Audio • Door Bell • Door Locks • Door & Window Sensors • Energy Monitoring • Garage Door • Image Sensor
Irrigation • Lights • Security Panel • Smoke Detector • Thermostats • Video Monitoring • Water Sensor
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-37461
ALARM.COM HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
8281 Greensboro Drive, Suite 100, Tysons, Virginia
(Address of principal executive offices)
26-4247032
(I.R.S. Employer
Identification Number)
22102
(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 registered
Common Stock, $0.01 par value per share
The Nasdaq Stock Market LLC
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
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
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).
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’s knowledge, 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, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
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
$37.63 per share of the registrant's common stock as reported on The Nasdaq Global Select Market on June 30, 2017 was $850.5 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 be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
As of February 15, 2018, there were 47,205,817 outstanding shares of the registrant's common stock, $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions 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 2018 Annual Meeting of Stockholders, 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 Exchange Commission not later than 120 days following the
end of the registrant’s fiscal year ended December 31, 2017.
LARM.CO
ALARM.COM HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
TABLE OF CONTENTS
PART I.
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 5.
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations(cid:3)
Consolidated Balance Sheets
Consolidated Statements of Cash Flows(cid:3)
Consolidated Statements of Equity
Notes to the Consolidated Financial Statements(cid:3)
Schedule II. Valuation and Qualifying Accounts
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure(cid:3)
Item 9.(cid:3)
Item 9A.(cid:3) Controls and Procedures
Item 9B.(cid:3) Other Information
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV.
Item 15. Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary(cid:3)
Signatures
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This 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, or the 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, our strategy, future
operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management. The
forward-looking statements are contained principally 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
statements involve 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 the information expressed or implied by these forward-looking
statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this
prospectus, 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 be certain. Forward-looking statements include statements about:
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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 provider partners, maintain existing service provider partner relationships and increase
the productivity of our service provider partners;
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 integrate and manage the businesses we acquired from Icontrol Networks, Inc., and realize the benefits
we expected from such acquisition;
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 systems, 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 provider partners 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 those expressed 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 be accurate.
Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant
uncertainties in these forward-looking statements, 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 frame or 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 similar references refer to Alarm.com Holdings, Inc. and, where appropriate, our
consolidated subsidiaries.
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ITEM 1. BUSINESS
Overview
PART I.
Alarm.com is the leading platform for the intelligently connected property. We offer a comprehensive suite of cloud-based
solutions for smart residential and commercial properties, including interactive security, video monitoring, intelligent automation,
energy management and wellness solutions. Millions of property owners rely on our technology to intelligently secure, monitor
and manage their residential and commercial properties. In the last year alone, our platforms processed more than 100 billion
data points generated by over 80 million connected devices. We believe that this scale of subscribers, connected devices and
data operations makes us the leader in the connected property market.
Our solutions are delivered through an established network of over 7,000 trusted service providers, who are experts at
selling, installing and supporting our solutions. We derive our revenue from three primary sources: the sale of cloud-based SaaS
services on our integrated Alarm.com platform, the sale of licenses and services on the Connect software platform and the sale
of hardware products. We sell our platform and hardware solutions to service provider partners that resell our solutions and
hardware to residential and commercial property owners, who are the service provider partners’ customers. Our subscribers
consist of all of the properties maintained by those residential and commercial property owners to which we are delivering at
least one of our solutions. We also sell our hardware to distributors who resell the hardware to service provider partners. Our
hardware sales include gateway modules and other connected devices that enable our services, such as video cameras and
smart thermostats.
We enter into contracts with our service provider partners that establish pricing for access to our platform solutions and for
the sale of hardware. These contracts typically have an initial term of one year, with subsequent renewal terms of one year. Our
service provider partners typically enter into contracts with our subscribers, which our service provider partners have indicated
range from three to five years in length. Our service provider partners are free to market and sell our products under their own
guidelines at prices to the consumer that they establish independently. We believe that the length of the service contracts with
residential and commercial property owners, combined with our robust SaaS platforms and over 15 years of operating
experience, contribute to a compelling business model.
We have experienced significant growth since our company's inception in 2000. We generated total revenue of $338.9
million, $261.1 million and $208.9 million in 2017, 2016 and 2015, respectively. Our SaaS and license revenue was $236.3
million, $173.5 million and $140.9 million in 2017, 2016 and 2015, respectively, representing a compound annual growth rate of
29.5%. We also generated net income of $29.3 million, $10.2 million and $11.8 million in 2017, 2016 and 2015, respectively, as
well as Adjusted EBITDA, a non-GAAP metric, of $71.6 million, $49.0 million and $34.4 million in 2017, 2016 and 2015,
respectively. See footnote 4 to the table contained in the section of this Annual Report titled “Selected Financial Data” for a
reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measures calculated and presented in
accordance with accounting principles generally accepted in the United States, or GAAP.
As of December 31, 2017, we had a total of 447 employees engaged in research and development functions. For the years
ended December 31, 2017, 2016 and 2015, our total research and development expenses were $72.8 million, $44.3 million and
$40.0 million, respectively.
Acquisition of Connect and Piper Business Units from Icontrol Networks
On March 8, 2017, we completed our previously announced acquisition of two business units, Connect and Piper, from
Icontrol Networks, Inc. The Connect and Piper business models both differ from ours. Connect provides a custom, on-premise
interactive security and home automation platform for ADT Pulse® and several other service providers. Although Connect
charges a monthly per subscriber fee for these services, Connect's software is deployed and operated by the service provider in
its own network operations center. This typically requires the service provider using the Connect platform to purchase its own
server capacity, network operations bandwidth and cellular services, and to directly manage more elements of support and other
business management services, in contrast to a fully turn-key cloud-based platform solution we provide our other service
provider partners on the Alarm.com platform. Piper provides an all-in-one video and home automation hub. The addition of new
technology infrastructure, talent, key relationships and hardware devices is expected to help accelerate our development of
intelligent, data-driven smart residential and commercial services.
