetermination of fair value.Note 11. LiabilitiesThe components of accounts payable, accrued expenses and other current liabilities are as follows (in thousands): December 31, 2015 2014Accounts payable$12,813 $11,179Accrued expenses4,244 1,911Other current liabilities2,219 2,143Accounts payable, accrued expenses and other current liabilities$19,276 $15,233The components of other liabilities (in thousands): December 31, 2015 2014Deferred rent$8,435 $1,013Other liabilities2,049 657Other liabilities$10,484 $1,670Note 12. Debt, Commitments and ContingenciesThe debt, commitments and contingencies described below are currently in effect and would require us, or our subsidiaries, to make payments to third parties under certaincircumstances.DebtPrior FacilityIn 2011, we entered into a Loan & Security Agreement with Silicon Valley Bank ("SVB"). We borrowed $10.0 million under a term loan (the "Prior Facility") to be repaid in sixtymonthly installments of principal and accrued interest. We had the option to prepay the Prior Facility without penalty provided that the Prior Facility had been outstanding for two ormore years. Absent a prepayment, the Prior Facility would have terminated on the date of the last required principal payment, which was December 1, 2016. This facility wasextinguished and repaid in May 2014.2014 FacilityOn May 8, 2014, we repaid all of the outstanding principal and interest under the Prior Facility, which was accounted for as an extinguishment of debt, and replaced it with a $ 50.0million revolving credit facility (the “2014 Facility”) with SVB, as administrative agent, and a syndicate of lenders. We utilized $ 6.7 million under the 2014 Facility to repay in full ourindebtedness under the Prior Facility. The 2014 Facility includes an option to increase the borrowing capacity available under the 2014 Facility to $ 75.0 million with the consent of thelenders. The 2014 Facility is available to us to finance working capital and certain permitted acquisitions and investments, and is secured by substantially all of our assets, includingour intellectual property. The principal outstanding under the 2014 Facility is due upon maturity in May 2017.90Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013The outstanding principal balance on the 2014 Facility accrues interest at a rate equal to either (1) the Eurodollar Base Rate, or LIBOR, plus an applicable margin based on ourconsolidated leverage ratio, or (2) the higher of (a) the Wall Street Journal prime rate and (b) the Federal Funds rate plus 0.50% plus an applicable margin based on our consolidatedleverage ratio, or ABR, at our option. Borrowings under LIBOR rates accrue interest at LIBOR plus 2.25% , LIBOR plus 2.5% , and LIBOR plus 2.75% when our consolidated leverageratio is less than 1.00 :1.00, greater than or equal to 1.00 :1.00 but less than 2.00 :1.00, and greater than or equal to 2.00 :1.00, respectively. Borrowings under ABR rates accrueinterest at ABR plus 1.25% , ABR plus 1.5% , and ABR plus 1.75% when our consolidated leverage ratio is less than 1.00 :1.00, greater than or equal to 1.00 :1.00 but less than 2.00:1.00, and greater than or equal to 2.00 :1.00, respectively. The 2014 Facility also carries an unused line commitment fee of 0.20% to 0.25% depending on our consolidated leverageratio. For the year ended December 31, 2015 , the effective interest rate on the 2014 Facility was 2.63% . The carrying value of 2014 Facility was $ 6.7 million as of December 31,2015 and 2014. The 2014 Facility includes a variable interest rate that approximates market and, as such, we determined that the carrying amount of the 2014 Facility approximates itsfair value.On December 7, 2015, we amended the 2014 Facility. The amendment reduces the rate at which borrowings under LIBOR rates accrue interest to LIBOR plus 2.00% , LIBORplus 2.25% , and LIBOR plus 2.50% when our consolidated leverage ratio is less than 1.00 :1.00, greater than or equal to 1.00 :1.00 but less than 2.00 :1.00, and greater than or equalto 2.00 :1.00, respectively. Borrowings under ABR rates accrue interest at ABR plus 1.00% , ABR plus 1.25% , and ABR plus 1.50% when our consolidated leverage ratio is less than1.00 :1.00, greater than or equal to 1.00 :1.00 but less than 2.00 :1.00, and greater than or equal to 2.00 :1.00, respectively. The 2014 Facility contains various financial and other covenants that require us to maintain a maximum consolidated leverage ratio not to exceed 2.50 :1.00 and a consolidatedfixed charge coverage ratio of at least 1.25 :1.00. During the year ended December 31, 2015 , we were in compliance with all financial and non-financial covenants and there were noevents of default.Commitments and ContingenciesRepurchase of Subsidiary UnitsIn 2012, we formed a subsidiary to develop and market home and commercial energy management devices and services. We granted an award of subsidiary stock to the founderand president. The terms of the award for the founder, who is also our employee, require a payment in cash on either the third or the fourth anniversary from the date the subsidiaryfirst makes its products and services commercially available, which was determined to be April 1, 2014. The vesting of the award is based on the subsidiary meeting certain minimumfinancial targets. We recorded a liability of $0.1 million and $0 million related to this commitment in other liabilities in our consolidated balance sheets as of December 31, 2015 and2014 .In 2011, we formed a subsidiary that offers to professional residential property management and vacation rental management companies technology solutions for remotemonitoring and control of properties, including access control and energy management. We granted an award of subsidiary stock to the founder and president. The terms of the awardfor the founder, who is our employee, require a payment in cash between the fourth and sixth anniversary of the date that the subsidiary’s products and services first becomecommercially available, which was determined to be June 1, 2013. The vesting of the award is based on the subsidiary meeting certain minimum financial targets. We have recorded aliability of $0.4 million and $ 0.2 million related to the commitment in other liabilities in our consolidated balance sheets as of December 31, 2015 and 2014 .At each reporting date until the respective payment dates, we will remeasure these liabilities, and we will record any changes in fair value in general and administrative expense.The liability balances are included in our other liabilities in our consolidated balance sheets.LeasesWe lease office space and office equipment under non-cancelable operating leases with various expiration dates through 2026. In August 2014, we signed a lease for new officespace to relocate our headquarters to Tysons, Virginia. The relocation occurred in February 2016. The lease term ends in 2026 and the lease includes one five -year renewal option,an $8.0 million tenant improvement allowance and scheduled rent increases. As of December 31, 2015 , we have utilized $5.6 million of the tenant improvement allowance. Rentexpense was $4.9 million , $2.8 million and $1.2 million for the years ended December 31, 2015, 2014 and 2013.The following table presents the future minimum lease payments under the non-cancelable operating leases at December 31, 2015 (in thousands):91Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013Year ending December 31 Minimum Lease Payments2016 $3,2212017 4,0512018 4,1452019 3,9082020 3,9812021 and thereafter 21,072 $40,378Indemnification AgreementsWe have various agreements that may obligate us to indemnify the other party to the agreement with respect to certain matters. Generally, these indemnification provisions areincluded in contracts arising in the normal course of business. Although we cannot predict the maximum potential amount of future payments that may become due under theseindemnification agreements, we do not believe any potential liability that might arise from such indemnity provisions is probable or material.Legal ProceedingsOn June 2, 2015, Vivint, Inc. filed a lawsuit against us in U.S. District Court, District of Utah, alleging that our technology directly and indirectly infringes six patents that Vivintpurchased. Vivint is seeking preliminary and permanent injunctions, enhanced damages and attorney’s fees. We answered the complaint on July 23, 2015. Among other things, weasserted defenses based on non-infringement and invalidity of the patents in question. Should Vivint prevail on its claims that one or more elements of our solution infringe one ormore of its patents, we could be required to pay damages of Vivint’s lost profits and/or a reasonable royalty for sales of our solution, enjoined from making, using and selling oursolution if a license or other right to continue selling such elements is not made available to us or we are unable to design around such patents, and required to pay ongoing royaltiesand comply with unfavorable terms if such a license is made available to us. The outcome of the legal claim and proceeding against us cannot be predicted with certainty. We believewe have valid defenses to Vivint’s claims. Based on currently available information, we determined a loss is not probable or reasonably estimable at this time.On February 9, 2016, we were sued along with one of our service providers in the Circuit Court for the City of Virginia Beach, Virginia by the estate of a deceased service providercustomer alleging wrongful death, among other claims. The suit seeks a total of $7 million in compensatory damages and $350,000 in punitive damages. We are currently reviewingthis matter and have made no determination yet regarding the merits of the case.From time to time, we may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predictedwith certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business.Other than the preceding matters, we are not a party to any lawsuit or proceeding that, in the opinion of management, is reasonably possible or probable of having a materialadverse effect on our financial position, results of operations or cash flows. We reserve for contingent liabilities based on ASC 450, “ Contingencies ,” when it is determined that aliability, inclusive of defense costs, is probable and reasonably estimable. Litigation is subject to many factors that are difficult to predict, so there can be no assurance that, in theevent of a material unfavorable result in one or more claims, we will not incur material costs.Note 13. Employee Benefit PlansEmployee Stock Purchase PlanWe adopted our 2015 ESPP in June 2015. Under the 2015 ESPP, 1,200,000 shares have been initially reserved for future grant with provisions established to increase thenumber of shares available on January 1 of each subsequent year for nine years. The annual automatic increase in the number of shares available for issuance under the 2015 ESPPis the lesser of 1% of each class of common stock outstanding as of December 31 of the preceding fiscal year, 1,500,000 shares of common stock or such lesser number asdetermined by the board of directors. The 2015 ESPP allows eligible employees to purchase shares of our common stock at 90% of the fair market value, rounded up to the nearestcent, based on the closing price of our common stock on the purchase date. The maximum number of shares of our common stock that a participant may purchase during anycalendar year shall not exceed such number of shares having a fair market value equal to the lesser of $15,000 or 10% of the participant's base compensation for that year.The 2015 ESPP is considered compensatory for purposes of share-based compensation expense due to the 10% discount on the fair market value of the common stock. In 2015 ,there were no purchases of shares as our first offering period under the92Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013plan ended on February 15, 2016. We recognized less than $0.1 million of compensation expense in 2015. Compensation expense is recognized for the amount of the discount, net offorfeitures, over the six-month purchase period, based on the monthly closing price of our common stock as an estimate of the final purchase price for the period. This estimate isadjusted monthly until the purchase is finalized. As of December 31, 2015 , 1,200,000 shares remain available for future issuance.401(k) Defined Contribution PlanWe adopted the Alarm.com Holdings 401(k) Plan ("the Plan") on April 30, 2009. All of our employees are eligible to participate in the Plan. Our discretionary match for 2015 and2014 was 100% of employee contributions up to 6% of salary and up to a $3,000 maximum match. Our discretionary match for 2013 was 50% of employee contributions up to 6% ofsalary and up to a $3,000 maximum match. We recognized costs of $1.0 million , $0.6 million and $0.3 million for the years ended December 31, 2015 , 2014 and 2013 related to ourmatching contributions.Note 14. Redeemable Convertible Preferred StockAs of December 31, 2014 , we had the following redeemable convertible preferred stock outstanding (amounts and shares in thousands except issuance price per share): Shares Authorized Shares Issued andOutstanding Carrying Amount AggregateLiquidationPreference Issuance Price PerShareSeries B Redeemable Convertible Preferred Stock1,810 1,810 $136,523 $191,132 $75.44Series B-1 Redeemable Convertible Preferred Stock1,670 83 6,265 8,759 $75.44Series A Redeemable Convertible Preferred Stock3,512 1,998 59,668 24,309 $10.00Total6,992 3,891 $202,456 $224,200 Upon completion of our IPO on July 1, 2015, all outstanding shares of redeemable convertible preferred stock converted into an aggregate of 35,017,884 shares of common stock.As of December 31, 2015 , we have no redeemable convertible preferred stock authorized or outstanding. Significant terms of Series B, B-1 and A redeemable convertiblepreferred stock prior to the completion of our IPO were as follows:Series B Redeemable Convertible Preferred StockDividend PreferencesIn the event we declare a dividend, the Series B Preferred stockholders are entitled to receive dividends for each outstanding share of Series B Preferred on a pari passu basiswith other stockholders, plus additional dividends equal to the declared dividend (the “Additional Dividends”). The Additional Dividends will be payable until such time as the Series BPreferred stockholders have been paid cumulative Additional Dividends in an aggregate amount equal to two fifths ( 0.40 ) times the original issue price of the Series B Preferredshares.Liquidation PreferencesIn the event of our liquidation or dissolution, the holders of Series B Preferred shares, along with holders of Series B-1 shares, will be paid out of the assets available beforedistribution or any payment is made to holders of Series A or Common. The liquidation preference is the greater of (1) a per share amount equal to one and two fifths ( 1.4 ) times theoriginal issue price per share, plus any declared but unpaid dividends, less any Series B Preferred Additional Dividends previously paid, or (2) the amount that would have been paidhad all the preferred stockholders been converted into common.Voting RightsSeries B Preferred stockholders are entitled to cast the number of votes equal to the number of whole shares of common into which the Series B Preferred shares are convertibleas of the record date of the vote. Certain actions of us, including mergers and acquisitions, dissolution, issuance of stock, declaration of dividends, the origination of debt, oramendments to our governing documents, requires the consent of a majority of the Series A stockholders, and Series B Preferred stockholders, voting as separate classes.Conversion93Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013Shares of Series B Preferred are convertible at the option of the holder into shares of common at any time and without the payment of additional consideration. All outstandingshares of Series B Preferred shall be converted automatically into common immediately upon the closing of an initial public offering of stock in which aggregate gross proceeds fromthe offering exceed $75.0 million . Each share of Series B Preferred will convert into the number of shares of common determined by dividing the original issuance price by theconversion price (“Series B Preferred Conversion Price”). In the event Series B Preferred is converted to common in connection with an initial public offering of our stock, the numberof common shares to be issued depends in part on the initial public offering price of our common stock (the “IPO Price”). If our IPO Price is less than the Series B Preferred per shareliquidation preference, or $11.74 , then the number of common shares issued upon conversion will be determined using a conversion price equal to the Series B Preferred ConversionPrice multiplied by a fraction equal to the IPO Price divided by the Series B Preferred liquidation preference per share (the “IPO Conversion Price”). The initial Series B PreferredConversion Price was $75.44 per share. On June 14, 2013, in conjunction with a nine-for-one forward split of our common shares, we amended our Certificate of Incorporation andadjusted the Series B Preferred Conversion Price to $8.38222222 per share. The Series B Preferred Conversion Price will be further adjusted if we issue additional shares of ourcapital stock and the consideration per share is less than the Series B Preferred Conversion Price in effect immediately prior to the issuance of the additional shares.RedemptionIn the event of certain capital transactions deemed to be liquidation events, the Series B Preferred stockholders may require the redemption of all outstanding Series B Preferredshares. In the event that the available proceeds from a liquidation event, or other available funds, are not sufficient to redeem all outstanding shares of Series B Preferred, we shallredeem a pro rata portion of each stockholder’s Series B Preferred shares along with a pro rata portion of each stockholder’s Series B-1 shares, on a pari passu basis, and we shallredeem the remaining shares as soon as adequate funds are available.Series B-1 Redeemable Convertible Preferred StockDividend PreferencesIn the event we declare a dividend, the Series B-1 stockholders are entitled to receive dividends for each outstanding share of Series B-1 on a pari passu basis with otherstockholders, plus Additional Dividends equal to the declared dividend. The Additional Dividends will be payable until such time the Series B-1 stockholders have been paid cumulativeAdditional Dividends in an aggregate amount equal to two fifths ( 0.40 ) times the original issue price of the Series B-1 shares.Liquidation PreferencesIn the event of our liquidation or dissolution, the holders of Series B-1 shares, along with holders of Series B Preferred shares, will be paid out of the assets available beforedistribution or any payment is made to holders of Series A or common. The liquidation preference is the greater of (1) a per share amount equal to one and two fifths ( 1.4 ) times theoriginal issue price per share, plus any declared but unpaid dividends, less any Series B-1 Additional Dividends previously paid, or (2) the amount that would have been paid had allthe preferred stockholders been converted into common.ConversionShares of Series B-1 are convertible at the option of the holder into shares of common at any time and without the payment of additional consideration. All outstanding shares ofSeries B-1 shall be converted automatically into common immediately upon the closing of an initial public offering of stock in which aggregate gross proceeds from the offering exceed$75.0 million . Each share of Series B-1 will convert into the number of shares of common determined by dividing the original issuance price by the conversion price (“Series B-1Conversion Price”). In the event Series B-1 is converted to common in connection with an initial public offering of our stock, the number of common shares to be issued depends inpart on the initial public offering price of our common stock (the “IPO Price”). If our IPO Price is less than the Series B-1 per share liquidation preference, or $11.74 , then the numberof common shares issued upon conversion will be determined using a conversion price equal to the Series B-1 Conversion Price multiplied by a fraction equal to the IPO Price dividedby the Series B-1 liquidation preference per share (the “IPO Conversion Price”). The initial Series B-1 Conversion Price was $75.44 per share. On June 14, 2013, in conjunction with anine-for-one forward split of our common shares, we amended our Certificate of Incorporation and adjusted the Series B-1 Conversion Price to $8.38222222 per share. The Series B-1Conversion Price will be further adjusted if we issue additional shares of our capital stock and the consideration per share is less than the Series B-1 Conversion Price in effectimmediately prior to the issuance of the additional shares.RedemptionIn the event of certain capital transactions deemed to be liquidation events, the Series B-1 stockholders may require