Our Solutions and Integrated Platforms
Our technology platforms are designed to make connected properties safer, smarter and more efficient. Our solutions are
used in both smart residential and commercial properties, which we refer to as the connected property market and we have
designed our technology platforms for all market participants. This includes not only the residential and commercial property
owners who subscribe to our services, but also the hardware partners who manufacture devices that integrate with our platforms
and the service provider partners who install and maintain our solutions.
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Our service provider partners can deploy our interactive security, video monitoring, intelligent automation, energy
management and wellness solutions as standalone offerings or as combined solutions to address the needs of a broad range of
customers. Our technology enables subscribers to seamlessly connect to their property through our family of mobile apps,
websites, and new engagement platforms like voice control through Amazon Echo, wearable devices like the Apple Watch, and
TV platforms such as Apple TV and Amazon Fire TV.
Subscriber Solutions
Interactive Security
Interactive security is the entry point for most of our smart home and business subscribers. Our dedicated, two-way cellular
connection between the property and our platforms is designed to be tamper resistant and to meet the high reliability standards
for life safety services. Our solution integrates 24x7 monitoring with emergency response through trusted and integrated central
monitoring stations. Subscribers can use our services to control and monitor their security systems, as well as connected
security devices including motion sensors, door locks, garage doors, thermostats and video cameras. The capabilities
associated with this solution include:
Alarm Transmission. We transmit alarm signals from monitored properties through our platforms to over 1,000 third-
party central monitoring stations staffed 24/7 with live operators ready to initiate emergency response.
Always-On Monitoring. Whether the security system is armed or disarmed, sensors continuously monitor activity at the
property so subscribers can be made aware of system events in all kinds of situations.
Insights Engine. Our proprietary machine learning algorithms help safeguard connected properties by learning the
unique activity patterns at the property and automatically notifying the subscriber of unexpected activity.
Real-Time Alerts. Notifications for any type of system event are delivered through push notifications, short message
service, or SMS, or email, based on the subscriber's preference.
Managed Access and Enterprise Control. Subscribers can manage their property through permission-based access,
including individualized user codes and rules based on time and day. Property managers and business owners can
utilize our Enterprise Control service to remotely manage employees’ access to the security system, door locks and
property partitions across multiple locations.
Wellness. Our technology can learn daily living patterns of an ill or aging family member through monitoring of activity
data from security and specialized sensors and identify anomalies in real-time that may indicate a problem. Alerts can
be sent to notify family members and caregivers when there are critical changes in patterns or an emergency is
detected.
Video Monitoring
Our high definition video monitoring solution can provide a direct view into the property, capture footage of critical events
and provide visual peace of mind. We integrate with various third-party camera manufacturers to offer indoor and outdoor
solutions for residential and commercial properties at varying price points. We also provide a doorbell video camera solution that
supports two-way audio with guests at the door.
The capabilities associated with our video monitoring solution include:
Live Streaming. Subscribers can securely access live video feeds through the web and mobile apps at any time.
Smart Clip Capture. Our video solutions can automatically record clips based on motion detection or system events,
like an alarm, a door opening or someone disarming the security panel.
Secure Cloud Storage. Video clips are uploaded to our cloud-based storage system for secure storage and remote
viewing.
Video Alerts. Smart clips can be automatically sent via SMS, push notifications or email as soon as they are recorded.
Continuous High Definition Recording. 24x7 onsite recording is enabled through our Stream Video Recorder, or SVR,
and can be played back securely, from anywhere, through the web and mobile apps.
Commercial Video Surveillance. Tailored for small and medium sized businesses, our commercial video surveillance
offering integrates leading commercial-grade network cameras to support a wide range of business needs, enabling
multi-camera installations with continuous recording, cloud based storage and mobile access.
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Intelligent Automation and Energy Management
Our solution provides enhanced monitoring and control for a large ecosystem of connected devices, including thermostats,
lights, locks, power meters, shades and other devices. Increasing awareness of energy usage and providing intelligent control
over connected devices enables subscribers to create personalized automation rules and schedules. We believe our solutions
can reduce energy waste as well as increase comfort and convenience for our subscribers. The capabilities associated with this
solution include:
Scenes. A customizable scenes button within the Alarm.com app provides the ability to adjust multiple devices in the
property with a single command. For example, a homeowner leaving the house can arm the security system, lock the
front door, close the garage door and adjust the thermostat with a single command.
Smart Thermostat Schedules. Machine learning algorithms analyze system activity patterns to recommend thermostat
schedules that increase energy efficiency when the property is not likely to be occupied.
Responsive Savings. Smart thermostats connected to our platforms can automatically respond to sensors and other
devices in the property to conserve energy. For example, when the security system is armed away, an arming state
used when the property is not occupied, the thermostat can automatically adjust to save energy.
Precision Comfort. Remote temperature sensors enable a subscriber to manage comfort in a specific region within their
property. For example, a homeowner can set a desired temperature for a child's nursery to improve the child’s comfort.
Subscribers can easily customize detailed schedules and rules to have the right temperature in the right location at the
right time.
Energy Usage Monitoring. Real-time and historical energy usage data for the entire property and individual devices can
give subscribers greater insight into the property’s energy consumption profile, which could encourage more efficient
use of energy-consuming devices.
Environmental Monitoring. Subscribers can utilize environmental sensors with our platforms to monitor and control their
property. For example, a leak detected by a basement water sensor can automatically shut off a water line, or a
property owner can be alerted to a sump-pump failure and react accordingly.
Geo-Services. Geo-Services use a phone’s geo-location to determine when to notify a subscriber of specific system
conditions, or to automatically adjust system settings. Subscribers who have enabled Geo-Services can be notified if
they leave home and forgot to lock a door, close the garage door, arm their security system or close a window.
Additionally, smart thermostats and lights can be automatically adjusted based on the subscriber's location. Subscribers
can create multiple geo-fences and customize the opt-in feature to meet their specific needs.
Demand Response Programs. Utilities can reduce or shift power consumption during peak demand periods by
accessing connected thermostats and other connected appliances that participate in the utility's program. Managed at
scale, these voluntary programs can significantly reduce costs for utilities. In addition to enabling subscribers to
participate in these programs through our energy management solution, our EnergyHub subsidiary aggregates a
diverse set of smart thermostats, enabling utilities to leverage these devices to operate demand response programs
and improve the results of certain demand response events through our SaaS platforms.