the redemption of all outstanding Series B-1 shares. In theevent that the available proceeds from a liquidation event, or other94Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013available funds, are not sufficient to redeem all outstanding shares of Series B-1 stock, we shall redeem a pro rata portion of each shareholder’s Series B-1 shares along with a prorata portion of each stockholder’s Series B Preferred shares, on a pari passu basis, and we shall redeem the remaining shares as soon as adequate funds are available.Series A Redeemable Convertible Preferred StockLiquidation PreferencesIn the event of our liquidation or dissolution, the holders of Series A shares will be paid out of the assets available before distribution or any payment is made to holders ofcommon, but after satisfaction of the liquidation preferences of the Series B Preferred and Series B-1 stockholders. The liquidation preference is the greater of (1) the original issueprice of the preferred stock plus a Series A additional preference equal to 8.0% per annum on the original issue price accruing on a daily basis from the original issuance date and untilthe date such Series A shares are liquidated, plus accrued and unpaid dividends, or (2) the amount that would have been paid had all the preferred stock holders been converted intoCommon.Voting RightsSeries A stockholders are entitled to cast the number of votes equal to the number of whole shares of common into which the Series A shares are convertible as of the record dateof the vote. Certain of our actions, including mergers and acquisitions, dissolution, issuance of stock, declaration of dividends, the origination of debt, or amendments to our governingdocuments, requires the consent of a majority of the Series A stockholders, and Series B Preferred stockholders, voting as separate classes.ConversionShares of Series A are convertible at the option of the holder into shares of common at any time and without the payment of additional consideration. All outstanding shares ofSeries A will automatically convert into shares of common immediately upon the closing of an initial public offering of stock in which aggregate gross proceeds from the offering exceed$75.0 million . Each share of Series A will convert into the number of shares of common determined by dividing the original issuance price by the conversion price (“Series AConversion Price”). The initial Series A Conversion Price was $10.00 per share. On June 14, 2013, in conjunction with a nine-for-one forward split of our common shares, we amendedour Certificate of Incorporation and adjusted the Series A Conversion Price to $1.11111111 per share. The Series A Conversion Price will be further adjusted if we issue additionalshares of our capital stock and the consideration per share is less than the Series A Conversion Price in effect immediately prior to the issuance of the additional shares.RedemptionIn the event of certain capital transactions deemed to be liquidation events, the Series A stockholders may require the redemption of all outstanding Series A shares, subject toand following payment in full of the amounts payable to Series B Preferred and Series B-1 stockholders. In the event that the available proceeds from a liquidation event, or otheravailable funds, are not sufficient to redeem all outstanding shares of Series A, we shall redeem a pro rata portion of each stockholder’s Series A and we shall redeem the remainingshares as soon as adequate funds are available.DividendOn June 12, 2015, our board of directors declared a cash dividend on our common and preferred stock in the amount of (1) $0.36368 per share of common stock (see Note 15)and Series A preferred stock and (2) $0.72736 per share of Series B preferred stock and Series B-1 preferred stock or $20.0 million in the aggregate, which we refer to as the 2015Dividends. The 2015 Dividends were paid to our stockholders of record as of June 12, 2015 and were paid in June 2015.Note 15. Stockholders’ equity / (deficit)We are authorized to issue two classes of stock, common stock and preferred stock. On June 9, 2015, the board of directors amended and restated our Amended and RestatedCertificate of Incorporation, effective upon the closing of our IPO, and authorized us to issue up to 300,000,000 shares of common stock and 10,000,000 shares of undesignatedpreferred stock. As of December 31, 2015 and December 31, 2014 , there were 45.6 million and 2.8 million shares of common stock issued, and 45.5 million and 2.6 million shares ofcommon stock outstanding, respectively. As of December 31, 2015 , there were no preferred shares issued and outstanding.Upon completion of our IPO on July 1, 2015, all outstanding shares of redeemable convertible preferred stock (see Note 14) converted into an aggregate of 35,017,884 shares ofcommon stock. Additionally, we issued 7,525,000 shares of common stock in our IPO.Each outstanding share of common stock is entitled to one vote per share.95Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013Note 16. Stock-Based CompensationStock OptionsIn June 2015, our board of directors adopted, our stockholders approved, and we registered the shares for our 2015 Equity Incentive Plan (the "2015 Plan"), pursuant to which wereserved and registered 4,700,000 shares of common stock for issuance to our employees, directors and non-employee directors and consultants. The registration included 141,222shares of our common stock previously reserved for issuance under our Amended and Restated 2009 Stock Incentive Plan (the "2009 Plan") that were added to the shares reservedunder the 2015 Plan upon its effectiveness. The 2015 Plan provides for the grant of incentive stock options to employees and for the grant of nonqualified stock options, stockappreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, and other forms of equity compensations to employees, directors and non-employee directors and consultants. The number of shares of common stock reserved for issuance under the 2015 Plan will automatically increase on January 1 each year, for aperiod of not more than ten years, commencing on January 1, 2016 through January 1, 2024, by 5% of the total number of shares of common stock outstanding on December 31st ofthe preceding calendar year, or a lesser number of shares as may be determined by the board of directors. As a result of the adoption of the 2015 Plan, no further grants may be madeunder the 2009 Plan described below. As of December 31, 2015 , 4,663,399 shares remained available for future grant under the 2015 Plan.The 2015 Plan (and the previous 2009 Plan) allow for the granting of incentive stock options to employees and for the granting of nonqualified stock options and restricted stock toour employees, directors and non-employee directors and consultants. Stock options under the 2015 Plan have been granted at exercise prices based on the closing price of ourcommon stock on the date of grant. Stock options under the previous 2009 Plan have been granted at exercise prices as determined by the board of directors to our officers andemployees. These stock options generally vest over a five -year period and each option, if not exercised or terminated, expires on the ten th anniversary of the grant date.The 2015 Plan (and the previous 2009 Plan) allow for the granting of options that may be exercised before the options have vested. Unvested shares issued as a result of earlyexercise are subject to repurchase by us upon termination of employment or services at the original exercise price. The proceeds from the early exercise of stock options are initiallyrecorded as a current liability and are reclassified to common stock and additional paid-in capital as the awards vest and our repurchase right lapses. As of December 31, 2015 and2014, there were 96,368 and 209,372 unvested shares of common stock outstanding subject to our right of repurchase. During the year ended December 31, 2015 , we repurchased287 unvested shares of common stock related to early exercised stock options in connection with employee terminations. As of December 31, 2015 and December 31, 2014 , werecorded $ 0.4 million and $ 0.7 million in accounts payable, accrued expenses and other current liabilities on the consolidated balance sheets for the proceeds from the early exerciseof the unvested stock options.Included in the stock-based compensation expense for the year ended December 31, 2015 was $0.8 million related to the cash settlement of recently exercised stock options of aterminated employee, at the company's election. We accounted for this cash settlement as a liability modification of the stock option awards.We account for stock-based compensation awards based on the fair value of the award as of the grant date. We recognize stock-based compensation expense using theaccelerated attribution method, net of estimated forfeitures, in which compensation cost for each vesting tranche in an award is recognized ratably from the service inception date tothe vesting date for that tranche.The following table summarizes the components of non-cash stock-based compensation expense (in thousands): Year Ended December 31, 2015 2014 2013Stock options$3,154 $3,181 $787Compensation related to the sale of common stock193 86 54Compensation related to the cash settlement of stock options777 — —Total stock-based compensation expense$4,124 $3,267 $841Tax benefit from stock-based awards$700 $782 $160Stock-based compensation expense is included in the following line items in the accompanying consolidated statements of operations (in thousands):96Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013Stock-based compensation expense data:Year Ended December 31, 2015 2014 2013Sales and marketing$372 $338 $102General and administrative2,486 1,862 495Research and development1,266 1,067 244Total stock-based compensation expense$4,124 $3,267 $841We value our stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the risk-free interest rate, expected term,expected stock price volatility and dividend yield. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistentwith the expected term of our stock options. The expected term represents the period of time the stock options are expected to be outstanding and is based on the “simplified method.”Under the “simplified method,” the expected term of an option is presumed to be the mid-point between the vesting date and the end of the contractual term. We use the “simplifiedmethod” due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected term of the stock options. Expected volatilityis based on historical volatilities for publicly traded stock of comparable companies over the estimated expected term of the stock options.The following table summarizes the assumptions used for estimating the fair value of stock options granted for the years ended December 31: Year Ended December 31, 2015 2014 2013Volatility48.5 - 51.8% 47.2 - 49.6% 44.1 - 47.6%Expected term4.5 - 6.3 years 4.0 - 5.7 years 3.3 - 6.3 yearsRisk-free interest rate1.3 - 1.9% 1.4 - 1.9% 0.9 - 1.9%Dividend rate—% —% —%The dividends declared and paid in June 2015 were in anticipation of our IPO, which we closed on July 1, 2015. Subsequent to the IPO, we do not expect to declare or paydividends on a recurring basis. As such, we assume that the dividend rate is zero.The following table summarizes the stock option activity for the year ended December 31, 2015 : Number ofOptions WeightedAverage ExercisePrice Per Share Weighted AverageRemainingContractual Life(in years) AggregateIntrinsic Value(in thousands)Outstanding at December 31, 20143,345,993 $2.68 7.0 $27,725Granted540,548 12.10 Exercised(290,249) 1.63 3,272Forfeited(42,936) 5.97 Cancelled(5,443) 2.23 Outstanding at December 31, 20153,547,913 $4.17 6.6 $44,411Vested and expected to vest at December 31, 20153,514,311 $4.12 6.5 $44,124Exercisable at December 31, 20152,178,312 $2.13 5.5 $31,690The weighted average grant date fair value for our stock options granted during the years ended December 31, 2015 , 2014 and 2013 was $ 5.90 , $4.20 and $4.02 . The total fairvalue of stock options vested during the years ended December 31, 2015 , 2014 and 2013 was $ 2.7 million , $ 1.5 million and $0.5 million . The aggregate intrinsic value of stockoptions exercised during the year ended December 31, 2015 and 2014 was $ 3.3 million , $ 7.3 million and $0.7 million . As of December 31, 2015 , the total compensation cost relatedto nonvested awards not yet recognized was $ 3.1 million , which will be recognized over a weighted average period of 2.2 years.Warrants97Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013In 2010, we issued performance-based warrants to two of our executive officers that gives these individuals the right to purchase up to 841,896 shares of our common stock in theaggregate if certain performance targets and market conditions are achieved. In 2012, we issued an additional performance-based warrant to an executive officer that gives thatexecutive officer the right to purchase up to 27,000 shares of our common stock if certain performance targets and market conditions are achieved. On March 30, 2015, we issuedperformance-based warrants to two employees. These warrants give these individuals the right to purchase up to 54,694 shares of our common stock in the aggregate if certainperformance targets are achieved.The first performance-based warrant for 750,015 shares of our common stock has an initial exercise price of $0.001 per share and two separate tranches of shares becomeexercisable upon the occurrence of a triggering event, which is defined as: (1) a change in control event that results in any person or entity (other than our stockholders immediatelyprior to the transaction) owning more than 50% of the combined voting power of all classes of our capital stock, (2) a sale of substantially all of our assets, (3) an initial public offering,or (4) a liquidation or other dissolution of the Company. Upon the occurrence of a triggering event, the number of shares that become exercisable under the warrant is determined bythe amount of cash consideration received by ABS Capital Partners, one of our stockholders, as a result of such triggering event. On July 11, 2012, we modified the terms of theperformance-based warrant to provide for a $3.1 million cash payment in the event that a triggering event has not occurred on or before January 3, 2013. We considered this to be anequity to cash settled liability modification and recorded $3.1 million in compensation expense, included within general and administrative expense, on the modification date. Theaward was settled for $3.1 million on January 3, 2013.The second performance-based warrant for 91,881 shares of our common stock has an exercise price of $ 0.41 per share and becomes exercisable if we have a change in controlor if we complete an initial public offering. This warrant for 91,881 shares of our common stock expired in May 2015 upon the cessation of the holder of the warrant's employment withus.The third performance-based warrant for 27,000 shares of our common stock has an exercise price of $ 3.89 per share and becomes exercisable if we have a change in control orif we complete an initial public offering. This warrant expired in July 2015 because the minimum annual revenue and EBITDA targets of the subsidiary unit required under the warrantwere not met during the exercise period. The exercise period began upon the occurrence of a triggering event, which was upon the effectiveness of the registration statement for ourIPO, and closed 30 days after the effectiveness of our registration statement.The fourth and fifth performance-based warrants, each for 27,347 shares of our common stock, have an exercise price of $ 10.97 per share and we may elect to terminate thewarrants in exchange for a one-time cash settlement in the event of a change in control. If the warrants become exercisable, the number of shares that become exercisable whichcannot exceed 27,347 shares for each warrant, is based upon the achievement of certain minimum annual revenue targets. These warrants will expire upon the earlier of March 2025and the date upon which the holder of the warrant is no longer our employee or an employee of an affiliate of ours. We believe that the achievement of the minimum annual revenuetargets is probable, and we began recognizing expense related to these performance-based warrants on April 1, 2015.As of December 31, 2015 , 2014 and 2013, none of the warrants that remained outstanding were exercisable because the performance requirements had not been met. Werecorded less than $0.1 million expense associated with the performance-based warrants during the year ended December 31, 2015 and we did not record expense associated withthe performance-based warrants during the years ended December 31, 2014 and 2013.Sale of Common Stock SubscriptionsOn May 22, 2013, we sold 238,500 shares of our common stock to one of our executive officers for $0.7 million , or $2.95 per share, an amount below fair value. Under the termsof the sale, we had the right to repurchase the shares for $2.95 per share subject to certain triggering events prior to April 2, 2017. Our repurchase right expired on July 1, 2015, thedate of the closing of our IPO. The excess of the fair value over the sale price was being recorded to stock-based compensation expense, on a straight-line basis, over the four-yearterm of the repurchase agreement. In 2015, we recognized the remaining unamortized expense upon the expiration of our repurchase right. For the years ended December 31, 2015,2014 and 2013, we recognized $0.2 million , less than $0.1 million and less than $0.1 million in general and administrative expense in our consolidated statement of operations.Note 17. Earnings Per ShareBasic and Diluted Earnings Per ShareThe components of basic and diluted EPS are as follows (in thousands, except share and per share amounts):98Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013 Year Ended December 31, 2015 2014 2013Net income$11,768 $13,502 $4,524Less: dividends paid to participating securities(18,987) — —Less: income allocated to participating securities— (12,939) (4,402)Net income available for common stockholders (A)$(7,219) $563 $122Weighted average common shares outstanding — basic (B)24,108,362 2,276,694 1,443,469Dilutive effect of stock options— 1,613,427 1,351,876Weighted average common shares outstanding — diluted (C)24,108,362 3,890,121 2,795,345Earnings per share: Basic (A/B)$(0.30) $0.25 $0.08Diluted (A/C)$(0.30) $0.14 $0.04Diluted net loss per common share is the same as basic net loss per common share for the year ended December 31, 2015 because the effects of potentially dilutive items wereanti-dilutive due to our net loss attributable to common stockholders. The following securities have been excluded from the calculation of diluted weighted average common sharesoutstanding because the effect is anti-dilutive: Year Ended December 31, 2015 2014 2013Redeemable convertible preferred stock: Series A— 1,998,257 1,998,257Series B— 1,809,685 1,809,685Series B-1— 82,934 82,934Stock options522,997 219,400 1,908,630Common stock subject to repurchase96,368 209,372 —Note 18. Significant Service ProvidersDuring the year s ended December 31, 2015 , 2014 and 2013 our 10 largest revenue service providers accounted for 63% , 65% and 66% of our revenue. One of our serviceproviders individually represented greater than 15% but not more than 20% of our revenue for the year ended December 31, 2015 , 2014 and 2013 . Two of our service providersindividually represented greater than 10% but not more than 15% of our revenue for the year ended December 31, 2014 . One of our service providers individually represented greaterthan 10% but not more than 15% of our revenue for the year ended December 31, 2013 .Trade accounts receivable from two service providers totaled $3.1 million and $2.7 million as of December 31, 2015 . No other individual service provider represented more than10% of accounts receivable as of December 31, 2015 . Trade accounts receivable from three service providers totaled $ 3.1 million , $ 2.7 million and $ 1.1 million , as ofDecember 31, 2014 . No other individual service provider represented more than 10% of accounts receivable as of December 31, 2014 .Note 19. Income TaxesThe components of our income tax expense for the years ended December 31, 2015 , 2014 and 2013 are as follows (in thousands):99Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013 Year Ended December 31, 2015 2014 2013Current Federal7,730 7,266 3,965State1,519 1,286 878 9,249 8,552 4,843Deferred Federal(3,372) (1,702) (1,919)State(180) (33) (236) (3,552) (1,735) (2,155) 5,697 6,817 2,688The difference between the income tax expense at the Federal statutory rate and income tax expense in the accompanying consolidated statements of operations is as follows: Year Ended December 31 2015 2014 2013Federal statutory rate35.0 % 35.0 % 35.0 %State income tax expense, net of Federal benefit4.5 4.0 4.7Nondeductible transaction costs— — 0.4Goodwill and intangible impairment— — 23.3Release of acquisition related contingent liability— — (28.2)Nondeductible meals and entertainment1.2 0.9 2.2Research and development tax credits(8.9) (6.2) —Other0.8 (0.2) (0.1) 32.6 % 33.5 % 37.3 %The components of our net deferred tax assets (liabilities) are as follows (in thousands): December 31 2015 2014Deferred tax assets, non- current Provision for doubtful accounts$1,345 $1,266 Accrued expenses2,936 964 Deferred revenue3,416 3,098 Deferred rent3,331 490 Stock-based compensation2,233 1,334 Acquisition costs126 117 Subsidiary unit compensation425 88 Equity investments180 29 Inventory reserve123 — Net operating losses3,183 3,824 Capital losses— 11 17,298 11,221 Deferred tax liabilities, non-current Intangible assets and prepaid patent licenses(2,098) (1,799) Depreciation(3,105) (1,059) Contingent consideration(180) —Total deferred tax liabilities$(5,383) $(2,858)Net deferred tax assets$11,915 $8,363100Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013A reconciliation of the beginning and ending amounts of unrecognized tax benefits (without related interest expense) is as follows (in thousands): Year Ended December 31 2015 2014 2013Beginning balance$208 $— $—Additions based on tax positions related to the current year152 69 —Additions for tax positions of prior year146 139 —Ending balance$506 $208 $—Our effective income tax rates were 32.6% , 33.5% and 37.3% for the years ended December 31, 2015 , 2014 and 2013. For the year s ended December 31, 2015 and 2014, oureffective tax rates were below the statutory rate primarily due to the research and development tax credits claimed, partially offset by the impact of state taxes and non-deductible mealand entertainment expenses. For the year ended December 31, 2013 our effective tax rate was above the statutory rate primarily due to the impact of state taxes and non-deductiblemeal and entertainment expenses, partially offset by the net adjustment to the contingent liability and goodwill carrying values.We recognize a valuation allowance if, based on the weight of available evidence, both positive and negative, it is more likely than not that some portion, or all, of net deferred taxassets will not be realized. Based on our historical and expected future taxable earnings, we believe it is more likely than not that we will realize all of the benefit of the existingdeferred tax assets at December 31, 2015 and December 31, 2014 . Accordingly, we have not recorded a valuation allowance as of December 31, 2015 and 2014.We apply guidance for uncertainty in income taxes that requires the application of a more likely than not threshold to the recognition and de-recognition of uncertain tax positions.If the recognition threshold is met, this guidance permits us to recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is more likely than not tobe realized upon settlement. We recorded an unrecognized tax benefit of $0.3 million for research and development tax credits claimed during the year ended December 31, 2015 and$ 0.2 million for research and development tax credits claimed during the year ended December 31, 2014 . We did not record any unrecognized tax benefits during 2013. As ofDecember 31, 2015 , we had accrued approximately $4,000 of total interest related to unrecognized tax benefits. We recognize interest and penalties related to unrecognized taxbenefits as a component of income tax expense.We are not aware of any events that make it reasonably possible that there would be a significant change in our unrecognized tax benefits over the next 12 months. As ofDecember 31, 2015 , all of the $0.5 million of unrecognized tax benefits, if recognized, would reduce our income tax expense and the effective tax rate.We file income tax returns in the United States. We are no longer subject to U.S. income tax examinations for years prior to 2011, with the exception that operating losscarryforwards generated prior to 2011 may be subject to tax audit adjustment. We are generally no longer subject to state and local income tax examinations by tax authorities foryears prior to 2011.As of December 31, 2015 , we had U.S. net operating loss carryforwards of approximately $8.7 million , which are scheduled to begin to expire in 2030. The net operating losscarryforward arose in connection with the EnergyHub acquisition. Utilization of net operating loss carryforwards may be subject to annual limitations due to ownership changelimitations as provided by the Internal Revenue Code of 1986, as amended.Note 20. Segment InformationWe have two reportable segments:• Alarm.com segment• Other segmentOur chief operating decision maker is the chief executive officer. Management determined that the operational data used by the chief operating decision maker is that of the tworeportable segments. Management bases strategic goals and decisions on these segments and the data presented below is used to measure financial results. Our Alarm.comsegment represents our cloud-based platform for the connected home and related solutions. Our Alarm.com segment also includes the results of Horizon Analog, a research companythat focuses on cost-effective collection and analysis of data relating energy usage and consumer behavior and energy disaggregation, Secure-i, a commercial video as a serviceprovider, and SecurityTrax, a provider of SaaS-based, customer relationship management software tailored for security system dealers. This segment contributed over 96% of ourrevenue for the year ended December 31, 2015 , 2014 and 2013 . Our Other segment is focused on researching and developing home and commercial automation, and energymanagement products and services in adjacent markets.101Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013Management evaluates the performance of its segments and allocates resources to them based on operating income. The reportable segment operational data is presented in thetable below as of December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015 , 2014 and 2013 (in thousands):Segment Information:Year Ended December 31, 2015 Alarm.com Other IntersegmentAlarm.com IntersegmentOther TotalRevenue$202,752 $9,052 $(952) (1,964) $208,888Operating income / (loss)38,437 (20,151) (279) (16) 17,991Assets215,315 10,780 226,095 Year Ended December 31, 2014 Alarm.com Other IntersegmentAlarm.com IntersegmentOther TotalRevenue$165,603 $2,388 $(646) $(33) $167,312Operating income / (loss)34,271 (13,255) (154) 138 21,000Assets108,935 11,997 120,932 Year Ended December 31, 2013 Alarm.com Other IntersegmentAlarm.com IntersegmentOther TotalRevenue$129,222 $1,207 $(207) $— $130,222Operating income / (loss)19,733 (12,297) (48) 36 7,424We derived substantially all revenue from North America for the years ended December 31, 2015 , 2014 and 2013 . Substantially all our long lived assets were in North Americaas of December 31, 2015 and December 31, 2014 .Note 21. Related Party TransactionsOur installation partner in which we have a 48.2% ownership interest performs installation services for security dealers and also provides installation services for us and certain ofour subsidiaries. On December 11, 2015, we purchased an additional 9,290 common units of the same company for $0.2 million , which did not change our proportional share ofownership interest. We account for this investment using the equity method (see Note 8). During the year s ended December 31, 2015 , 2014 and 2013, we recorded $0.8 million ,$0.3 million and $0 of cost of hardware and other revenue in connection with this installation partner. As of December 31, 2015 and December 31, 2014 , our accounts payablebalance to our installation partner was $0.5 million and $0.1 million . In September 2014, we loaned $315,000 to our installation partner under a secured promissory note that accruesinterest at 8.0% . Interest is payable monthly with the entire principal balance plus accrued but unpaid interest due at maturity in September 2016. For the year ended December 31,2015 and 2014, we recorded $26,000 and $7,000 of interest income related to this note receivable.In June 2015, two of our significant stockholders, entities affiliated with Technology Crossover Ventures ("TCV"), and entities affiliated with ABS Capital Partners ("ABS"), enteredinto a Securities Purchase Agreement (the "Secondary Sale Agreement"). Pursuant to the terms of the Secondary Sale Agreement, ABS agreed to sell to TCV, and TCV agreed to buyfrom ABS, 888,988 shares of our common stock at a purchase price of $13.02 per share.102Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013Note 22. Other Comprehensive IncomeThe table below presents the tax effects related to other comprehensive income (loss) and reclassifications made to the consolidated statements of operations (in thousands): Available-for-sale security Before tax Tax After TaxAs of January 1, 2013$— $— $—Other comprehensive income / (loss) before reclassification92 (36) 56Amounts reclassified from accumulated other comprehensive income— — —Net current period other comprehensive income$92 $(36) $56As of December 31, 2013$92 $(36) $56 As of January 1, 2014$92 $(36) $56Other comprehensive income / (loss) before reclassification(30) 11 (19)Amounts reclassified from accumulated other comprehensive income toother (expense) / income, net(62) 25 (37)Net current period other comprehensive income$(92) $36 $(56)As of December 31, 2014$— $— $—We disposed of our marketable securities during the year ended December 31, 2014 and there were no marketable securities outstanding as of December 31, 2015 and 2014 .There were no components of other comprehensive income in 2015 .103Table of ContentsALARM.COM HOLDINGS, INC.Notes to the Consolidated Financial Statements - (Continued)December 31, 2015, 2014 and 2013Note 23. Quarterly Financial Data (Unaudited)The following tables show selected unaudited quarterly consolidated statement of operations data for each of our eight most recently completed quarters. In the opinion ofmanagement, the information for each of these quarters has been prepared on the same basis as our audited financial statements and include all adjustments, consisting of normalrecurring adjustments and accruals, necessary for the fair statement of financial information in accordance with generally accepted accounting principles. Historical results are notnecessarily indicative of results that may be achieved in future periods, and operating results for quarterly periods are not necessarily indicative of operating results for a full year. Theselected consolidated statements of operation data in amounts are presented below (in thousands, except per share data): Three Months Ended Reported Revised 1 ReportedSelected Consolidated Statement ofOperations Data: March 31, 2014 June 30, 2014 September 30, 2014 December 31, 2014 March 31, 2015 June 30, 2015 September 30, 2015 December 31, 2015 (unaudited)Total revenue $36,851 $42,078 $42,832 $45,551 $46,011 $51,949 $54,007 $56,921 Net income $4,273 $2,076 $2,667 $4,486 $3,041 $2,509 $2,943 $3,275Dividends paid to participating securities — — — — — (18,987) — Income allocated to participatingsecurities (4,125) (1,988) (2,549) (4,284) (2,895) — (45) (8)Net income / (loss) attributable tocommon stockholders $148 $88 $118 $202 $146 $(16,478) $2,898 $3,267Per share information attributable tocommon stockholders: Net income / (loss) per share: Basic $0.08 $0.04 $0.05 $0.08 $0.06 $(6.09) $0.06 $0.07Diluted $0.04 $0.02 $0.03 $0.05 $0.04 $(6.09) $0.06 $0.071 In the fourth quarter of 2015, we identified an error related to the amount of stock-based compensation expense that we recorded in the third quarter of 2015. In the table above, we have revised our previously reportedfinancial results to correct the error. For the three months ended September 30, 2015, the correction increased general and administrative expense by $480,000 , reduced the provision for income taxes by $194,000 ,reduced net income by $286,000 and reduced basic and diluted net income per share attributable to common stockholders by $0.01 . We have concluded that the impact of the error is immaterial to the previouslyissued quarterly financial statements. The consolidated statements of operations for the three and nine months ended September 30, 2015 will be revised in our Form 10-Q for the quarterly period end September 30,2016. 104Table of ContentsSchedule II – Valuation and Qualifying Accounts and ReservesAlarm.com Holdings, Inc.Schedule IIValuation and Qualifying Accounts and Reserves(In thousands) Description Balance atBeginning ofYear AdditionsChargedAgainst(Credited to)Revenue AdditionsCharged toOtherAccounts Deductions Balance atEnd of YearYear ended December 31, 2015 Allowance for doubtful accounts $1,397 $276 $(358) $1,315Allowance for hardware returns 1,838 1,559 (1,281) 2,116Year ended December 31, 2014 Allowance for doubtful accounts 304 1,371 (278) 1,397Allowance for hardware returns 952 1,863 (977) 1,838Year ended December 31, 2013 Allowance for doubtful accounts 580 592 (868) 304Allowance for hardware returns 906 1,781 (1,735) 952105Table of ContentsITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresWe maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act,that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarizedand reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’smanagement, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes thatany controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies itsjudgment in evaluating the cost-benefit relationship of possible controls and procedures.Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as ofDecember 31, 2015. Based on the evaluation of our disclosure controls and procedures as of December 31, 2015, our Chief Executive Officer and Chief Financial Officer concludedthat, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.Management’s Report on Internal Control over Financial Reporting and Attestation Report of the Registered Public Accounting FirmThis Annual Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our registered publicaccounting firm due to a transition period established by rules of the SEC for newly public companies.Changes in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting during the fourth quarter of 2015 that have materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.Inherent Limitations on Effectiveness of ControlsOur management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financialreporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expectthat our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that thereare resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision makingcan be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion oftwo or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of futureevents, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequatebecause of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected.ITEM 9B. OTHER INFORMATIONNone.PART III.We will file a definitive Proxy Statement for our Annual Meeting, or our 2016 Proxy Statement, with the SEC, pursuant to Regulation 14A, not later than 120 days after the end ofour fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10 K. Only those sections of the 2016 Proxy Statementthat specifically address the items set forth herein are incorporated by reference.106Table of ContentsItem 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by Item 10 is hereby incorporated by reference to the sections of our 2016 Proxy Statement under the captions “Information Regarding Committees ofthe Board Of Directors,” “Election of Directors,” “Management” and “Section 16(a) Beneficial Ownership Reporting.”We have adopted a written Code of Business Conduct and Ethics, or the Code of Conduct, applicable to all of our employees, executive officers and directors, including ourprincipal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A current copy of the Code of Conduct isavailable on the Investors section of our website, www.alarm.com, under “Corporate Governance.” We intend to disclose on our website any amendments to, or waivers from, ourCode of Conduct that are required to be disclosed pursuant to SEC rules.Item 11. EXECUTIVE COMPENSATIONThe information required by Item 11 is hereby incorporated by reference to the sections of our 2016 Proxy Statement under the captions “Executive Compensation” and “DirectorCompensation.”Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by Item 12 is hereby incorporated by reference to the sections of our 2016 Proxy Statement under the captions “Security Ownership of Certain BeneficialOwners and Management” and “Securities Authorized for Issuance under Equity Compensation Plans.”Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCEThe information required by Item 13 is hereby incorporated by reference to the sections of our 2016 Proxy Statement under the captions “Transactions with Related Persons” and“Director Independence.”Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by Item 14 is hereby incorporated by reference to the section of our 2016 Proxy Statement under the caption “Principal Accountant Fees and Services.”Part IV.ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES(a) The following documents are filed as part of this Annual Report:(1) Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm(2) Consolidated Financial Statement Schedule(3) Exhibits are incorporated herein by reference or are filed with this Annual Report as indicated below(numbered in accordance with Item 601 of Regulation S-K).(b) Exhibits107Table of Contents Incorporated by ReferenceExhibitDescriptionSchedule / FormFile NumberExhibitFile Date2.1Agreement and Plan of Merger by and among the Registrant, Energyhub Holdings, Inc.EnergyHub, Inc. and Shareholder Representative Services LLC, as stockholder representative,dated May 3, 2013S-1333-2044282.1May 22, 20153.1Amended and Restated Certificate of Incorporation of the Registrant8-K001-374613.1July 2, 20153.2Amended and Restated Bylaws of the Registrant8-K001-374613.2July 2, 20154.1Form of common stock certificate of the RegistrantS-1333-2044284.1May 22, 20154.2Amended and Restated Registration Rights Agreement by and among the Registrant and certain ofits stockholders, dated July 11, 2012S-1333-2044284.2May 22, 201510.1Deed of Lease between Registrant and 8150 Leesburg Pike, L.L.C., dated April 21, 2009, asamended July 21, 2010, April 28, 2011, January 10, 2012, June 5, 2012, December 7, 2012, March12, 2013 and May 29, 2013S-1333-20442810.1May 22, 201510.2Deed of Office Lease Agreement between Registrant and Marshall Property LLC, dated August 8,2014S-1333-20442810.2May 22, 201510.3†Amended and Restated 2009 Stock Incentive Plan, Form of Non-Qualified Stock OptionAgreement and Form of Early Exercise Notice and Restricted Stock Purchase AgreementthereunderS-1333-20442810.3May 22, 201510.4†2015 Equity Incentive Plan10-Q001-3746110.1August 14, 201510.5†#Form of Option Grant Package under 2015 Equity Incentive Plan 10.6†Form of RSU Notice and Agreement under 2015 Equity Incentive PlanS-1/A333-20442810.6June 10, 201510.7#Form of Early Exercise Restricted Stock Purchase Agreement 10.8†2015 Employee Stock Purchase Plan10-Q001-3746110.2August 14, 201510.9†Non-Employee Director Compensation PolicyS-1/A333-20442810.8June 10, 201510.10†Form of Indemnity Agreement by and between Registrant and each of its directors and executiveofficersS-1/A333-20442810.9June 10, 201510.11Senior Secured Credit Facilities Credit Agreement by and among the Registrant, Alarm.comIncorporated, Silicon Valley Bank, Bank of America, N.A. and the several lenders from time to timeparties thereto, dated May 8, 2014S-1333-20442810.10May 22, 201510.12#Second Amendment to Credit Agreement by and among the Registrant, Alarm.com Incorporated,Silicon Valley Bank, Bank of America, N.A. and the several lenders from time to time partiesthereto, dated December 7, 2015 10.13*Alarm.com Dealer Program Agreement by and between the Registrant and Monitronics FundingLP, dated October 22, 2007, as amended by Amendment No. 1 dated January 15, 2008 and theSecond Amendment dated February 23, 2013S-1/A333-20442810.11June 19, 201510.14 † #Third Amendment to Alarm.com Dealer Program Agreement by and between the Registrant andMonitronics International, Inc. 21.1Subsidiaries of the RegistrantS-1333-20442821.1May 22, 201523.1#Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm 24.1#Power of Attorney. Reference is made to the signature page hereto 31.1#**Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under theSecurities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002 31.2#**Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under theSecurities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002 32.1#**Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C.Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS#XBRL Instance Document 101.SCH#XBRL Taxonomy Extension Schema Document 101.CAL#XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF#XBRL Taxonomy Extension Definition Linkbase Document 101.LAB#XBRL Taxonomy Extension Label Linkbase Document 101.PRE#XBRL Taxonomy Extension Presentation Linkbase Document 108Table of Contents† Indicates management contract or compensatory plan.