Commercial Solutions
In addition to our residential solutions, we offer security solutions for small and medium businesses, ranging from single-site
to multi-location enterprises. Our smarter business security solutions help solve many of the challenges faced by small business
owners, with an array of always-on operational tools that can improve management and control. Our solution enhances and
simplifies business operations, streamlines security, saves energy and provides insights into customer buying habits.
Additionally, our business insights tools provide actionable intelligence, including open and close trends by location, peak
periods of activity and customer traffic and energy savings opportunities. Key benefits of the commercial offering include:
Daily Safeguards. Smarter business security keeps subscribers' properties and business locations secure with
automatic arming at a certain time each day or after a certain period of inactivity.
Commercial Grade Video Solutions. Connected commercial cameras communicate with the security system, capturing
clips as activity occurs and clips are uploaded to our cloud-based storage system for secure storage and remote
viewing. Subscribers can receive real-time alerts and instantly view footage through the web or mobile apps if the alarm
goes off, a door is unlocked, or unexpected activity occurs outside of normal business hours. Business owners can
assess the situation and take appropriate action at any time of day and from any location.
Energy Savings. Our smarter thermostat helps subscribers reduce energy costs automatically, even if someone forgets
to adjust the temperature when they're closing up at the end of the day, generating a real return on investment.
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Protection for Valuables and Inventory. Quick notifications keep business owners in the know about individuals entering
or exiting the back office, the supply room, or any other specific rooms or doors.
Access Control. Business owners and managers can easily add and delete access for new employees and departing
employees in a few clicks, without calling the alarm company or worrying about spare keys.
Operational Insights. Visibility into activity patterns and trends can help business owners make smarter decisions
around staffing, promotions, energy use and more. Reports show activity patterns across the business, helping owners
spot new opportunities for staffing, traffic flow and promotions.
Early Problem Identification. Identify problematic activity such as unexpected entry after hours, or doors propped open
that could cause energy waste or safety concerns. Alarm.com provides a time stamped log of which users armed or
disarmed the system or entered the property using their keycard.
Simple to Use. Alarm.com’s smartphone app is intuitive to use, with visibility and control of every solution available
within a single dashboard.
Professionally Supported. Smarter business security powered by Alarm.com is supported by our authorized service
provider partners from start to finish, with installation, configuration and technical support included. Our service provider
partners are trained and equipped with Alarm.com’s advanced digital tools.
Easy to Maintain. Alarm.com’s solutions are cloud-based, so no additional IT resources are needed.
Service Provider Solutions
We also offer a comprehensive suite of enterprise-grade business management solutions for our service provider partners.
We are committed to helping our service provider partners grow their businesses, efficiently manage their customer bases and
maximize the value of their Alarm.com accounts. We believe these services strengthen our partnerships with service providers
as they build their businesses on our platforms.
Service Provider Portal. Our permission-based online portal provides account management, sales, marketing, training
and support tools. Through this portal, our service provider partners can activate and manage their Alarm.com
customer accounts, order equipment, access invoices and billing, remotely program customer systems, obtain sales
and marketing services and engage in training.
Installation and Support. The ease of installation and cost of supporting connected property solutions are critical
considerations for our service provider partners. We support the end-to-end process for deploying and managing our
solutions with tools that make installation and support more efficient.
• MobileTech Application and Remote Toolkit. Our installation and troubleshooting mobile app, designed for
service provider technicians, facilitates the successful installation, programming and support of equipment
while either on-site at subscribers’ properties or while working remotely. Service provider technicians and
customer service personnel can access a collection of remote system management tools and panel settings
through the Remote Toolkit using the MobileTech application and our service provider portal. This saves
subscribers and service providers time and money while the speed and ease of the support experience greatly
increases subscriber satisfaction.
Business Management. Our services deeply integrate with our service provider partners’ offerings and provide
increased business insight into their customer base and key business health metrics.
• Web Services. Our web services allow our service provider partners to integrate their existing customer
management software and tools with our platforms. This creates a unified interface for our service provider
partners to seamlessly perform functions like creating a new customer account or upgrading a service plan.
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Business Intelligence. Our powerful business intelligence tools provide service providers with crucial insights
into the performance of their Alarm.com subscriber account base. Business Intelligence provides key
operational metrics related to account plan adoption, attrition and service quality to help service provider
partners grow their business and improve customer retention.
Customer Relationship Management (CRM): Our SecurityTrax offering enhances our platforms with a
cloud-based CRM and enterprise resource planning solution. Expressly developed for security service
providers, SecurityTrax automates business processes across the entire customer lifecycle for more efficient
customer management and support operations.
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Sales, Marketing & Training. Our comprehensive customer lifecycle sales and marketing services are available to help
our service provider partners effectively market and sell our solutions.
• Marketing Portal. We provide a broad suite of marketing and sales tools and resources for our service
provider partners, including a MobileSales app, co-brandable landing pages, mobile optimized websites with
integrated lead capture, social media, videos, images, collateral, direct mail and event materials.
• Alarm.com Academy. We offer comprehensive in-person training programs to our service provider partners.
Additionally, we offer online courses through a learning management system, enabling our service provider
partners to access training on the full suite of Alarm.com solutions anytime.
• Customer Connections. We help our service provider partners maximize the value of existing accounts by
offering targeted in-app messaging and e-mail communications to existing subscribers. These campaigns are
designed to increase engagement, drive upsell opportunities and enable referrals for our service provider
partners.
Benefits of Our Solutions
Residential and commercial properties are ripe for reinvention. The intersection of significant technology trends, like the
broad adoption of mobile devices, the emergence of the Internet of Things, or IoT, the power of big data and the extensibility of
the cloud, makes the connected property possible. Security systems, thermostats, door locks, video cameras, lights, garage
doors and other devices that were once inert can now be intelligent and connected. Our intelligently connected property
solutions provide a wealth of benefits to our subscribers and our service provider partners.
Benefits to Subscribers:
Single Connected Platform. Our cloud-based platforms provide subscribers with a single point of integrated control
across a diverse ecosystem of IoT devices. Solutions are easily personalized to suit the individual subscriber’s needs.
Reliable Network Communications. Our platforms utilize a highly secure, highly reliable, dedicated cellular
connection which mitigates common vulnerabilities of systems that are connected via the phone line or wired networks,
such as power outages, cut phone lines, or broadband connectivity issues.
Intelligent and Actionable. Our platforms aggregate real-time, multi-point data about property activity and system
status. We have developed a highly scalable data analytics engine to deliver unique features and capabilities based on
insights derived from this growing set of data. For example, learning detailed activity patterns in a property enables our
platforms to proactively alert the subscriber about unexpected events. Our platforms continue to learn and adapt to
become more personalized over time.
Broad Device Compatibility. Our platforms support a wide variety of connected devices and communications
protocols, allowing seamless integration and automation of many devices, as well as the addition of new devices in the
future.
Accessible and Affordable. Our platforms offer an affordable alternative to expensive automation systems, legacy
residential and commercial control products and disparate point product solutions.
Trusted Provider. We have established a reputation and brand as a trusted and reliable technology provider. We
respect the privacy of our subscribers and do not sell their data. Our reputation is strengthened through our network of
over 7,000 service provider partners, who have significant expertise in the delivery of our SaaS platforms and suite of
solutions.
Benefits to Service Provider Partners:
New Revenue Generation Opportunities. Our solutions help broaden our service provider partners' offerings beyond
traditional security to also include comprehensive smart residential and commercial solutions like intelligent automation,
video monitoring and energy management. They can access new market opportunities and drive incremental recurring
monthly revenue by expanding their offerings with our solutions. We offer training, tools and other resources to help our
service provider partners fully leverage the breadth and depth of our platforms.
Expanded Set of Value-Added Services. We provide value-added services to our service provider partners, including
training, marketing, installation and support tools and business intelligence analytics. This support helps our service
provider partners more efficiently acquire, install and support their customers on our platforms.
Improved Service Provider Economics. Our cloud-based platforms can help reduce our service provider partners’
service delivery and support costs. Remote Toolkit enables our service provider partners to remotely configure, support
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and upgrade their customer's hardware or software, eliminating the cost of an in-person service call. In addition, we
believe our service provider partners can generate more revenue from each subscriber by providing services beyond
traditional security.
Broad Device Interoperability. We have an open platform which allows service provider partners to respond to market
innovation and consumer demands for connected devices. Device hardware is deeply integrated into our platforms to
provide a more cohesive experience than stand-alone products deliver. For example, we launched a smart video
doorbell suite in April 2016 to help our service provider partners address growing consumer interest with a differentiated
and fully integrated solution. Furthermore, our platforms support various broadly adopted communications protocols
used in many automation devices, including Z-Wave, Wi-Fi, ZigBee, cellular and broadband. Our open platforms and
interoperability give our service provider partners a wide selection of devices to suit their customers' needs now and in
the future.
Competitive Advantages
We believe the benefits we can deliver to our subscribers and our service provider partners create a significant competitive
advantage in the connected property market.
Scale of Subscriber Base and Service Provider Coverage. Our platforms currently support millions of residential
and commercial subscribers and we have over 7,000 service provider partners who market, sell and support Alarm.com
solutions. In 2017, our platforms processed more than 100 billion data points generated by over 80 million connected
devices. We believe the combination of the size of our subscriber base, service provider network and the volume of
data generated by the integrated devices on our platforms creates a competitive advantage for us.
Security Grade, Cloud-Based Architecture. We built our platforms with a cloud-based, multi-tenant architecture that
allows for real-time updates and upgrades. Our platforms were purpose-built from the ground up with life safety
standards at the core.
Highly Scalable Data Analytics Engine. We processed more than 100 billion data points in 2017. As consumer
preferences shift towards more proactive, intelligence-based features, we believe the scale of our data combined with
proprietary analytics give us a competitive advantage.
Trusted Brand. We believe our leading position in our space is an indicator that we have developed a trusted brand
with service providers and consumers for innovative and reliable technology and service. Our iOS and Android mobile
apps have each been downloaded millions of times and both apps consistently have exceptional user ratings.
Commitment to Innovation. We are a pioneer in the intelligently connected property market and we continue to make
significant investments in innovative research and development. Our investment has resulted in 130 issued patents as
of December 31, 2017 and numerous patent applications pending which we believe can help ensure that our
technology remains competitively differentiated and legally protected.
Growth Strategy
We intend to maintain our leadership position by continuing to develop and deploy innovative technologies and by
expanding our ecosystem of partners. Our key growth strategies include:
Drive SaaS and license revenue growth and add new service providers. We will continue to focus on helping our
service provider partners succeed in driving adoption of our full suite of services. We offer sales and marketing
resources to help our service provider partners become more effective in selling our solutions and we will continue to
make significant investments to support our service provider network. In addition, we plan to continue to expand our
network of service provider partners.
Upgrade traditional security customers to our solutions. We believe there is a significant opportunity for our service
provider partners to expand adoption of our connected solutions within their customer base. We intend to leverage our
status as a trusted provider and drive consumer interest for our offerings to enable our service provider partners to
upgrade their legacy security customers to our connected property solutions.
Continue to invest in our platforms. As a pioneer in connected home and business solutions, we have made
significant investments in building our platforms over the last 18 years. We intend to invest heavily to continue adding
innovative offerings and broadening our suite of solutions. As the IoT grows and more devices become connected, we
are building technology and partnerships to connect these devices to our platforms.
Expand international presence. We are investing in international expansion because we believe there is a significant
global market opportunity for our products and services. Today, our service provider partners are actively selling our
solutions in 34 markets, including Brazil, Chile, Colombia, Australia, New Zealand, South Africa and Turkey. We intend
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to continue to grow our number of international subscribers by strengthening our presence in existing markets and
expanding to additional markets.
Expand into the small and medium business market segment. We believe there is significant opportunity to expand
the offering of our products and services to small and medium businesses, ranging from single-site to multi-location
enterprises. We intend to leverage many of our existing solutions to provide such businesses with visibility into their key
operational activities as well as the ability to keep businesses secure and manage their energy costs.
Channel expansion. Today, many consumers purchase connected devices through a security service provider.