# Filed herewith.* Confidential treatment has been granted from the Securities and Exchange Commission as to certain portions of this document.† Confidential treatment has been requested from the Securities and Exchange Commission as to certain portions of this document.** These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of theSecurities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any generalincorporation language in such filing.109Table of ContentsSIGNATUREPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized. Alarm.com Holdings, Inc. Date: February 29, 2016By:/s/ Stephen Trundle Stephen Trundle President, Chief Executive Officer and Director (Principal Executive Officer) Date: February 29, 2016By:/s/ Jennifer Moyer Jennifer Moyer Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacitiesand on the dates indicated.SignatureTitleDate/s/ Stephen TrundlePresident, Chief Executive Officer and DirectorFebruary 29, 2016Stephen Trundle(Principal Executive Officer) /s/ Jennifer MoyerChief Financial OfficerFebruary 29, 2016Jennifer Moyer(Principal Financial Officer and Principal Accounting Officer) /s/ Timothy McAdamChairman of the Board of DirectorsFebruary 29, 2016Timothy McAdam /s/ Donald ClarkeDirectorFebruary 29, 2016Donald Clarke /s/ Hugh PaneroDirectorFebruary 29, 2016Hugh Panero /s/ Mayo ShattuckDirectorFebruary 29, 2016Mayo Shattuck /s/ Ralph TerkowitzDirectorFebruary 29, 2016Ralph Terkowitz 110Table of ContentsEXHIBIT INDEX111Table of Contents Incorporated by ReferenceExhibitDescriptionSchedule / FormFile NumberExhibitFile Date2.1Agreement and Plan of Merger by and among the Registrant, Energyhub Holdings, Inc.EnergyHub, Inc. and Shareholder Representative Services LLC, as stockholder representative,dated May 3, 2013S-1333-2044282.1May 22, 20153.1Amended and Restated Certificate of Incorporation of the Registrant8-K001-374613.1July 2, 20153.2Amended and Restated Bylaws of the Registrant8-K001-374613.2July 2, 20154.1Form of common stock certificate of the RegistrantS-1333-2044284.1May 22, 20154.2Amended and Restated Registration Rights Agreement by and among the Registrant and certain ofits stockholders, dated July 11, 2012S-1333-2044284.2May 22, 201510.1Deed of Lease between Registrant and 8150 Leesburg Pike, L.L.C., dated April 21, 2009, asamended July 21, 2010, April 28, 2011, January 10, 2012, June 5, 2012, December 7, 2012, March12, 2013 and May 29, 2013S-1333-20442810.1May 22, 201510.2Deed of Office Lease Agreement between Registrant and Marshall Property LLC, dated August 8,2014S-1333-20442810.2May 22, 201510.3†Amended and Restated 2009 Stock Incentive Plan, Form of Non-Qualified Stock OptionAgreement and Form of Early Exercise Notice and Restricted Stock Purchase AgreementthereunderS-1333-20442810.3May 22, 201510.4†2015 Equity Incentive Plan10-Q001-3746110.1August 14, 201510.5†#Form of Option Grant Package under 2015 Equity Incentive Plan 10.6†Form of RSU Notice and Agreement under 2015 Equity Incentive PlanS-1/A333-20442810.6June 10, 201510.7#Form of Early Exercise Restricted Stock Purchase Agreement 10.8†2015 Employee Stock Purchase Plan10-Q001-3746110.2August 14, 201510.9†Non-Employee Director Compensation PolicyS-1/A333-20442810.8June 10, 201510.10†Form of Indemnity Agreement by and between Registrant and each of its directors and executiveofficersS-1/A333-20442810.9June 10, 201510.11Senior Secured Credit Facilities Credit Agreement by and among the Registrant, Alarm.comIncorporated, Silicon Valley Bank, Bank of America, N.A. and the several lenders from time to timeparties thereto, dated May 8, 2014S-1333-20442810.10May 22, 201510.12#Second Amendment to Credit Agreement by and among the Registrant, Alarm.com Incorporated,Silicon Valley Bank, Bank of America, N.A. and the several lenders from time to time partiesthereto, dated December 7, 2015 10.13*Alarm.com Dealer Program Agreement by and between the Registrant and Monitronics FundingLP, dated October 22, 2007, as amended by Amendment No. 1 dated January 15, 2008 and theSecond Amendment dated February 23, 2013S-1/A333-20442810.11June 19, 201510.14 † #Third Amendment to Alarm.com Dealer Program Agreement by and between the Registrant andMonitronics International, Inc. 21.1Subsidiaries of the RegistrantS-1333-20442821.1May 22, 201523.1#Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm 24.1#Power of Attorney. Reference is made to the signature page hereto 31.1#**Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under theSecurities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002 31.2#**Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under theSecurities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002 32.1#**Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C.Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS#XBRL Instance Document 101.SCH#XBRL Taxonomy Extension Schema Document 101.CAL#XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF#XBRL Taxonomy Extension Definition Linkbase Document 101.LAB#XBRL Taxonomy Extension Label Linkbase Document 101.PRE#XBRL Taxonomy Extension Presentation Linkbase Document 112Table of Contents† Indicates management contract or compensatory plan.# Filed herewith.* Confidential treatment has been granted from the Securities and Exchange Commission as to certain portions of this document.† Confidential treatment has been requested from the Securities and Exchange Commission as to certain portions of this document.** These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of theSecurities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any generalincorporation language in such filing.113Exhibit 10.5ALARM.COM HOLDINGS, INC. STOCK OPTION GRANT NOTICE (2015 EQUITY INCENTIVE PLAN)Alarm.com Holdings, Inc. (the “ Company ”), pursuant to its 2015 Equity Incentive Plan (the “ Plan ”), hereby grants to Optionholder an option topurchase the number of shares of the Company’s Common Stock set forth below. This option is subject to all of the terms and conditions as set forth inthis notice, in the Option Agreement, the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety.Capitalized terms not explicitly defined herein but defined in the Plan or the Option Agreement will have the same definitions as in the Plan or theOption Agreement. If there is any conflict between the terms in this notice and the Plan, the terms of the Plan will control.Optionholder: Date of Grant: Vesting Commencement Date: Number of Shares Subject to Option: Exercise Price (Per Share): Total Exercise Price: Expiration Date: Type of Grant: ¨ Incentive Stock Option ¨ Nonstatutory Stock OptionExercise Schedule : ¨ Same as Vesting Schedule ¨ Early Exercise PermittedVesting Schedule :Twenty percent (20%) of the shares subject to this option shall vest on the one-year anniversary of the vesting commencementdate (the “ Anniversary Date ”); the balance of the shares vest in a series of forty-eight (48) successive equal monthlyinstallments on the first calendar day of each month thereafter, beginning on the first calendar day of the month following theAnniversary Date, provided the Optionholder remains in Continuous Service as of and through each such date.Payment:By one or a combination of the following items (described in the Option Agreement):¨ By cash, check, bank draft or money order payable to the Company¨ Pursuant to a Regulation T Program if the shares are publicly traded¨ By delivery of already-owned shares if the shares are publicly traded¨If and only to the extent this option is a Nonstatutory Stock Option, and subject to the Company’s consent at the time ofexercise, by a “net exercise” arrangement[Forfeiture :This option is subject to the forfeiture provisions of Section 10 of the Option Agreement.]1.Additional Terms/Acknowledgements: Optionholder acknowledges receipt of, and understands and agrees to, this Stock Option Grant Notice, theOption Agreement and the Plan. Optionholder acknowledges and agrees that this Stock Option Grant Notice and the Option Agreement may not bemodified, amended or revised except as provided in the Plan. Optionholder further acknowledges that as of the Date of Grant, this Stock Option GrantNotice, the Option Agreement, and the Plan set forth the entire understanding between Optionholder and the Company regarding this option award andsupersede all prior oral and written agreements, promises and/or representations on that subject with the exception of (i) options previously granted anddelivered to Optionholder, (ii) any compensation recovery policy that is adopted by the Company or is otherwise required by applicable law and(iii) any written employment or severance arrangement that would provide for vesting acceleration of this option upon the terms and conditions setforth therein.By accepting this option, Optionholder consents to receive such documents by electronic delivery and to participate in the Plan through an online orelectronic system established and maintained by the Company or another third party designated by the Company.ALARM.COM HOLDINGS, INC.By: SignatureTitle: Date: OPTIONHOLDER: SignatureDate: ATTACHMENTS : Option Agreement, 2015 Equity Incentive Plan and Notice of Exercise2. ATTACHMENT IOPTION AGREEMENTALARM.COM HOLDINGS, INC. 2015 EQUITY INCENTIVE PLANOPTION AGREEMENT (INCENTIVE STOCK OPTION OR NONSTATUTORY STOCK OPTION)Pursuant to your Stock Option Grant Notice (“ Grant Notice ”) and this Option Agreement, Alarm.com Holdings, Inc. (the “ Company ”) hasgranted you an option under its 2015 Equity Incentive Plan (the “ Plan ”) to purchase the number of shares of the Company’s Common Stock indicatedin your Grant Notice at the exercise price indicated in your Grant Notice. The option is granted to you effective as of the date of grant set forth in theGrant Notice (the “ Date of Grant ”). If there is any conflict between the terms in this Option Agreement and the Plan, the terms of the Plan willcontrol. Capitalized terms not explicitly defined in this Option Agreement or in the Grant Notice but defined in the Plan will have the same definitionsas in the Plan.The details of your option, in addition to those set forth in the Grant Notice and the Plan, are as follows:1. VESTING. Subject to the provisions contained herein, your option will vest as provided in your Grant Notice. Vesting will ceaseupon the termination of your Continuous Service.2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and yourexercise price per share in your Grant Notice will be adjusted for Capitalization Adjustments.3. EXERCISE RESTRICTION FOR NON-EXEMPT EMPLOYEES. If you are an Employee eligible for overtime compensationunder the Fair Labor Standards Act of 1938, as amended (that is, a “ Non-Exempt Employee ”), and except as otherwise provided in the Plan, you maynot exercise your option until you have completed at least six (6) months of Continuous Service measured from the Date of Grant, even if you havealready been an employee for more than six (6) months. Consistent with the provisions of the Worker Economic Opportunity Act, you may exerciseyour option as to any vested portion prior to such six (6) month anniversary in the case of (i) your death or disability, (ii) a Corporate Transaction inwhich your option is not assumed, continued or substituted, (iii) a Change in Control or (iv) your termination of Continuous Service on your“retirement” (as defined in the Company’s benefit plans).4. METHOD OF PAYMENT. You must pay the full amount of the exercise price for the shares you wish to exercise. You may pay theexercise price in cash or by check, bank draft or money order payable to the Company or in any other manner permitted by your Grant Notice, whichmay include one or more of the following:(a) Pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to theissuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay theaggregate exercise price to the Company from the sales proceeds. This manner of payment is also known as a “broker-assisted exercise”, “same daysale”, or “sell to cover”.1.(b) By delivery to the Company (either by actual delivery or attestation) of already-owned shares of Common Stock thatare owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise.“Delivery” for these purposes, in the sole discretion of the Company at the time you exercise your option, will include delivery to the Company of yourattestation of ownership of such shares of Common Stock in a form approved by the Company. You may not exercise your option by delivery to theCompany of Common Stock if doing so would violate the provisions of any law, regulation or agreement restricting the redemption of the Company’sstock.(c) If this option is a Nonstatutory Stock Option, subject to the consent of the Company at the time of exercise, by a “netexercise” arrangement pursuant to which the Company will reduce the number of shares of Common Stock issued upon exercise of your option by thelargest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price. You must pay any remaining balance of theaggregate exercise price not satisfied by the “net exercise” in cash or other permitted form of payment. Shares of Common Stock will no longer beoutstanding under your option and will not be exercisable thereafter if those shares (i) are used to pay the exercise price pursuant to the “net exercise,”(ii) are delivered to you as a result of such exercise, and (iii) are withheld to satisfy your tax withholding obligations.5. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock.6. SECURITIES LAW COMPLIANCE. In no event may you exercise your option unless the shares of Common Stock issuable uponexercise are then registered under the Securities Act or, if not registered, the Company has determined that your exercise and the issuance of the shareswould be exempt from the registration requirements of the Securities Act. The exercise of your option also must comply with all other applicable lawsand regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in materialcompliance with such laws and regulations (including any restrictions on exercise required for compliance with Treas. Reg. 1.401(k)-1(d)(3), ifapplicable).7. TERM. You may not exercise your option before the Date of Grant or after the expiration of the option’s term. The term of youroption expires, subject to the provisions of Section 5(h) of the Plan, upon the earliest of the following:(a) immediately upon the date on which the event giving rise to your termination of Continuous Service for Cause occurs (or, ifrequired by law, the date of termination of Continuous Service for Cause);(b) three (3) months after the termination of your Continuous Service for any reason other than Cause, your Disability or your death(except as otherwise provided in Section 7(d) below); provided , however , that if during any part of such three (3) month period your option is notexercisable solely because of the condition set forth in the section above relating to “Securities Law Compliance,” your option will not expire until theearlier of the Expiration Date or until it has been exercisable for an aggregate period of three (3) months after the termination of your ContinuousService; provided further, if during any part of such three (3) month period, the sale of any Common Stock received upon exercise of your optionwould violate the Company’s insider trading policy, then your option will not expire until the earlier of the Expiration Date or until it has beenexercisable for an aggregate period of three (3) months after the termination of your Continuous Service during which the sale of the Common Stockreceived upon exercise of your option would not be in violation of the Company’s insider trading policy. Notwithstanding the foregoing, if (i) you are aNon-Exempt2. Employee, (ii) your Continuous Service terminates within six (6) months after the Date of Grant, and (iii) you have vested in a portion of your option atthe time of your termination of Continuous Service, your option will not expire until the earlier of (x) the later of (A) the date that is seven (7) monthsafter the Date of Grant, and (B) the date that is three (3) months after the termination of your Continuous Service, and (y) the Expiration Date;(c) twelve (12) months after the termination of your Continuous Service due to your Disability (except as otherwise provided inSection 7(d)) below;(d) eighteen (18) months after your death if you die either during your Continuous Service;(e) the Expiration Date indicated in your Grant Notice; or(f) the day before the tenth (10th) anniversary of the Date of Grant.If your option is an Incentive Stock Option, note that to obtain the federal income tax advantages associated with an Incentive Stock Option, theCode requires that at all times beginning on the Date of Grant and ending on the day three (3) months before the date of your option’s exercise, youmust be an employee of the Company or an Affiliate, except in the event of your death or Disability. The Company has provided for extendedexercisability of your option under certain circumstances for your benefit but cannot guarantee that your option will necessarily be treated as anIncentive Stock Option if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminatesor if you otherwise exercise your option more than three (3) months after the date your employment with the Company or an Affiliate terminates.8. EXERCISE.(a) You may exercise the vested portion of your option (and the unvested portion of your option if your Grant Notice so permits)during its term by (i) delivering a Notice of Exercise (in a form designated by the Company) or completing such other documents and/or proceduresdesignated by the Company for exercise (including, if applicable, the delivery of an Early Exercise Restricted Stock Purchase Agreement, ascontemplated by Section 8(d), below) and (ii) paying the exercise price and any applicable withholding taxes to the Company’s Secretary, stock planadministrator, or such other person as the Company may designate, together with such additional documents as the Company may then require.(b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter intoan arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (i) theexercise of your option, (ii) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at or after the time ofexercise, or (iii) the disposition of shares of Common Stock acquired upon such exercise.(c) If your option is an Incentive Stock Option, by exercising your option you agree that you will notify the Company in writingwithin fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your option that occurswithin two (2) years after the Date of Grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your option.3. (d) Exercise Prior to Vesting (“Early Exercise”) . If permitted in your Grant Notice (i.e., the “Exercise Schedule” indicates “EarlyExercise Permitted”) and subject to the provisions of your option, you may elect at any time that is both (i) during the period of your ContinuousService and (ii) during the term of your option, to exercise all or part of your option, including the unvested portion of your option; provided , however, that:(i) a partial exercise of your option shall be deemed to cover first vested shares of Common Stock and thenthe earliest vesting installment of unvested shares of Common Stock;(i) as a condition of such exercise, you shall enter into the Company’s form of Early Exercise Restricted Stock PurchaseAgreement as provided by the Company at the time of exercise with a vesting schedule that will result in the shares of restricted Common Stock beingsubject to same vesting schedule and other conditions as if no early exercise had occurred;(ii) any shares of Common Stock so purchased from installments that have not vested as of the date of exercise shall be subjectto the risk of forfeiture and repurchase and reacquisition restrictions in favor of the Company as set forth in the Early Exercise Restricted StockPurchase Agreement; and(iii) if your option is an Incentive Stock Option, then, to the extent that the aggregate Fair Market Value (determined at thetime of grant) of the shares of Common Stock with respect to which your option plus all other Incentive Stock Options you hold are exercisable for thefirst time by you during any calendar year (under all plans of the Company and its Affiliates) exceeds $100,000, your option(s) or portions thereof thatexceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options.9. TRANSFERABILITY. Except as otherwise provided in this Section 9, your option is not transferable, except by will or by the laws ofdescent and distribution, and is exercisable during your life only by you.(a) Certain Trusts. Upon receiving written permission from the Board or its duly authorized designee, you may transfer your optionto a trust if you are considered to be the sole beneficial owner (determined under Section 671 of the Code and applicable state law) while the option isheld in the trust. You and the trustee must enter into transfer and other agreements required by the Company.