Continued growth in the connected property market has invited new participants into the space that can complement
our current partner ecosystem. We intend to continue to develop partnerships with heating, ventilation and air
conditioning installers, property management companies and other services companies to expand avenues into
residential and commercial properties.
Pursue selective strategic acquisitions. We may selectively pursue future acquisitions of businesses, technologies,
or products that complement our platforms and align with our overall growth strategy. Such acquisitions could expand
our team and/or technology portfolio to help us add new features to our platforms, accelerate the pace of our innovation
or help us access complementary markets.
Market Opportunity
Our addressable market consists of both residential and commercial properties. Our residential subscribers are typically
owners of single-family homes and our commercial subscribers often include retail businesses, restaurants, commercial facilities
and professional offices.
We believe there is an opportunity to significantly increase the adoption of our solutions as more residential and commercial
property owners look to add monitored security systems. According to research data from Parks Associates, approximately 21 to
22% of U.S. broadband households had professionally monitored security systems from 2014 to 2016 and this percentage is
expected to grow to 27% by 2020. In addition, a market research report on the IoT published by MarketsandMarkets estimates
that the IoT security market is expected to grow from $7 billion in 2017 to $29 billion by 2022, at a compound annual growth rate,
or CAGR, of 34% from 2017 to 2022.
We also believe that the major technology trends of mobile access, the IoT, big data and cloud technology will continue to
create opportunities to connect people with their properties in new ways. These trends will continue to make connected services
and devices more broadly available and affordable for property owners across North America and worldwide. According to a
2017 Parks Associates industry report, 26% of U.S. broadband households owned at least one smart home device in 2016.
Parks Associates’ research suggests that sales of smart home devices will continue to grow as nearly 55 million devices are
expected to be sold in 2020 alone. While we do not expect that Alarm.com will be the sole beneficiary of the trends suggested by
these reports, we do believe that the trends highlight a significant market opportunity.
Our Technology
Cloud Services Platform
Our internal engineering teams have designed and developed our core technology. As an industry leader, we believe we
have robust cloud service platforms for the intelligently connected property. Our cloud services platforms manage
communication with the system at the property, intelligently direct alerts and notifications, learn patterns and identify anomalies
and manage video processing and storage. Additionally, our platforms enable device integrations through application program
interfaces, or APIs, and offer our service provider partners extensive integration services.
Since our inception, we have utilized a multi-tenant SaaS platform architecture to enable rapid innovation in a highly
scalable environment. Our platforms are architected to scale and our technology team has developed proprietary cloud-based
applications to support our service provider partners and subscribers. Security and life safety are mission critical components of
our service offering; thus, we are committed to very high reliability standards. We operate our Alarm.com cloud services platform
through two fully redundant network operation centers located in Phoenix, Arizona and Ashburn, Virginia. Each center is
designed to run the entire Alarm.com platform independent of the other.
Hardware and Manufacturing
We are involved in designing and manufacturing various types of hardware that enable our solutions, including:
Cellular Communication Modules. We offer cellular communications modules that are tightly integrated with security
system control panels, sensors and other devices. We regularly pioneer technical advances in this space, including the
expansion of our deployment of security services hardware with 4G LTE cellular network connections. All of our
modules, designed by our device engineering team and manufactured in the United States by a contract manufacturing
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partner, provide a dedicated and fully managed two-way cellular connection between the subscriber’s property and our
cloud platforms. The modules run our proprietary firmware and enable:
• Real-time analysis of system events reported by security sensors and other devices.
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Local automation rule execution.
The management of message transmissions to our cloud platforms for further processing.
Image Sensor. Our image sensor, designed by our device engineering team and manufactured in the United States by
a contract manufacturing partner, is a wireless, battery-operated, passive infrared motion sensor that captures images
based on various system triggers. These images are transmitted by our cellular communications module to our cloud
platforms. Subscribers can securely view images through our website and mobile apps, as well as customize their
notification settings to have new images automatically sent via SMS and email.
Video Cameras. We offer a suite of high definition, Internet Protocol, or IP, video cameras to enable our video
monitoring services. Our indoor, outdoor, and video doorbell cameras include options for night vision capabilities as well
as wireless or Power over Ethernet communication features. We also offer a network video recording device, the SVR,
for on premise, continuous video recording seamlessly connected to our cloud platforms for remote playback through
our user interfaces. Our video cameras and SVRs are specified to our platforms through proprietary software. Our
video service also enables third-party cameras, such as legacy analog cameras, to be integrated into our platforms.
Alarm.com Smart Thermostat. Our Smart Thermostat combines elegant design, sophisticated cloud services and
advanced energy management features. It was designed by our device engineering team to work in concert with other
devices in the connected property. It communicates with the Alarm.com communications module via Z-wave and
supports both battery power and common wire power installation.
• Remote temperature sensors can pair with our Smart Thermostat to enable temperature set points for any
room in the property, not just the room where the thermostat is installed. Our Smart Thermostat supports
multiple remote temperature sensors for precise temperature control for a residential or commercial property.
• We designed our Smart Thermostat to be easy to install and support remotely. The MobileTech app assists in
proper wiring and installation and Remote Toolkit enables remote access to the thermostat settings for easy
troubleshooting and support.
Research and Development
We invest substantial resources in research and development to enhance our platforms and applications, support our
technology infrastructure, develop new capabilities and conduct quality assurance testing. We expect to invest significantly in
continued research and development efforts to expand the capabilities of our technology. Our research and development of new
products and services is a multidisciplinary effort across our product management, program management, software engineering,
device engineering, quality engineering, configuration management and network operations teams. As of December 31, 2017,
we had 447 employees engaged in research and development functions. For the years ended December 31, 2017, 2016 and
2015, our total research and development expenses were $72.8 million, $44.3 million and $40.0 million, respectively.
Service Provider Network
Our trusted service provider partner network is key in driving the adoption of connected home and commercial solutions.
Our solutions are sold, installed, and serviced by a network of licensed, professional service provider partners. Our channel
network currently consists of over 7,000 active service provider partners, including smaller local providers, larger regional
providers and national service providers with thousands of employees. We have also seen growth in other areas of our channel
network, including new providers in the intelligent automation, HVAC and property management markets.
We believe this highly trusted, established network is a core strategic strength that enables an efficient and scalable
customer acquisition model, allowing us to focus on technology innovation. We also believe that the combination of our solutions
and our service provider partners’ expertise is the most effective way to drive mass market adoption of the intelligently
connected property.
The traditional security and home automation market is highly fragmented with approximately 15,000 security dealers
nationally. According to the February 2018 Barnes Buchanan Conference Report, the top 5 dealers represented 35% of all
industry recurring monthly revenue in 2017. The distribution of revenue among our service provider partners is reflective of the
industry overall. Monitronics International, Inc. represented greater than 15% but not more than 20% of our revenue in 2015 and
greater than 10% but not more than 15% of our revenue in 2016 and 2017. ADT LLC represented greater than 15% but not more
than 20% of our revenue in 2017.
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Subscribers
Our platforms currently support millions of residential and commercial subscribers. We define the number of 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 of our service level packages as well as one or more of our a la carte add-ons is counted as one subscriber.
Our number of subscribers does not include the customers of our service provider partners to whom we license our intellectual
property, as they do not utilize one of our SaaS platforms. While approximately 4% of subscribers utilize a commercial service
plan, we do not have exact data regarding the actual number of commercial properties utilizing our services because we believe
that many commercial properties are serviced with our basic interactive security service plans. Our subscriber acquisition cost
payback period has historically been less than one year.
Sales and Marketing
The goal of our sales team is to help our service provider partners succeed in selling, installing and supporting our full suite
of solutions. Our sales team is also responsible for recruiting new service provider partners to Alarm.com. We also have a global
business development team dedicated to establishing new service provider and distribution relationships in international
markets.
Our marketing team is focused on empowering our service provider partners to effectively promote and sell our solutions.
We design, develop and provide end-to-end marketing services including tools and content for lifecycle marketing to help our
service providers build awareness, create interest, activate subscribers, develop and maintain the ongoing customer
relationship, increase customer engagement, and generate upsell and referral opportunities. We also offer comprehensive
training opportunities through our Alarm.com Academy, including in-person training courses and an online learning management
system.
We believe our sales and marketing approach enables us to expand our breadth of service providers, provide highly
customized services and scale quickly with only incremental costs. As of December 31, 2017, we had 242 employees engaged
in sales and marketing functions.
Service Provider Support
We support the full suite of software and hardware products on the Alarm.com platform through a highly trained and
experienced team of professionals based in the United States. We primarily support our service provider partners. Our service
provider partners, in turn, support their customers, who are our subscribers. To that end, subscribers occasionally reach us
directly with support needs and we either assist the subscriber directly or, when appropriate, route the subscriber to the
appropriate service provider partner for additional assistance.
We offer high-quality support to our service providers via phone, web ticketing and email. With every interaction, our team is
committed to exceptional customer satisfaction and industry-leading response times. We use a tiered structure to efficiently
escalate and resolve issues of varying complexity and to scale our support organization as we grow. Our staff is multilingual and
we continue to grow our language capabilities to support our international expansion.
Our Competition
The market in which we participate for connected property solutions is fragmented, highly competitive and constantly
evolving. We expect competition to continue from existing competitors as well as potential new market entrants in the interactive
security, video monitoring, intelligent automation and energy management markets. Our current competitors include providers of
other technology platforms for the connected property with interactive security, including Honeywell International Inc., Telular
Corporation, SecureNet Technologies, LLC, Ring Inc., IPR, Inc. (formed following the merger of ipDatatel, LLC and Resolution
Products, LLC), and United Technologies Corporation, which sell solutions to service providers, cable operators, technology
retailers and other residential and commercial automation providers. We also compete with interactive, monitored security
solutions sold directly to subscribers by firms like Scout and SimpliSafe. In addition, our service provider partners compete with
managed service providers, such as cable television, telephone and broadband companies like Comcast, AT&T Inc. and Charter
Communications, Inc., and providers of point products, including Google Inc.'s Nest Labs, Inc. which offers the Nest Protect
security system as well as a smart thermostat, a smart smoke detector and video cameras. Amazon.com offers a security
camera and smart lock integration feature, Amazon Key. Samsung's SmartThings offers a security system and a home
automation and awareness hub. Apple Inc. offers a feature that allows some manufacturers’ connected devices and accessories
to be controlled through its HomeKit service available in Apple’s iOS operating system. Additionally, Lowes, Canary and other
companies offer all in one video monitoring and awareness devices. In addition, we may compete with other large technology
companies that offer control capabilities among their products, applications and services, and that may have ongoing
development efforts to address the broader connected home market.
Many 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 and internationally, from other
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established and emerging residential and commercial security monitoring, video monitoring and automation, wellness, and
energy management companies as well as large technology companies. 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 may also
establish cooperative relationships among themselves or with third parties and rapidly acquire significant market share.
Increased competition could also result in price reductions and loss of market share, any of which could result in lower revenue
and negatively affect our ability to grow our business. We believe the principal competitive factors in the connected property
market include the following:
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simplicity and ease of use;
ability to offer persistent awareness, control, and intelligent automation;
breadth of features and functionality provided;
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. Additionally, we believe that our cloud-based
software platforms, intelligently connected property solutions, and proven scalability help further differentiate us from
competitors. Nevertheless, our competitors may have substantially greater financial, technical and other resources, greater
brand recognition, larger sales and marketing budgets and broader distribution channels than we do.
Our Intellectual Property
Our 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 property rights. 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 license agreements,
confidentiality agreements and other contractual protections.
As of December 31, 2017, we owned 126 issued United States utility patents, one issued United States design patent, two
issued Canadian patents and one issued Australian patent that are scheduled to expire between 2021 and 2036. We continue to
file patent applications and as of December 31, 2017, we had 101 pending utility patent applications and 79 provisional patent
applications filed in the United States. We also had seven pending patent applications in Canada, five pending patent
applications in Europe, four pending patent applications in Australia and eight international patent applications pending under the
Patent Cooperation Treaty. The claims for which we have sought patent protection apply to both our platforms and solutions. Our
patent and patent applications generally apply to the features and functions of our platforms, and solutions and the applications
associated with our platforms. We also have, and may be required 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 13 registered trademarks in
the United States, including Alarm.com and the Alarm.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 that all 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 different industry 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 have misappropriated 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 technology infringe or violate the intellectual property rights
of others.