(b) Domestic Relations Orders. Upon receiving written permission from the Board or its duly authorized designee, and provided thatyou and the designated transferee enter into transfer and other agreements required by the Company, you may transfer your option pursuant to the termsof a domestic relations order, official marital settlement agreement or other divorce or separation instrument as permitted by Treasury Regulation1.421-1(b)(2) that contains the information required by the Company to effectuate the transfer. You are encouraged to discuss the proposed terms ofany division of this option with the Company prior to finalizing the domestic relations order or marital settlement agreement to help ensure the requiredinformation is contained within the domestic relations order or marital settlement agreement. If this option is an Incentive Stock Option, this optionmay be deemed to be a Nonstatutory Stock Option as a result of such transfer.4. (c) Beneficiary Designation. Upon receiving written permission from the Board or its duly authorized designee, you may, bydelivering written notice to the Company, in a form approved by the Company and any broker designated by the Company to handle option exercises,designate a third party who, on your death, will thereafter be entitled to exercise this option and receive the Common Stock or other considerationresulting from such exercise. In the absence of such a designation, your executor or administrator of your estate will be entitled to exercise this optionand receive, on behalf of your estate, the Common Stock or other consideration resulting from such exercise.10. FORFEITURE FOR DETRIMENTAL ACTIVITY(a) Definition of Detrimental Activity . Notwithstanding any other provision of this Option Agreement to the contrary, you shall notengage, directly or indirectly, in any Detrimental Activity prior to, or during the two (2) year period following the termination of your ContinuousService (the “ Restricted Period ”). For purposes of this Section 10, “ Detrimental Activity ” shall mean: (i) to perform, provide, or attempt to performor provide, wireless and web-enabled security system technology or wireless health solutions that is competitive with any product or service offered bythe Company (“ Conflicting Services ”) within the Restricted Territory or assist any other company to perform or provide Conflicting Services withinthe Restricted Territory; (ii) to induce, or attempt to induce, any employee of the Company to be employed or perform services for you or anycompany that is competitive to the Company; or (iii) to solicit, divert, take away, contact, call upon, accept business from, or service any current orprospective customer, dealer or partner of the Company for the purpose of providing any wireless and web-enabled security system technology orwireless health solution that competes with any product or service then offered by the Company. For purposes of this Section 10, “ Restricted Territory” means the geographic territory serviced by you within the last twelve (12) months of your employment with the Company.(b) Forfeiture and Clawback . If yo u engage in any Detrimental Activity during the Restricted Period without the Company’s expresswritten consent, the Company shall have the right to cause a forfeiture of your rights under this option and/or a clawback of proceeds you receive inconnection with this option, including, but not limited to, the right to: (i) cancel any outstanding portion of the option, (ii) cause a forfeiture of anyCommon Stock acquired by you upon the exercise of this option (but the Company will pay you the option price without interest), and (iii) with respectto the period commencing twelve (12) months prior to and ending two (2) years following the termination of your Continuous Service, require you topay over to the Company any consideration paid to you upon the sale, transfer or other transaction involving this option or the sale of shares ofCommon Stock received upon exercise of this option, in such manner and on such terms and conditions as may be required, and the Company shall beentitled to set-off against the amount of any such proceeds any amount owed to you by the Company to the fullest extent permitted by law.(c) Remedies Cumulative . The right of the Company to cancel your option and demand a return of any shares of Common Stockand/or consideration paid to you pursuant to your option, to the extent permitted by law, is cumulative and in addition to every other right and remedygiven to the Company at law or in equity, including rights to injunctive relief. In addition, you and the Company agree that this Section 10 does notsupersede and shall in no way limit the application of any Invention Assignment and Restrictive Covenants Agreement between you and the Companyentered into in connection with your employment with the Company, and should be interpreted consistently with any such agreement.5. (d) Reform . In the event that a court finds this Section 10, or any of its restrictions, to be ambiguous, unenforceable, or invalid, youand the Company agree that the court will read the Agreement as a whole and interpret the restriction(s) at issue to be enforceable and valid to themaximum extent allowed by law. If the court declines to enforce this Section 10 in the manner provided in the preceding sentence, you and theCompany agree that this Section 10 will be automatically modified to provide the Company with the maximum protection of its business interestsallowed by law and you agree to be bound by this Section 10 as modified.11. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option will bedeemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or anAffiliate to continue your employment. In addition, nothing in your option will obligate the Company or an Affiliate, their respective stockholders,boards of directors, officers or employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate.12. WITHHOLDING OBLIGATIONS.(a) At the time you exercise your option, in whole or in part, and at any time thereafter as requested by the Company, you herebyauthorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means ofa “same day sale” pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by theCompany), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, whicharise in connection with the exercise of your option.(b) If this option is a Nonstatutory Stock Option, then upon your request and subject to approval by the Company, and compliancewith any applicable legal conditions or restrictions, the Company may withhold from fully vested shares of Common Stock otherwise issuable to youupon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the dateof exercise, not in excess of the minimum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoidclassification of your option as a liability for financial accounting purposes). If the date of determination of any tax withholding obligation is deferredto a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make aproper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercisewith respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date ofexercise of your option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares ofCommon Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequencesto you arising in connection with such share withholding procedure shall be your sole responsibility.(c) You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied.Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company will have no obligation toissue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein, if applicable, unlesssuch obligations are satisfied.6. 13. TAX CONSEQUENCES . You hereby agree that the Company does not have a duty to design or administer the Plan or its othercompensation programs in a manner that minimizes your tax liabilities. You will not make any claim against the Company, or any of its Officers,Directors, Employees or Affiliates related to tax liabilities arising from your option or your other compensation. In particular, you acknowledge thatthis option is exempt from Section 409A of the Code only if the exercise price per share specified in the Grant Notice is at least equal to the “fairmarket value” per share of the Common Stock on the Date of Grant and there is no other impermissible deferral of compensation associated with theoption.14. NOTICES. Any notices provided for in your option or the Plan will be given in writing (including electronically) and will be deemedeffectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail,postage prepaid, addressed to you at the last address you provided to the Company. The Company may, in its sole discretion, decide to deliver anydocuments related to participation in the Plan and this option by electronic means or to request your consent to participate in the Plan by electronicmeans. By accepting this option, you consent to receive such documents by electronic delivery and to participate in the Plan through an on-line orelectronic system established and maintained by the Company or another third party designated by the Company.15. PERSONAL DATA . You understand that your employer, if applicable, the Company, and/or its Affiliates hold certain personalinformation about you, including but not limited to your name, home address, telephone number, date of birth, social security or equivalent taxidentification number, salary, nationality, job title, and details of your option (the “Personal Data” ). Certain Personal Data may also constitute“Sensitive Personal Data” or similar classification under applicable local law and be subject to additional restrictions on collection, processing and useof the same under such laws. Such data include but are not limited to Personal Data and any changes thereto, and other appropriate personal andfinancial data about you. You hereby provide express consent to the Company or its Affiliates to collect, hold, and process any such Personal Data andSensitive Personal Data. You also hereby provide express consent to the Company and/or its Affiliates to transfer any such Personal Data and SensitivePersonal Data outside the country in which you are employed or retained, including transfers to the United States. The legal persons for whom suchPersonal Data are intended are the Company and any broker company providing services to the Company in connection with the administration of thePlan.16. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made apart of your option, and is further subject to all interpretations, amendments, rules and regulations, which may from time to time be promulgated andadopted pursuant to the Plan. If there is any conflict between the provisions of your option and those of the Plan, the provisions of the Plan will control.In addition, your option (and any compensation paid or shares issued under your option) is subject to recoupment in accordance with The Dodd–FrankWall Street Reform and Consumer Protection Act and any implementing regulations thereunder, any clawback policy adopted by the Company and anycompensation recovery policy otherwise required by applicable law.17. CHOICE OF LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State ofDelaware without regard to such state’s conflicts of laws rules.18. WAIVER. The failure of the Company or any successor or assign, or you, to enforce at any time any provision of this Agreement shall inno way be construed to be a waiver of such provision or of any other provision hereof.7. 19. OTHER DOCUMENTS . You hereby acknowledge receipt of and the right to receive a document providing the information required byRule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt of the Company’spolicy permitting certain individuals to sell shares only during certain “window” periods and the Company’s insider trading policy, in effect from timeto time.20. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS . The value of this option will not be included as compensation, earnings,salaries, or other similar terms used when calculating your benefits under any employee benefit plan sponsored by the Company or any Affiliate, exceptas such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Company’s or anyAffiliate’s employee benefit plans.21. VOTING RIGHTS . You will not have voting or any other rights as a stockholder of the Company with respect to the shares to be issuedpursuant to this option until such shares are issued to you. Upon such issuance, you will obtain full voting and other rights as a stockholder of theCompany. Nothing contained in this option, and no action taken pursuant to its provisions, will create or be construed to create a trust of any kind or afiduciary relationship between you and the Company or any other person.22. SEVERABILITY . If all or any part of this Option Agreement or the Plan is declared by any court or governmental authority to beunlawful or invalid, such unlawfulness or invalidity will not invalidate any portion of this Option Agreement or the Plan not declared to be unlawful orinvalid. Any Section of this Option Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in amanner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.23. MISCELLANEOUS .(a) The rights and obligations of the Company under your option will be transferable to any one or more persons or entities, and allcovenants and agreements hereunder will inure to the benefit of, and be enforceable by the Company’s successors and assigns.(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of theCompany to carry out the purposes or intent of your option.(c) You acknowledge and agree that you have reviewed your option in its entirety, have had an opportunity to obtain the advice ofcounsel prior to executing and accepting your option, and fully understand all provisions of your option.(d) This Option Agreement will be subject to all applicable laws, rules, and regulations, and to such approvals by any governmentalagencies or national securities exchanges as may be required.(e) All obligations of the Company under the Plan and this Option Agreement will be binding on any successor to the Company,whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of thebusiness and/or assets of the Company.8. * * *This Option Agreement will be deemed to be signed by you upon the signing by you of the Grant Notice to which it is attached.9. ATTACHMENT II2015 EQUITY INCENTIVE PLAN ATTACHMENT IIINOTICE OF EXERCISE NOTICE OF EXERCISE ALARM.COM HOLDINGS, INC.Attention: Stock Plan Administrator8150 Leesburg PikeVienna, Virginia 22182 Date of Exercise: _______________This constitutes notice to Alarm.com Holdings, Inc. (the “ Company ”) under my stock option that I elect to purchase the below number of shares of Common Stock of the Company(the “ Shares ”) for the price set forth below.Type of option (check one):Incentive ¨Nonstatutory ¨Stock option dated:______________________________Number of Shares as to which option is exercised:______________________________Certificates to be issued in name of:______________________________Total exercise price:$______________$______________Cash payment delivered herewith:$______________$______________Value of ________ Shares deliveredherewith:$______________$______________Value of ________ Shares pursuant to netexercise (to the extent permitted by theCompany at the time of exercise):$______________$______________Regulation T Program (cashless exercise):$______________$______________By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the Alarm.com Holdings, Inc. 2015 Equity Incentive Plan and/orthe applicable Option Agreement (including, if applicable, an Early Exercise Restricted Stock Purchase Agreement, as contemplated by the Option Agreement), (ii) to provide for thepayment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this option, and (iii) if this exercise relates to an Incentive StockOption, to notify you in writing within fifteen (15) days after the date of any disposition of any of the Shares issued upon exercise of this option that occurs within two (2) years after thedate of grant of this option or within one (1) year after such Shares are issued upon exercise of this option.Very truly yours, Signature Print Name Exhibit 10.7ALARM.COM HOLDINGS, INC.2015 EQUITY INCENTIVE PLANEARLY EXERCISE RESTRICTED STOCK PURCHASE AGREEMENTThis Early Exercise Restricted Stock Purchase Agreement (“ Agreement ”) is made as of [______________], by and between Alarm.comHoldings, Inc., a Delaware corporation (the “ Company ”), and [_________________] (“ Purchaser ”). To the extent any capitalized terms used in thisAgreement are not defined, they shall have the meaning ascribed to them in the Company’s 2015 Equity Incentive Plan (as amended and in effect fromtime-to-time, the “ Plan ”).WITNESSETH:WHEREAS, Purchaser was awarded an option to purchase up to [________] shares of Common Stock (“ Common Stock ”) of the Company(the “ Option ”) pursuant to the Plan;WHEREAS , the Option consists of a Stock Option Grant Notice (the “ Grant Notice ”) and a Stock Option Agreement (the “ OptionAgreement ,” and together with the Grant Notice, the “ Option Documents ”);WHEREAS, the Grant Notice provides that “early exercise” of the Option is permitted in accordance with the terms of the Option Documents;andWHEREAS, Purchaser desires to exercise all or a portion of the Option on the terms and conditions contained herein, and wishes to takeadvantage of the early exercise provision of Purchaser’s Option Documents and therefore to enter into this Agreement.NOW, THEREFORE, IT IS AGREED between the parties as follows:1. Exercise of Option . Subject to the terms and conditions hereof, Purchaser hereby elects to exercise Purchaser’s Option to purchase[_____________] shares of the Common Stock (the “ Shares ”). Of these Shares, Purchaser has elected to purchase [________] of those Shares whichhave become vested as of the date hereof pursuant to the Vesting Schedule set forth in the Grant Notice (the “ Vested Shares ”) and [________] Shareswhich are unvested as of the date hereof pursuant to the Vesting Schedule set forth in the Grant Notice (the “ Unvested Shares ”). The Unvested Sharesshall be subject to the Reacquisition Right set forth in Section 3(b) below.Purchaser acknowledges that, in connection with the exercise of the Option, Purchaser has delivered to the Company a properly completed andexecuted Notice of Exercise in the form attached as Attachment III to the Option Documents as well as any and all other documents, agreements andinformation required to be delivered pursuant to the terms and conditions of the Option Documents and the Plan.As noted in the Notice of Exercise, the purchase price for the Shares shall be $[________] per Share for a total purchase price of$[__________] and Purchaser has delivered the purchase price to the Company in the following manner: [___________].1The term “ Shares ” refers to the purchased Shares and all securities received in replacement of the Shares or as stock dividends or splits, allsecurities received in replacement of the Shares in a recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additionalsecurities or other properties to which Purchaser is entitled by reason of Purchaser’s ownership of the Shares. The number of Shares and/or class ofsecurities subject to this Agreement may also be adjusted from time to time for Capitalization Adjustments. [The Shares also remain subject to theprovisions of Section 10 of the Option Agreement].2. Time and Place of Exercise . The purchase and sale of the Shares under this Agreement shall occur at the principal office of the Companysimultaneously with the execution and delivery of this Agreement in accordance with the provisions of the Option; provided, however, that paymentshall be provided in the form provided herein and in the Notice of Exercise. Following such date, subject to the restrictions and conditions of thisAgreement, the Company will issue to Purchaser the Shares to be purchased by Purchaser (which shall be issued in Purchaser’s name) against paymentof the purchase price therefor by Purchaser.3. Limitations on Transfer .(a) Transfer Restrictions . In addition to any other limitation on transfer created by applicable securities laws or any stockholders’agreement to which Purchaser is a party, Purchaser shall not sell, assign, hypothecate, donate, encumber or otherwise dispose of any interest in theUnvested Shares while the Shares are subject to the Company’s Reacquisition Right (as defined below); provided, however , that an interest in theUnvested Shares may be transferred pursuant to a domestic relations order as defined in the Code. After any Shares have been released from suchReacquisition Right, Purchaser shall not assign, encumber or dispose of any interest in such Shares except in compliance with this Agreement, theCompany’s bylaws and applicable securities laws.(b) Reacquisition Right .