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Employees
As of December 31, 2017, we had 784 full-time employees. We also engage consultants and temporary employees from
time to time. None of our employees are covered by collective bargaining agreements and we consider our relations with our
employees to be good.
Segment Revenue
Information about segment revenue is set forth in Note 18 of our consolidated financial statements included elsewhere in
this Annual Report on Form 10-K.
Corporate Information
We 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-owned subsidiary of MicroStrategy. MicroStrategy sold all its interests in Alarm.com
Incorporated in 2009 and we established Alarm.com Holdings, Inc. in connection with the sale transaction. Our principal
executive offices are located at 8281 Greensboro Drive, Suite 100, Tysons, Virginia 22102. Our telephone number is
(877) 389-4033. We completed our initial public offering in July 2015 and our common stock is listed on The Nasdaq Global
Select Market under the symbol “ALRM.”
Available Information
Our 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 on Form 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, as amended, 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 furnish it 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 maintains an 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 provide notifications of news or announcements regarding our business and
financial performance, SEC filings, investor events, and our press and earnings releases, as part of our investor 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 RSS feeds. Further corporate governance information, including our corporate governance
guidelines and board committee charters, is also available on our investor relations website under 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 report or document we file with the SEC, and any references to our websites are intended to be inactive textual
references only.
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ITEM 1A. RISK FACTORS
Our business is subject to numerous risks. You should consider carefully the risks and uncertainties described below, in
addition to other information contained in this Annual Report on Form 10-K as well as our other public filings with the Securities
and Exchange Commission, or SEC. 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 Acquisition of the Connect and Piper Business Units from Icontrol Networks, Inc.
Substantially all of the Connect platform revenues are from a single customer and the loss of this customer could harm
our operating results.
In March 2017, we acquired certain assets related to the Connect business unit of Icontrol Networks, Inc., or Icontrol, and all
of the outstanding equity interests of the two subsidiaries through which Icontrol conducts its Piper business, which we refer to
as the Acquisition. Historically, ADT LLC, or ADT, has accounted for substantially all of the revenues of the Connect business
unit. While we amended our master service agreement with ADT to cover services provided with respect to the Connect
platform, we cannot assure you that we will be able to meet the conditions set forth in the amended agreement or that ADT will
use the Connect platform for its new customers or keep its existing customers on the Connect platform. In addition, even if ADT
continues to use the Connect platform, we cannot assure you that the revenues from ADT or new accounts added by ADT will
reach or exceed historical levels in any future period. We may not be able to offset any unanticipated decline in revenues from
ADT with revenues from new customers or other existing customers. Because the Connect platform relies on ADT for
substantially all of its revenue, any negative developments in ADT’s business, or any decrease in revenues from or loss of ADT
as a customer could harm our business, financial condition, cash flows and results of operations.
The incurrence of debt to fund the Acquisition may impact our financial position and subject us to additional financial
and operating restrictions.
We used $81.5 million of cash on hand and drew $67.0 million under our senior line of credit with Silicon Valley Bank, or
SVB, and a syndicate of lenders, or the 2014 Facility, to fund the payment of the Acquisition consideration and to pay related
fees and expenses. On October 6, 2017, we refinanced the $72.0 million remaining outstanding balance under the 2014 Facility,
by entering into a new $125.0 million senior secured revolving credit facility, or the 2017 Facility, with SVB, as administrative
agent, PNC Bank, National Association, as documentation agent, and a syndicate of lenders. In connection with the 2017
Facility, we borrowed $72.0 million, which was used to repay the previously outstanding balance under the 2014 Facility.
Our overall leverage and certain covenants and 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 to satisfy our obligations, including under the terms of the 2017 Facility;
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limiting our ability to refinance our debt on terms acceptable to us or at all;
limiting our flexibility to plan for and adjust to changing business and market conditions and increasing our vulnerability
to general adverse economic and industry conditions;
limiting our ability to use our available cash flow to fund future acquisitions, working capital, business activities, and
other general corporate requirements; and
limiting our ability to obtain additional financing for working capital, to fund growth or for general corporate purposes,
even when necessary to maintain adequate liquidity.
Furthermore, substantially all of our assets, including our intellectual property, secure the 2017 Facility. If an event of default
under the credit agreement occurs and is continuing, SVB may request the acceleration of the related debt and foreclose on the
underlying security interests.
In addition, our 2017 Facility restricts our ability to make dividend payments and requires us to maintain certain leverage
ratios, which may restrict our ability to invest in future growth. Any of the foregoing could have a material adverse effect on our
business, financial condition, cash flows or results of operations.
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The Acquisition subjects us to significant additional liabilities for which we will not be indemnified.
In connection with the Acquisition, we assumed certain historic liabilities of the Connect and Piper business units, including
pre-closing liabilities relating to current and former employees of the Connect and Piper business units, pre-closing compliance
by the Connect and Piper business units with applicable laws and pre-closing performance by the Connect and Piper business
units of the assumed contracts. In addition, we assumed any liabilities that may arise from certain pending intellectual property
litigation. In addition to the known liabilities we assumed, there could be unasserted claims or assessments that we failed or
were unable to discover or identify in the course of performing due diligence investigations and there may be liabilities that are
neither probable nor estimable at this time which may become probable and estimable in the future. Further, while the terms of
the Acquisition transaction documents provide for us to be indemnified for breaches of certain representations and warranties
made about the Connect and Piper business units, the liabilities that arise may not entitle us to contractual indemnification or our
contractual indemnification may not be effective. Any such liabilities, individually or in the aggregate, could have a material
adverse effect on our business and our prospects.
The Acquisition may cause disruptions in our business, which could have an adverse effect on our business, financial
condition or results of operations.