(i) In the event Purchaser’s Continuous Service terminates, Purchaser will forfeit and the Company will automaticallyreacquire (the “ Reacquisition Right ”), without any required action or notice to Purchaser, on the date that is ninety (90) days after the termination ofParticipant Continuous Service (the “ Reacquisition Date ”) all Unvested Shares as of the date of Purchaser’s termination of Continuous Service for aper Share price equal to the Reacquisition Price (as defined below). Purchaser hereby agrees to take whatever action the Company deems necessary toeffectuate the Company’s reacquisition of the Unvested Shares and the exercise of the Reacquisition Right hereunder. Notwithstanding anything to thecontrary in this Section 3(b) or in this Agreement, the Company may elect to waive, in its sole discretion, its Reacquisition Right in whole or in part byproviding written notice to you, at any time prior to or on the Reacquisition Date, and the Escrow Agent may then release to you the number of sharesof Common Stock not being reacquired by the Company and/or cause any applicable restrictions to be removed from the Shares with the Company’stransfer agent (or other applicable custodian).(ii) As used herein, the term “ Reacquisition Price ” shall mean he lower of (x) the Fair Market Value of the Common Stock(as determined under the Plan) on the date of reacqusition or (y) the price equal to Purchaser’s Exercise Price per Share as indicated in Section 1 and inthe Grant Notice.(iii) The Reacquisition Price may, at the Company’s option, be paid (A) by delivery to Purchaser or Purchaser’s executor withsuch notice of a check in the amount of the aggregate Reacquisition2Price for the Shares being purchased, or (B) in the event Purchaser is indebted to the Company, by cancellation by the Company of an amount of suchindebtedness equal to the purchase price for the Shares being reacquired, or (C) by a combination of (A) and (B) so that the combined payment andcancellation of indebtedness equals such aggregate Reacquisition Price. Upon delivery of such notice and payment of the purchase price in any of theways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interest therein orrelated thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased by the Company, withoutfurther action by Purchaser.(iv) One hundred percent (100%) of the Unvested Shares shall initially be subject to the Reacquisition Right. The UnvestedShares shall be released from the Reacquisition Right in accordance with the Vesting Schedule set forth in the Grant Notice, including any provisionsregarding acceleration of vesting, as if such Unvested Shares were still subject to the Option Documents. Fractional shares shall be rounded to thenearest whole share.(v) To the extent the Reacquisition Right remains in effect following a Corporate Transaction or Change in Control, unlessotherwise provided by the Board pursuant to the terms of the Plan, it will apply to the new capital stock, cash or other property received in exchange forthe Unvested Shares in consummation of the Corporate Transaction or Change in Control, as applicable, but only to the extent the Unvested Shareswere at the time covered by such right.4. Escrow of Unvested Shares . For purposes of facilitating the enforcement of the provisions of Section 3 above, Purchaser agrees,immediately upon receipt of the certificate(s), if certificated, for the Shares subject to the Company’s Reacquisition Right described in Section 3(b), todeliver such certificate(s), together with an Assignment Separate from Certificate in the form attached to this Agreement as Attachment A-1 executedby Purchaser and by Purchaser’s spouse (if required for transfer), in blank, to the Secretary of the Company, or the Secretary’s designee, to hold suchcertificate(s) and Assignment Separate from Certificate in escrow and to take all such actions and to effectuate all such transfers and/or releases as arein accordance with the terms of this Agreement. Purchaser hereby acknowledges that the Secretary of the Company, or the Secretary’s designee, is soappointed as the escrow holder with the foregoing authorities as a material inducement to make this Agreement and that said appointment is coupledwith an interest and is accordingly irrevocable. Purchaser agrees that said escrow holder shall not be liable to any party hereof (or to any other party).The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may resign at any time.Purchaser agrees that if the Secretary of the Company, or the Secretary’s designee, resigns as escrow holder for any or no reason, the Company shallhave the power to appoint a successor to serve as escrow holder pursuant to the terms of this Agreement. Alternatively, the Company in its solediscretion, may elect not to issue any certificate representing the Unvested Shares and instead document Purchaser’s interest therein by registering suchshares of Common Stock with the Company’s transfer agent (or another custodian selected by the Company) in book entry form in Purchaser’s namewith the applicable restrictions noted in the book-entry system, in which case certificate(s) representing all or a part of shares of Common Stock willnot be issued unless and until the Reacquisition Right with respect to such Unvested Shares has lapsed.5. Rights as a Stockholder . Subject to the provisions of this Agreement, Purchaser will exercise all rights and privileges of a stockholder ofthe Company with respect to the shares of Common Stock deposited3in escrow. Purchaser will be deemed to be the holder of the shares for purposes of receiving any dividends that may be paid with respect to such shares(which will be subject to the same vesting and forfeiture restrictions as apply to the shares to which they relate) and for purposes of exercising anyvoting rights relating to such shares, even if some or all of such shares have not yet vested and been released from the Company’s ReacquisitionRight. 6. Restrictive Legends and Stop-Transfer Orders .(a) Legends . All certificates and/or book entries representing the Common Stock issued hereunder will be endorsed with appropriatelegends determined by the Company (in addition to any other legend that may be required by other agreements between Purchaser and the Company).(b) Stop-Transfer Notices . Purchaser agrees that, in order to ensure compliance with the restrictions referred to herein, the Companymay issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may makeappropriate notations to the same effect in its own records.(c) Refusal to Transfer . The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwisetransferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividendsto any purchaser or other transferee to whom such Shares shall have been so transferred.7. No Employment Rights . Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or anAffiliate, to terminate Purchaser’s employment or consulting relationship, for any reason, with or without cause.8. Withholding Obligations .(a) As of the date the Option is exercised, the date Shares are issued to the Purchaser and/or at any time thereafter as requested by theCompany, Purchaser hereby authorizes withholding from payroll and any other amounts payable to Purchaser, and Purchaser otherwise agrees to makeadequate provision for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, ifany, which arise in connection with the Option or this Agreement (the “ Withholding Taxes ”). The Company may, in its sole discretion, satisfy all orany portion of the Withholding Taxes obligation by any of the following means or by a combination of such means: (i) withholding from any amountsotherwise payable to Purchaser by the Company; (ii) causing Purchaser to tender a cash payment; (iii) withholding shares of Common Stock from theshares of Common Stock issued or otherwise issuable to Purchaser in connection with the Option or this Agreement that are not subject to theReacquisition Right with a Fair Market Value equal to the amount of such Withholding Taxes or (iv) permitting or requiring Purchaser to enter into a“same day sale” commitment, if applicable, with a broker-dealer that is a member of the Financial Industry Regulatory Authority (a “ FINRA Dealer ”)whereby Purchaser irrevocably elects to sell a portion of the shares subject to this Agreement or the Option to the extent not subject to theReacquisition Right to satisfy the Withholding Taxes and whereby the FINRA Dealer irrevocably commits to forward the proceeds necessary to satisfythe Withholding Taxes directly to the Company and/or its Affiliates; provided, however, that the number of such shares of Common Stock withheldmay not exceed the amount necessary to satisfy the Company’s required tax withholding obligations using the minimum statutory withholding rates forfederal, state, local and4foreign tax purposes, including payroll taxes, that are applicable to supplemental taxable income; and provided, further, that to the extent necessary toqualify for an exemption from application of Section 16(b) of the Exchange Act, if applicable, such share withholding procedure will be subject to theexpress prior approval of the Company’s Compensation Committee.(b) Unless the tax withholding obligations of the Company and any Affiliate are satisfied, the Company will have no obligation toissue a certificate for such shares, delivery of such shares and/or release such shares from any escrow (as applicable) provided for in this Agreement.(c) In the event the Company’s obligation to withhold arises prior to the delivery or release to Purchaser of Common Stock or it isdetermined after the delivery of Common Stock to Purchaser that the amount of the Company’s withholding obligation was greater than the amountwithheld by the Company, Purchaser agrees to indemnify and hold the Company harmless from any failure by the Company to withhold the properamount.9. Section 83(b) Election . Purchaser understands that Section 83(a) of the Internal Revenue Code of 1986, as amended (the “ Code ”), taxesas ordinary income for a Nonstatutory Stock Option and as alternative minimum taxable income for an Incentive Stock Option the difference betweenthe amount paid for the Shares and the Fair Market Value of the Shares as of the date any restrictions on the Shares lapse. In this context, “restriction”means the Company’s Reacquisition Right set forth in Section 3(b) of this Agreement. Purchaser understands that Purchaser may elect to be taxed atthe time the Shares are purchased, rather than when and as the Reacquisition Right expires, by filing an election under Section 83(b) (an “ 83(b)Election ”) of the Code with the Internal Revenue Service within 30 days from the date of purchase. Even if the Fair Market Value of the Shares at thetime of the execution of this Agreement equals the amount paid for the Shares, the election must be made to avoid income and alternative minimum taxtreatment under Section 83(a) in the future. Purchaser understands that failure to file such an election in a timely manner may result in adverse taxconsequences for Purchaser. Purchaser further understands that an additional copy of such election form should be filed with his or her federal incometax return for the calendar year in which the date of this Agreement falls. Purchaser acknowledges that the foregoing is only a summary of the effect ofUnited States federal income taxation with respect to purchase of the Shares hereunder, and does not purport to be complete.Purchaser agrees that Purchaser will execute and deliver to the Company with this executed Agreement a copy of the Acknowledgment andStatement of Decision Regarding Section 83(b) Election (the “ Acknowledgment ”) attached hereto as Attachment A-2 . Purchaser further agrees thatPurchaser will execute and submit with the Acknowledgment a copy of the 83(b) Election attached hereto as Attachment A-3 (for income tax purposesin connection with the early exercise of a Nonstatutory Stock Option) if Purchaser has indicated in the Acknowledgment his or her decision to makesuch an election.The Company has no duty or obligation to minimize the tax consequences to Purchaser in connection with the Option or this Agreement andshall not be liable to Purchaser for any adverse tax consequences to Purchaser arising in connection herewith or therewith. Purchaser is hereby advisedto consult with Purchaser’s own personal tax, financial and/or legal advisors regarding the tax consequences of this Agreement and by signing thisAgreement, Purchaser agrees that Purchaser has done so or knowingly and voluntarily declined to do so. Purchaser understands that Purchaser (and notthe Company) shall be responsible for Purchaser’s own tax liability that may arise as a result of this investment or the transactions contemplated by thisAgreement.5Purchaser agrees to review with Purchaser’s own tax advisors the federal, state, local and foreign tax consequences of this investment and thetransactions contemplated by this Agreement. Purchaser will rely solely on such advisors and not on any statements or representations of the Companyor any of its agents.10. Governing Plan Documents . This Agreement is subject to all the provisions of the Plan, the provisions of which are hereby made a parthereof, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adoptedpursuant to the Plan. In the event of any conflict between the provisions of this Agreement and those of the Plan, the provisions of the Plan will control.In addition, this Agreement (and any compensation paid or shares issued under this Agreement) is subject to recoupment in accordance with TheDodd–Frank Wall Street Reform and Consumer Protection Act and any implementing regulations thereunder, any clawback policy adopted by theCompany, [the provisions of Section 10 of the Option Agreement,] and any compensation recovery policy otherwise required by applicable law.11. Miscellaneous .(a) Governing Law . This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties heretoshall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts oflaw.(b) Entire Agreement; Enforcement of Rights . This Agreement, its attachments and the related Option Documents and Plan set forththe entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. Nomodification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by theparties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of suchparty.(c) Severability . If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree torenegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision,then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were soexcluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms.(d) Construction . This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and theirrespective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall beconstrued in favor of or against any one of the parties hereto.(e) Notices . Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient when deliveredpersonally or sent by telegram or fax or 48 hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, andaddressed to the party to be notified at such party’s address as set forth below or as subsequently modified by written notice.(f) Effect on Other Employee Benefit Plans . The value of amounts payable under this Agreement will not be included ascompensation, earnings, salaries, or other similar terms used when calculating your benefits under any employee benefit plan sponsored by theCompany or any Affiliate, except6as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Company’s or anyAffiliate’s employee benefit plans.(g) Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all ofwhich together shall constitute one instrument.(h) Successors and Assigns . The rights and obligations of the Company are transferable by the Company to any one or more personsor entities, and all covenants and agreements hereunder will inure to the benefit of, and be enforceable by the Company’s successors and assigns. Therights and obligations of Purchaser under this Agreement may only be assigned with the prior written consent of the Company.(i) Further Assurances . Purchaser agrees upon request to execute any further documents or instruments necessary or desirable in thesole determination of the Company to carry out the purposes or intent of this Agreement.7The parties have executed this Agreement as of the date first set forth above.COMPANY:ALARM.COM HOLDINGS, INC.By: Name (print): Title: PURCHASER: (Signature) (Print Name)Address: I, ______________________, spouse of Purchaser, have read and hereby approve the foregoing Agreement. In consideration of the Company’sgranting my spouse the right to purchase the Shares as set forth in the Agreement, I hereby agree to be bound irrevocably by the Agreement and furtheragree that any community property or similar interest that I may have in the Shares shall hereby be similarly bound by the Agreement. I hereby appointmy spouse as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement.___________________________________Spouse of Purchaser (if applicable)8ATTACHMENT A-1ASSIGNMENT SEPARATE FROM CERTIFICATEFOR VALUE RECEIVED and pursuant to that certain Early Exercise Restricted Stock Purchase Agreement between the undersigned (“Purchaser ”) and ALARM.COM HOLDINGS, INC. (the “ Company ”) dated _______________, ____ (the “ Agreement ”), Purchaser hereby sells,assigns and transfers unto the Company _________________________________ (________) shares of the Common Stock of the Company, standingin Purchaser’s name on the books of the Company and represented by Certificate No. ____, and does hereby irrevocably constitute and appoint________________________________________________ to transfer said stock on the books of the Company with full power of substitution in thepremises.THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND THE ATTACHMENTS THERETO.Dated: (Signature) (Print Name) Spouse of Purchaser (if applicable)Instruction: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise itsReacquisition Right set forth in the Agreement without requiring additional signatures on the part of Purchaser.9ATTACHMENT A-2ACKNOWLEDGMENT AND STATEMENT OF DECISIONREGARDING SECTION 83(b) ELECTIONThe undersigned (which term includes the undersigned’s spouse), a purchaser of ___________ shares of Common Stock of ALARM.COMHOLDINGS, INC., a Delaware corporation (the “ Company ”) by exercise of an option (the “ Option ”) granted pursuant to the Company’s 2015Equity Incentive Plan (the “ Plan ”), hereby states as follows:1. The undersigned acknowledges receipt of a copy of the Plan relating to the offering of such shares. The undersigned has carefullyreviewed the Plan and the option agreement pursuant to which the Option was granted.2. The undersigned either [check and complete as applicable]:(a) ____ has consulted, and has been fully advised by, the undersigned’s own tax advisor regarding the federal, state and local taxconsequences of purchasing shares under the Plan, and particularly regarding the advisability of making elections pursuant to Section 83(b) of theInternal Revenue Code of 1986, as amended (the “Code”) and pursuant to the corresponding provisions, if any, of applicable state law; or(b) ____ has knowingly chosen not to consult such a tax advisor.3. The undersigned hereby states that the undersigned has decided [check as applicable]:(c) ____ to make an election pursuant to Section 83(b) of the Code, and is submitting to the Company, together with theundersigned’s executed Early Exercise Notice and Restricted Stock Purchase Agreement, an executed form entitled “Election Under Section 83(b) ofthe Internal Revenue Code of 1986”; or(d) ____ not to make an election pursuant to Section 83(b) of the Code.4. Neither the Company nor any Affiliate or representative of the Company has made any warranty or representation to the undersigned withrespect to the tax consequences of the undersigned’s purchase of shares under the Plan or of the making or failure to make an election pursuant toSection 83(b) of the Code or the corresponding provisions, if any, of applicable state law.Dated: (Signature) (Print Name) Spouse of Purchaser (if applicable)10ATTACHMENT A-3ELECTION UNDER SECTION 83(b)OF THE INTERNAL REVENUE CODE OF 1986[Date of Mailing]Department of the TreasuryInternal Revenue Service[Address][Address]Re:Election Under Section 83(b)Ladies and Gentlemen:The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in gross income ascompensation for services the excess (if any) of the fair market value of the shares described below over the amount paid for those shares. Thefollowing information is supplied in accordance with Treasury Regulation § 1.83-2:1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows:NAME OF TAXPAYER: NAME OF SPOUSE: ADDRESS: IDENTIFICATION NO. OF TAXPAYER: IDENTIFICATION NO. OF SPOUSE: TAXABLE YEAR: 2. The property with respect to which the election is made is described as follows:______________ shares of the Common Stock $0.01 par value, of ALARM.COM HOLDINGS, INC., a Delaware corporation (the “ Company”).3. The date on which the property was transferred is: _______________4. The property is subject to the following restrictions:Repurchase option at the lower of cost or fair market value in favor of the Company upon termination of taxpayer’s employment or consultingrelationship. This repurchase option lapses over a specified vesting period.5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms willnever lapse, of such property is: $____________6. The amount (if any) paid for such property: $____________117. The amount to include in gross income is $____________The undersigned taxpayer will file this election with the Internal Revenue Service office with which taxpayer files his or her annual income tax returnnot later than 30 days after the date of transfer of the property. A copy of the election also will be furnished to the person for whom the services wereperformed and the transferee of the property. Additionally, the undersigned will include a copy of the election with his or her income tax return for thetaxable year in which the property is transferred. The undersigned is the person performing the services in connection with which the property wastransferred.The undersigned understands that the foregoing election may not be revoked except with the consent of the Commissioner.Dated: TaxpayerDated: Spouse of Taxpayer12Exhibit 10.12Execution VersionSECOND AMENDMENT TO CREDIT AGREEMENTThis Second Amendment to Credit Agreement (this “ Amendment ”) dated as of December 7, 2015, is by and among ALARM.COMINCORPORATED , a Delaware corporation (“ Alarm ”), ALARM.COM HOLDINGS, INC. , a Delaware corporation (“ Holdings ”, and togetherwith Alarm, individually and collectively, jointly and severally, the “ Borrower ”), the several banks and other financial institutions or entities partyhereto, including SILICON VALLEY BANK (“ SVB ”) (each a “ Lender ” and, collectively, the “ Lenders ”), SVB , as the Issuing Lender and theSwingline Lender, and SVB, as administrative agent and collateral agent for the Lenders (in such capacity, the “ Administrative Agent ”).W I T N E S S E T H :WHEREAS , the Borrower, the Lenders, the Administrative Agent, the Issuing Lender and the Swingline Lender are party to that certain CreditAgreement dated as of May 8, 2014, as amended by a First Amendment to Credit Agreement dated February 23, 2015 (as amended, modified,supplemented or restated and in effect from time to time, the “ Credit Agreement ”); andWHEREAS , the Borrower has requested that the Required Lenders and the Administrative Agent agree to modify and amend certain termsand conditions of the Credit Agreement.NOW, THEREFORE , for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties heretoagree as follows:1. Capitalized Terms . All capitalized terms used herein and not otherwise defined shall have the same meaning herein as in the CreditAgreement.2. Amendment to the definition of “Applicable Margin” in Section 1.1 of the Credit Agreement . The definition of “Applicable Margin” inSection 1.1 of the Credit Agreement is hereby amended and restated in full to read as follows:“ Applicable Margin ”: the rate per annum set forth under the relevant column heading below:Consolidated Leverage RatioEurodollar Loans/Letter of Credit FeesABR Loans≥ 2.00:1.002.50%1.50%≥ 1.00:1.00 but < 2.00:1.002.25%1.25%< 1.00:1.002.00%1.00%1Notwithstanding the foregoing, if the Borrower fails to deliver the financial statements required by Section 6.1 and the related ComplianceCertificate required by Section 6.2(b) , by the respective date required thereunder after the end of any related fiscal quarter of Holdings, the ApplicableMargin shall be the rates corresponding to the Consolidated Leverage Ratio of ≥2.00:1.00 in the foregoing table until such financial statements andCompliance Certificate are delivered, and (b) no reduction to the Applicable Margin shall become effective at any time when an Event of Default hasoccurred and is continuing.If, as a result of any restatement of or other adjustment to the financial statements of the Loan Parties or for any other reason, the AdministrativeAgent determines that (x) the Consolidated Leverage Ratio as calculated by the Borrower as of any applicable date was inaccurate and (y) a propercalculation of the Consolidated Leverage Ratio would have resulted in different pricing for any period, then (i) if the proper calculation of theConsolidated Leverage Ratio would have resulted in higher pricing for such period, the Borrower shall automatically and retroactively be obligated topay to the Administrative Agent, for the benefit of the applicable Lenders, promptly on demand by the Administrative Agent, an amount equal to theexcess of the amount of interest and fees that should have been paid for such period over the amount of interest and fees actually paid for such period;and (ii) if the proper calculation of the Consolidated Leverage Ratio would have resulted in lower pricing for such period, neither the AdministrativeAgent nor any Lender shall have any obligation to repay any interest or fees to the Borrower. ”3. Amendment to the definition of “Change of Control” in Section 1.1 of the Credit Agreement . The definition of “Change of Control” inSection 1.1 of the Credit Agreement is hereby amended and restated in full to read as follows:“ Change of Control ”: (a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) becomes the“beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of 35% or more of the voting Capital Stock ofHoldings; (b) [reserved]; or (c) at any time, Holdings shall cease to own and control, of record and beneficially, directly or indirectly, 100% of eachclass of outstanding Capital Stock of Alarm and each other Loan Party free and clear of all Liens (except Liens created by the Security Documents). Apublic offering of Capital Stock of the Borrower pursuant to a registration statement filed with the SEC or any successor or similar authority shall notconstitute a “Change of Control”.”4. Amendment to Section 6.1 of the Credit Agreement . Section 6.1 of the Credit Agreement is hereby amended and restated in its entirety toread as follows:“6.1 Financial Statements . Furnish to the Administrative Agent, with sufficient copies for distribution to each Lender:2(a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the auditedconsolidated balance sheet of Holdings and its consolidated Subsidiaries as at the end of such fiscal year and the related auditedconsolidated statements of income and of cash flows for such fiscal year, setting forth in each case in comparative form the figures forthe previous year, together with an unqualified opinion of certified public accountants of nationally recognized standing and reasonablyacceptable to the Administrative Agent;(b) [Reserved]; and(c) as soon as available, but in any event not later than 45 days after the end of each of the first three (3) fiscal quarters occurringduring each fiscal year of the Borrower, the unaudited consolidated balance sheet of Holdings and its consolidated Subsidiaries as at theend of such quarter and the related unaudited consolidated statements of income and of cash flows for such quarter and the portion of thefiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by aResponsible Officer of the Borrower as being fairly stated in all material respects (subject to normal year-end audit adjustments).All such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordancewith GAAP applied (except as approved by such accountants or officer, as the case may be, and disclosed in reasonable detail therein) consistentlythroughout the periods reflected therein and with prior periods.”5. Amendment to Section 7.8(m)(vii) of the Credit Agreement . Section 7.8(m)(vii) of the Credit Agreement is hereby amended and restatedin its entirety to read as follows:“(vii) except with respect to an acquisition in which the acquisition consideration is less than $10,000,000, delivery by the Borrower to theAdministrative Agent of (i) a description of the proposed acquisition, and (ii) to the extent available, a due diligence package, in each case, priorto closing of the acquisition;”6. Conditions Precedent to Effectiveness . This Amendment shall not be effective until each of the following conditions precedent have beenfulfilled to the satisfaction of the Administrative Agent:(a) This Amendment shall have been duly executed and delivered by the respective parties hereto. The Administrative Agent shall havereceived a fully executed copy hereof.3(b) All necessary consents and approvals to this Amendment shall have been obtained by the Loan Parties.(c) After giving effect to this Amendment, no Default or Event of Default shall have occurred and be continuing.(d) The Administrative Agent shall have received the fees costs and expenses required to be paid pursuant to Section 8 of this Amendment(including the reasonable and documented fees and disbursements of legal counsel required to be paid thereunder).7. Representations and Warranties . The Borrower hereby represents and warrants to the Administrative Agent and the Lenders as follows:(a) This Amendment is, and each other Loan Document to which it is or will be a party, when executed and delivered by each Loan Party thatis a party thereto, will be the legally valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with itsrespective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limitingcreditors’ rights generally and equitable principals (whether enforcement is sought by proceedings in equity or at law).(b) Its representations and warranties set forth in this Amendment, the Credit Agreement, as amended by this Amendment and after givingeffect hereto, and the other Loan Documents to which it is a party are (i) to the extent qualified by materiality, true and correct in all respects and (ii) tothe extent not qualified by materiality, true and correct in all material respects, in each case, on and as of the date hereof, as though made on such date(except to the extent that such representations and warranties relate solely to an earlier date, in which case such representations and warranties shallhave been true and correct in all material respects as of such earlier date).(c) The execution and delivery by each Loan Party of this Amendment, the performance by such Loan Party of its obligations hereunder andthe performance of the Borrower under the Credit Agreement, as amended by this Amendment, (i) have been duly authorized by all necessaryorganizational action on the part of such Loan Party and (ii) will not (A) violate any provisions of the certificate of incorporation or formation ororganization or by-laws or limited liability company agreement or limited partnership agreement of such Loan Party or (B) constitute a violation bysuch Loan Party of any applicable material Requirement of Law.Each Loan Party acknowledges that the Administrative Agent and the Lenders have acted in good faith and have conducted in a commerciallyreasonable manner their relationships with each Loan Party in connection with this Amendment and in connection with the other Loan Documents.Each Loan Party understands and acknowledges that the Administrative Agent and the Lenders are entering into this Amendment in reliance upon, andin partial consideration for, the4above representations, warranties, and acknowledgements, and agrees that such reliance is reasonable and appropriate.8. Payment of Costs and Expenses . The Borrower shall pay to the Administrative Agent all reasonable costs and out-of-pocket expenses ofevery kind in connection with the preparation, negotiation, execution and delivery of this Amendment and any documents and instruments relatinghereto or thereto (which costs include, without limitation, the reasonable and documented fees and expenses of any attorneys retained by theAdministrative Agent).9. Choice of Law . THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BEGOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEWYORK . Each party hereto submits to the exclusive jurisdiction of the State and Federal courts in the Southern District of the State of New York;provided, however, that nothing in the Credit Agreement as amended by this Amendment shall be deemed to operate to preclude the AdministrativeAgent or any Lender from bringing suit or taking other legal action in any other jurisdiction to realize on the Collateral or any other security for theObligations, or to enforce a judgment or other court order in favor of such Agent or such Lender. TO THE EXTENT PERMITTED BYAPPLICABLE LAW, EACH PARTY HERETO WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTIONARISING OUT OF OR BASED UPON THIS AMENDMENT, THE OTHER LOAN DOCUMENTS OR ANY CONTEMPLATEDTRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. EACH PARTY HERETOACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THATEACH HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AMENDMENT, AND THAT EACH WILL CONTINUETO RELY ON THIS WAIVER IN ITS RELATED FUTURE DEALINGS. EACH PARTY HERETO FURTHER WARRANTS ANDREPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY ANDVOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.10. Counterpart Execution . This Amendment may be executed in any number of counterparts and by different parties on separatecounterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute butone and the same Amendment. Delivery of an executed counterpart of this Amendment by telefacsimile or by e-mail transmission of an Adobe fileformat document (also known as a PDF file) shall be equally as effective as delivery of an original executed counterpart of this Amendment. Any partydelivering an executed counterpart of this Amendment by telefacsimile or by e-mail transmission of an Adobe file format document (also known as aPDF file) also shall deliver an5original executed counterpart of this Amendment but the failure to deliver an original executed counterpart shall not affect the validity, enforceability,and binding effect of this Amendment.11. Effect on Loan Documents .(a) The amendments set forth herein shall be limited precisely as written and shall not be deemed (a) to be a forbearance, waiver, ormodification of any other term or condition of the Credit Agreement or of any Loan Documents or to prejudice any right or remedy which theAdministrative Agent may now have or may have in the future under or in connection with the Loan Documents; (b) to be a consent to any futureconsent or modification, forbearance, or waiver to the Credit Agreement or any other Loan Document, or to any waiver of any of the provisionsthereof; or (c) to limit or impair the Administrative Agent’s right to demand strict performance of all terms and covenants as of any date. Each LoanParty hereby ratifies and reaffirms its obligations under the Credit Agreement and the other Loan Documents to which it is a party and agrees that noneof the amendments or modifications to the Credit Agreement set forth in this Amendment shall impair such Loan Party’s obligations under the LoanDocuments or the Administrative Agent’s rights under the Loan Documents. Each Loan Party hereby further ratifies and reaffirms the validity andenforceability of all of the Liens heretofore granted, pursuant to and in connection with the Guarantee and Collateral Agreement or any other LoanDocument to the Administrative Agent on behalf and for the benefit of the Secured Parties, as collateral security for the obligations under the LoanDocuments, in accordance with their respective terms, and acknowledges that all of such Liens, and all collateral heretofore pledged as security forsuch obligations, continues to be and remain collateral for such obligations from and after the date hereof. Each Loan Party acknowledges and agreesthat the Credit Agreement and each other Loan Document is still in full force and effect and acknowledges as of the date hereof that such Loan Partyhas no defenses to enforcement of the Loan Documents. Each Loan Party waives any and all defenses to enforcement of the Credit Agreement asamended hereby and each other Loan Documents that might otherwise be available as a result of this Amendment of the Credit Agreement. To theextent any terms or provisions of this Amendment conflict with those of the Credit Agreement or other Loan Documents, the terms and provisions ofthis Amendment shall control.(b) To the extent that any terms and conditions in any of the Loan Documents shall contradict or be in conflict with any terms or conditionsof the Credit Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed modified or amended accordingly toreflect the terms and conditions of the Credit Agreement as modified or amended hereby.(c) This Amendment is a Loan Document.12. Entire Agreement . This Amendment constitutes the entire agreement between the Loan Parties and the Lenders pertaining to the subjectmatter contained herein and supersedes all prior agreements, understandings, offers and negotiations, oral or written, with respect hereto and6no extrinsic evidence whatsoever may be introduced in any judicial or arbitration proceeding, if any, involving this Amendment. All of the terms andprovisions of this Amendment are hereby incorporated by reference into the Credit Agreement, as applicable, as if such terms and provisions were setforth in full therein, as applicable. All references in the Credit Agreement to “this Agreement”, “hereto”, “hereof”, “hereunder” or words of like importshall mean the Credit Agreement as amended hereby.13. Severability . The provisions of this Amendment are severable, and if any clause or provision shall be held invalid or unenforceable inwhole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in suchjurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision in this Amendment inany jurisdiction.[SIGNATURE PAGES FOLLOW]IN WITNESS WHEREOF , the parties hereto have caused this Amendment to be duly executed and delivered by their proper and dulyauthorized officers as of the day and year first above written.BORROWER:ALARM.COM INCORPORATEDBy: /s/ Jennifer A. Moyer Name: Jennifer A. Moyer Title: CFO ALARM.COM HOLDINGS, INC.By: /s/ Jennifer A. Moyer Name: Jennifer A. Moyer Title: CFO ADMINISTRATIVE AGENT:SILICON VALLEY BANK, as the Administrative AgentBy: /s/ Will Deevy Name: Will Deevy Title: Vice President LENDERS:SILICON VALLEY BANK, as Issuing Lender, Swingline Lender and as a LenderBy: /s/ Will Deevy Name: Will Deevy Title: Vice President BANK OF AMERICA, N.A., as a LenderBy: /s/ Mary K. Giermek Name: Mary K. Giermek Title: Senior Vice President 7Exhibit 10.14- 1 –*** Confidential information contained in this document, marked by brackets, has been omitted and filed separately withthe Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.THIRD AMENDMENT TOTHE ALARM.COM DEALER PROGRAM AGREEMENTBETWEEN ALARM.COM INCORPORATEDAND MONITRONICS INTERNATIONAL, INC.THIS THIRD AMENDMENT (the “Amendment” ) by and between Alarm.com Incorporated, a company with its principal place of businessat 8150 Leesburg Pike, Suite 1400, Vienna, VA 22182 ( “Alarm.com” ), and Monitronics International, Inc., a Delaware company with its principalplace of business at 1990 Wittington Place, Dallas, TX 75234 (“ Monitronics ”), hereby amends the October 22, 2007 Alarm.com Agreement (“Agreement”) , as amended, by and between Monitronics and Alarm.com. In the event of a conflict between any provisions of the Agreement, asamended, and this Amendment, the provisions of this Amendment shall prevail. Capitalized terms used herein without definition have the meaningsassigned to them in the Agreement.WHEREAS, Alarm.com and Monitronics are parties to the Agreement, as amended by way of Amendment No. 1 dated January 15, 2008 andthe Second Amendment dated February 25, 2013;WHEREAS , Alarm.com and Monitronics desire to amend and supplement certain provisions of the Agreement, as amended, on the terms andsubject to the conditions set forth below.NOW, THEREFORE, in consideration of the mutual covenants herein contained, and other good and valuable consideration, Alarm.com andMonitronics agree as follows:1. AMENDMENTS RELATING TO THE ALARM.COM SERVICES1.1 Amendment Effective Date. All price adjustments reflected in this Amendment shall be effective for new accounts created on orafter the first day of the month in which this agreement has been signed by both parties (“ Amendment Effective Date ”). For the avoidance ofdoubt, for all accounts owned by Monitronics and created prior to the Amendment Effective Date, Monitronics’ existing pricing shall remain ineffect, except as allowed by Section 1.5 (Upgrade Conversion Pricing). Further, the provisions in Section 1.4 shall apply to the […***…] of […***…].1.2 High Volume Pricing Qualification . Monitronics desires to obtain the advantage of certain lower prices for Alarm.com Servicesthat can be offered by Alarm.com. Alarm.com desires to see ongoing new account production by Monitronics and the Monitronics Dealers.Alarm.com shall offer its high volume- 2 –*** Confidential information contained in this document, marked by brackets, has been omitted and filed separately withthe Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.pricing set forth in Schedule A to Monitronics, as well as the other incentives contained in this Section 1, for all accounts owned by Monitronicsand created by Monitronics or a third party on Monitronics’ behalf on or after the Amendment Effective Date ([…***…]) so long as either (a)the cumulative percentage of Alarm.com accounts activated by Monitronics or a third party on Monitronics’ behalf after the AmendmentEffective Date exceeds […***…]% of the cumulative number of […***…] accounts (regardless of whether […***…] is the […***…] or a[…***…]) activated by Monitronics or a third party on Monitronics’ behalf after the Amendment Effective Date, or (b) the […***…] ofAlarm.com accounts activated by Monitronics or a third party on Monitronics’ behalf after the Amendment Effective Date exceeds […***…]([…***…]) per month (the “ Account Production Threshold ”). Bulk purchases of accounts are excluded from the high volume pricingqualification calculations set forth above.1.3 Bulk Purchase Pricing . If, following the Amendment Effective Date, Monitronics purchases accounts in a bulk acquisition, thefollowing pricing shall apply to said accounts:(a) If the account was created on or after the Amendment Effective Date, and in the […***…] the […***…] the […***…] the […***…],then the rate charged for said account shall be the rate set forth on Schedule A.(b) For all other bulk accounts not covered by paragraph 1.3 (a) above, if Monitronics or a third party on Monitronic’s behalf has created atleast […***…] accounts per month for the […***…] ([…***…]) months, the rate charged shall be the rate set forth on Schedule B.4.(c) For all other bulk purchases not covered by paragraph 1.3(a) and 1.3(b) above, the rate on such accounts shall […***…] be subject to […***…] and shall […***…] at the […***…] to […***…].Notwithstanding the foregoing, in no event shall pricing on any bulk account be […***…] the rate charged to the […***…] on the respective bulkaccount.If the number of accounts acquired in a bulk transaction exceeds […***…] ([…***…]), then Alarm.com shall […***…] on those acquired accounts[…***…] over a period of […***…] from the […***…] of […***…] according to the schedule below until the […***…] (as set forth above inparagraphs 1.3 (a) and (b).[ …***… ] After the [ …***… ] […***…][…***…][…***…][…***…][…***…][…***…][…***…][…***…]%[…***…]%[…***…]%[…***…]%[…***…]%[…***…]%** Alarm.com Confidential **- 3 –*** Confidential information contained in this document, marked by brackets, has been omitted and filed separately withthe Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.. 1.4 [ …***… ] Account Production [ …***… ]. Monitronics shall be [ …***… ] an [ …***… ] in the [ …***… ] a [ …***… ] pursuant to the[ …***… ]. If in any given month Monitronics [ …***… ] this [ …***… ], then it shall receive a [ …***… ] pursuant to the following table.Monitronics [ …***… ] Level[ …***… ] Monthly Service Billing Amount ([ …***… ])Discount % [ …***… ]$0 - $[…***…]mm[…***…]%$[…***…]mm - $[…***…]mm[…***…]%$[…***…]mm - $[…***…]mm[…***…]%$[…***…]mm - $[…***…]mm[…***…]%+ Every […***…] $[…***…] Above $[…***…]mm+ […***…]%This […***…] will be capped at […***…]%. As of September 30, 2015, the Monitronics […***…] was $[…***…] million, […***…]. Byway of example, if in July 2017 Monitronics has achieved the Account Production Threshold, and its August 1, 2017 […***…] is $[…***…]million, then Monitronics will […***…] for and receive a […***…]% […***…] of $[…***…] which will be applied as a […***…]. The […***…], however, shall be […***…] a […***…] of […***…] after the Amendment Effective Date such that […***…] of the […***…] thatMonitronics […***…] pursuant to this Section 1.4 shall be […***…] to Monitronics each […***…] until the […***…] is achieved in […***…]. If for example Monitronics […***…] a […***…]% […***…], then Alarm.com shall apply a […***…]% […***…] in […***…]after the Amendment Effective Date, […***…]% in […***…], and so on until in […***…] the […***…]% […***…] is applied.1.5 2g Upgrade Conversion Pricing. Alarm.com recognizes that Monitronics owns Subscriber accounts whose equipment utilizes the 2gGSM network and that those accounts may need to be upgraded to newer generation technology in the coming years. For any non-Alarm.com 2g account owned by Monitronics, Alarm.com shall […***…] in this replacement initiative by […***…] the […***…] toMonitronics on that account if it is converted to the Alarm.com Services […***…] a […***…] to $[…***…] per month. The $[…***…] per month charge shall be the monthly fee for each such converted account […***…], and shall last for a period of […***…]([…***…]) billing cycles, at which point the rate charged by Alarm.com for that account shall be the rate set forth on Schedule A orSchedule B, whichever** Alarm.com Confidential **- 4 –*** Confidential information contained in this document, marked by brackets, has been omitted and filed separately withthe Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.is in effect at such time. Monitronics shall provide to Alarm.com a list of accounts each month which are upgrades of non-Alarm.com2G accounts which were immediately previously serviced by Monitronics on a third party 2G offering, and inclusive of the Alarm.comCustomer ID for such accounts. Such list shall be officially approved by either the CFO or the Senior Vice President of Operations atMonitronics and provided to Alarm.com by the 15 th business day of each month (for the previous month’s conversion activity) andAlarm.com shall enroll these customers in the […***…] effective the billing cycle after notification. By way of example, if Monitronicsupgraded a non-Alarm.com 2g account to the Alarm.com Services […***…] a […***…] on February 6 th , 2016, and Monitronicsnotified Alarm.com on March 10 th , 2016 of such conversion, then Alarm.com would bill Monitronics $[…***…] per month on theirnext […***…] invoices (or for so long as the account remained active) for that account beginning April 1 st , 2016, and on […***…]the rate charged for the account would be […***…] according to […***…] rates with Alarm.com as of […***…] for any features theaccount is subscribed to.Furthermore, upon the upgrade of any Alarm.com subscriber account from a 2g to 3g or LTE Alarm.com module, the monthly fee for suchsubscriber account will be changed to the […***…] rate […***…] at the time of upgrade (i.e., […***…] as a […***…], and shall […***…]in […***…]). For the avoidance of doubt, the conversion of an AT&T 2g account to […***…] shall not be eligible for new pricing and theexisting rate for such account shall continue to apply.1.6 Pricing Changes. If during any month following the Amendment Effective Date, the Account Production Threshold outlined insection 1.2, is not satisfied the following price increases shall take effect:◦For each account created in the month immediately after the month in which the Account Production Threshold is not met, thepricing for such accounts shall be increased to the rate set forth in Schedule B (based on the […***…] of Alarm.com accountsactivated by Monitronics or a third party on Monitronics’ behalf after the Amendment Effective Date. At such time as theAccount Production Threshold is again achieved, the rate on newly generated accounts shall be as set forth in Schedule A,however all accounts created during the months in which the Account Production Threshold was not met shall continue to becharged at the rate at which they were created pursuant to Schedule B.◦Further, in any month that the Account Threshold is not met and in which Monitronics creates less than […***…] new accounts,(based** Alarm.com Confidential **- 5 –*** Confidential information contained in this document, marked by brackets, has been omitted and filed separately withthe Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.on the […***…] of Alarm.com accounts activated by Monitronics or a third party on Monitronics’ behalf after the AmendmentEffective Date) the […***…], if any, to which Monitronics is entitled pursuant to Section 1.4 shall be […***…] for therespective month as follows:◦If Monitronics creates […***…] than […***…] accounts (based on the […***…] of Alarm.com accounts activated byMonitronics or a third party on Monitronics’ behalf after the Amendment Effective Date) but […***…], (based on the[…***…] of Alarm.com accounts activated by Monitronics or a third party on Monitronics’ behalf after the AmendmentEffective Date) Monitronics shall receive […***…]% of the […***…];◦If Monitronics creates […***…] or […***…] accounts (based on the […***…] of Alarm.com accounts activated byMonitronics or a third party on Monitronics’ behalf after the Amendment Effective Date) but […***…], (based on the[…***…] of Alarm.com accounts activated by Monitronics or a third party on Monitronics’ behalf after the AmendmentEffective Date) Monitronics shall receive […***…]% of the […***…];◦If Monitronics creates […***…] or […***…] accounts, (based on the […***…] of Alarm.com accounts activated byMonitronics or a third party on Monitronics’ behalf after the Amendment Effective Date) Monitronics shall receive […***…]% of the […***…].2. GENERAL TERMS2.1 Confidentiality . For the avoidance of doubt, this Amendment forms part of the Agreement and therefore the provision of Section8.6 of the Agreement shall apply to any disclosure of the existe nc e or terms of this Amendment, including the pricing contemplated hereby.2.2 Press Release. The parties agree to issue a press release as mutually agreed by the parties.2.3 Effect of this Amendment . Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit,impair, constitute a waiver of or otherwise affect the rights and remedies of Alarm.com and Monitronics and shall not alter, modify, amend or inany way affect any of the terms, conditions, obligations, covenants or agreements contained in the Agreement, as amended, all** Alarm.com Confidential **- 6 –*** Confidential information contained in this document, marked by brackets, has been omitted and filed separately withthe Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.of which are ratified or affirmed in all respects and shall continue in full force and effect. Nothing herein shall be deemed to entitle eitherAlarm.com or Monitronics to consent to, or constitute a waiver, amendment, modification or other change of, any of the terms, conditions,obligations, covenants or agreements contained in the Agreement, as amended, in similar or different circumstances. After the AmendmentEffective Date, any reference to the Agreement shall mean the Agreement as amended hereby.2.4 Entire Agreement . This Amendment, together with the Agreement, as amended, contains the entire agreement and understandingbetween the parties concerning its subject matter. This Amendment supersedes all prior proposals, representations, agreements, andunderstandings, written or oral, concerning its subject matter. No amendment to this Amendment shall be effective unless it is in writing andsigned by the parties.2.5 [ …***… ] . Except as otherwise set forth in Section 4.1 (a) (i.e., third party telecommunication charges) of the originalAgreement dated October 22, 2007, or in the event of verifiable government or regulatory surcharges or taxes, […***…] may […***…] the[…***…] in this Amendment without the express written consent of […***…].2.6 Assent to this Amendment . Monitronics signifies its assent to this Amendment by signing the Amendment in the indicatedsignature block and faxing or otherwise providing it to Alarm.com. Alarm.com signifies its assent to this Amendment by signing thisAmendment and returning it to Monitronics. Alarm.com, at its option, may sign a counterpart of this Agreement other than the counterpartassented to by Monitronics. The parties intend that facsimile signatures shall have the same binding effect as originals. The individual signingon behalf of Monitronics represents and warrants that he or she is a representative of Monitronics duly authorized by to signify assent to thisAgreement.2.7 [ …***…]. […***…]. At the request of Monitronics, the CFO or CEO of Alarm.com shall certify in writing that Alarm.com is incompliance with its obligations hereunder. As of the date of this Amendment, Alarm.com acknowledges and agrees it is in compliance with thiscovenant.2.7 Additional Changes . Except as set forth in the Agreement, as amended, and this Amendment, Alarm.com shall not change the ratesfor any services to Monitronics without the mutual written consent of Monitronics.* * * *** Alarm.com Confidential **- 7 –IN WITNESS WHEREOF , this Third Amendment to the Alarm.com Dealer Program Agreement, as amended, has been executed anddelivered by the duly authorized officers of the parties hereto on the date first above written.ALARM.COM INCORPORATEDMonitronics International, inc.By: /s/ Stephen Trundle By: /s/ Bruce Mungiguerra Name: Stephen Trundle Name: Bruce Mungiguerra Title: CEO Title: Senior Vice President Operations Date: 12/31/2015 Date: 12/31/2015 - 8 –*** Confidential information contained in this document, marked by brackets, has been omitted and filed separately withthe Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.Schedule A[ …***… ] ALARM SIGNALING AND ENHANCED SERVICES PLAN PRICINGServicePriceWireless Signal Forwarding 1$[ …***… ]Home Center 2$[ …***… ]Silver Interactive 3$[ …***… ]Silver Interactive + Automation 4$[ …***… ]Interactive Gold 5$[ …***… ]2-Way Voice$[ …***… ]Pro Video 6$[ …***… ]Video Expansion Packs 7$[ …***… ]Video 24x7 8$[ …***… ]1 Wireless Signal Forwarding (WSF) includes Daily Supervision, Usage Reporting, and Level 1 Smash and Crash and all enterprise management capabilities associated with AirFX as well as the Business Intelligence module.2 Home Center includes all of the features of Wireless Signal Forwarding, as well as Level 2 Smash and Crash, remote arming, alerts for alarm and other system events, and cellular 2-Way Voice, and 5 day weather as well as severe weather alerts.3 Silver Interactive includes all of the features of Wireless Signal Forwarding, as well as Level 2 Smash and Crash, remote arming, alerts with up to 30 sensors for alarm events, system events, and non-alarm sensor events, and cellular 2-Way Voice, and 5 day weatherand severe weather alerts.4 Silver Interactive + Automation includes all of the features of Silver Interactive as well as automation of thermostats, lights, locks, and garage doors.5 Interactive Gold includes all of the features of Silver Interactive + Automation as well as Image Sensor photo notifications and Identity Theft Protection.6 Pro Video includes support for up to 4 cameras, with 1,000 clips of cloud storage and 1,000 clip uploads per month.7 Video Expansion Packs require a Pro Video subscription and allow support for up to an additional 4 cameras, as well as 5,000 clips of cloud storage and 5,000 clip uploads per month.8 Video 24x7 provides continuous recording service, and requires a Pro Video subscription and a Streaming Video Recorder.In addition to the above capabilities, the following business tools will be included at [ …***… ] to Monitronics: [ …***… ], and [ …***… ].Alarm.com will charge an [ …***… ] of up to $[ …***… ] per [ …***… ] for each of [ …***… ], and [ …***… ] accounts when used in [ …***… ]. ** Alarm.com Confidential **- 9 –*** Confidential information contained in this document, marked by brackets, has been omitted and filed separately withthe Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.Schedule BPricing for Accounts when Account Production Threshold Not Met1.Pricing for [ …***… ] accounts if [ …***… ] creation rate is between [ …***… ] and [ …***… ] (based on the […***…] of Alarm.com accounts activated byMonitronics or a third party on Monitronics’ behalf after the Amendment Effective Date)Wireless Signal Forwarding $ [ …***… ]Home Center $ [ …***… ]Silver Interactive $ [ …***… ]Silver Interactive + Automation $ [ …***… ]Interactive Gold $ [ …***… ]2-Way Voice $ [ …***… ]Pro Video* $ [ …***… ]Video Expansion Packs $ [ …***… ]Video 24x7 $ [ …***… ]2.Pricing for [ …***… ] accounts if [ …***… ] creation rate is between [ …***… ] and [ …***… ] accounts (based on the […***…] of Alarm.com accountsactivated by Monitronics or a third party on Monitronics’ behalf after the Amendment Effective Date)Wireless Signal Forwarding $ [ …***… ]Home Center $ [ …***… ]Silver Interactive $ [ …***… ]Silver Interactive + Automation $ [ …***… ]Interactive Gold $ [ …***… ]2-Way Voice $ [ …***… ]Pro Video* $ [ …***… ]Video Expansion Packs $ [ …***… ]Video 24x7 $ [ …***… ]3.Pricing for [ …***… ] accounts if [ …***… ] creation rate is between [ …***… ] and [ …***… ] accounts (based on the […***…] of Alarm.com accountsactivated by Monitronics or a third party on Monitronics’ behalf after the Amendment Effective Date)Wireless Signal Forwarding $ [ …***… ]Home Center $ [ …***… ]Silver Interactive $ [ …***… ]Silver Interactive + Automation $ [ …***… ]Interactive Gold $ [ …***… ]2-Way Voice $ [ …***… ]Pro Video* $ [ …***… ]Video Expansion Packs $ [ …***… ]Video 24x7 $ [ …***… ]** Alarm.com Confidential **- 10 –*** Confidential information contained in this document, marked by brackets, has been omitted and filed separately withthe Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.4.Pricing for [ …***… ] accounts if [ …***… ] creation rate is [ …***… ] accounts (based on the […***…] of Alarm.com accounts activated by Monitronics or athird party on Monitronics’ behalf after the Amendment Effective Date)Wireless Signal Forwarding $ [ …***… ]Home Center $ [ …***… ]Silver Interactive $ [ …***… ]Silver Interactive + Automation $ [ …***… ]Interactive Gold $ [ …***… ]2-Way Voice $ [ …***… ]Pro Video* $ [ …***… ]Video Expansion Packs $ [ …***… ]Video 24x7 $ [ …***… ]** Alarm.com Confidential **Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-205245) of Alarm.com Holdings, Inc. of our report datedFebruary 29, 2016 relating to the financial statements and financial statement schedule, which appears in this Form 10-K./s/PriceWaterhouseCoopers LLPMcLean, VAFebruary 29, 2016Exhibit 31.1 Certification of Chief Executive OfficerPursuant to Rule 13a-14(a) under theSecurities Exchange Act of 1934, as Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002 I, Stephen Trundle, certify that: 1.I have reviewed this Annual Report on Form 10-K of Alarm.com Holdings, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light ofthe circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) for the registrant and have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that materialinformation relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which thisreport is being prepared; b)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosurecontrols and procedures, as of the end of the period covered by this report based on such evaluation; and c)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’sfourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and theaudit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect theregistrant’s ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.Date: February 29, 2016 /s/ Stephen Trundle Stephen Trundle President, Chief Executive Officer and Director(Principal Executive Officer)Exhibit 31.2 Certification of Chief Financial OfficerPursuant to Rule 13a-14(a) under theSecurities Exchange Act of 1934, as Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002 I, Jennifer Moyer, certify that: 1.I have reviewed this Annual Report on Form 10-K of Alarm.com Holdings, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light ofthe circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) for the registrant and have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that materialinformation relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which thisreport is being prepared; b)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosurecontrols and procedures, as of the end of the period covered by this report based on such evaluation; and c)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’sfourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and theaudit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect theregistrant’s ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 29, 2016 /s/ Jennifer Moyer Jennifer Moyer Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)Exhibit 32.1 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of theUnited States Code (18 U.S.C. §1350), Stephen Trundle, Chief Executive Officer of Alarm.com Holdings, Inc. (the “Company”), and Jennifer Moyer, Chief Financial Officer of theCompany, each hereby certifies that, to the best of his or her knowledge:1.The Company’s Annual Report on Form 10-K for the period ended December 31, 2015 (the “Annual Report”), to which this Certification is attached as Exhibit 32.1, fullycomplies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and2.The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.In Witness Whereof , the undersigned have set their hands hereto as of the 29th day of February, 2016. /s/ Stephen TrundleDate: February 29, 2016 Stephen Trundle President, Chief Executive Officer and Director(Principal Executive Officer) /s/ Jennifer MoyerDate: February 29, 2016 Jennifer Moyer Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer)This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into anyfiling of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K),irrespective of any general incorporation language contained in such filing.

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