The Acquisition and the ongoing integration of the Connect and Piper business units could cause disruptions in our
business in the following ways, among others:
• Customers, service providers and other third-party business partners may seek to terminate or renegotiate their
relationships with us whether pursuant to the terms of their existing agreements or otherwise; and
• Current and prospective employees may experience uncertainty about their future roles, which might adversely affect
our ability to retain, recruit and motivate key personnel.
Should they occur, any of these developments could have an adverse effect on our business, cash flows, financial condition
or results of operations.
We have incurred substantial transaction fees and costs, and expect to continue to incur costs in connection with the
Acquisition.
We have incurred approximately $17.1 million to date in non-recurring expenses in connection with the Acquisition, including
legal, accounting, financial advisory and other expenses. We also may incur significant expenses in connection with the
integration of the acquired businesses, including integrating technology, personnel, information technology systems and
accounting systems and implementing consistent standards, policies, and procedures. We cannot be certain that the elimination
of duplicative costs or the realization of other efficiencies related to the integration of the businesses, if any, will offset the
transaction and integration costs in the near term, or at all.
We may experience difficulties in realizing the expected benefits of the Acquisition.
The success of the Acquisition depends, in part, on our ability to manage the acquired businesses, including managing
Connect's relationship with ADT, realizing potential cost savings, and executing our integration and growth strategy in an efficient
and effective manner. Because our business and the businesses we acquired differ, we may not be able to manage these
business units smoothly or successfully and the process of achieving any potential cost savings may take longer than expected.
Potential difficulties that may be encountered in the integration process include the following:
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lost sales and customers as a result of customers deciding not to do business with the combined company;
the loss of key employees;
integrating personnel while maintaining focus on providing consistent, high-quality products and service to customers;
complexities associated with managing the larger, more complex business; and
potential unknown liabilities and unforeseen expenses.
If we are unable to successfully manage the operations of these businesses, we may be unable to realize the anticipated
benefits we expect to achieve as a result of the Acquisition. As a result, our business and results of operations could be
adversely affected.
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Our actual post-Acquisition operating results may differ significantly from any guidance provided.
Our guidance regarding our projected post-Acquisition financial performance and the impact of the Acquisition, including
forward-looking statements, is prepared by management and is qualified by, and subject to, a number of assumptions and
estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and
competitive uncertainties and contingencies. Many of these uncertainties and contingencies are beyond our control and are
based upon specific assumptions with respect to future business decisions, some of which will change. We generally state
possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are
not intended to represent that actual results could not fall outside of the suggested ranges.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance
furnished by us will not materialize or will vary significantly from actual results. In particular, guidance relating to the anticipated
results of operations of an acquired business is inherently more speculative in nature than other guidance as management will,
necessarily, be less familiar with the business, procedures and operations of the acquired business. Accordingly, any guidance
with respect to our projected post-Acquisition financial performance is necessarily only an estimate of what management
believes is realizable as of the date the guidance is given. Actual results will vary from the guidance and the variations may be
material. Investors should also recognize that the reliability of any forecasted financial data will diminish the farther in the future
that the data is forecasted.
Actual operating results may be different from our guidance, and such differences may be adverse and material. In light of
the foregoing, investors are urged to put the guidance in context and not to place undue reliance on it. In addition, the market
price of our common stock may reflect various market assumptions as to the accretive value of the Acquisition and the accuracy
of our guidance. If our actual results of operations fall below the expectations of investors or securities analysts, the price of our
common stock could decline substantially.
Risks Related to Our Business and Industry
Our 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 or securities analysts, which could cause our stock price to decline.
Our quarterly operating results, including the levels of our revenue, gross margin, cash flow and deferred revenue, may
fluctuate as a result of a variety of factors, including revenue related to the product mix that we sell, the relative sales related to
our platforms 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 or securities 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:
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the portion of our revenue attributable to software as a service, or SaaS, and license versus hardware and other sales;
our ability to manage the businesses we acquired from Icontrol and any future acquisitions of businesses;
fluctuations in demand, including due to seasonality, for our platforms and solutions;
changes in pricing by us in response to competitive pricing actions;
our ability to increase, retain and incentivize the service provider partners that market, sell, install and support our
platforms and solutions;
the ability of our hardware vendors to continue to manufacture high-quality products and to supply sufficient products to
meet our demands;
the timing and success of introductions of new solutions, products or upgrades by us or our competitors and 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 partner network to generate
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;
issues related to introductions of new or improved products such as shortages of prior generation products or short-
term decreased demand for next generation products;
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perceived or actual problems with the security, integrity, reliability, quality or compatibility of our solutions, including
those related to security breaches in our systems, our subscribers’ systems, unscheduled downtime, or outages;
the amount and timing of expenditures, including those related to expanding our operations, including through
acquisitions, increasing research 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 platforms and solutions;
the strength of regional, national and global economies; and
the impact of natural disasters such as earthquakes, hurricanes, fires, power outages, floods and other catastrophic
events or man-made problems such as terrorism or global or regional economic, political and social conditions.
Due to the foregoing factors and the other risks discussed in this Annual Report on Form 10-K, you should not rely
on quarter-to-quarter comparisons of our results of operations as an indication of 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. See
the Non-GAAP Measures section of Item 7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations," for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the
most comparable GAAP measurement, for the years ended December 31, 2017, 2016 and 2015.
We may not sustain our growth rate and we may not be able to manage any future growth effectively.
We have experienced significant growth and also have substantially expanded our operations in a short period of time. Our
revenue increased from $130.2 million in 2013 to $338.9 million in 2017. We do not expect to achieve similar growth 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 are unable 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 successfully manage our growth and obligations as a public company, we believe we must effectively, among other
things:
• maintain our relationships with existing service provider partners and add new service provider partners;
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increase our subscriber base and help our service provider partners maintain and improve their revenue retention rates,
while also expanding their cross-sell effectiveness;
add, train and integrate sales and marketing personnel;
expand our international operations; and
continue to implement and improve our administrative, financial and operational systems, procedures and controls.
We intend to continue to invest in research and development, sales and marketing, and general and administrative functions
and other areas to grow our business. We are likely 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 may develop 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 existing solutions and we may fail to satisfy subscriber and service provider partner
requirements, maintain the quality of our solutions, execute on our business plan or respond to competitive pressures, which
could result in our financial results suffering and a decline in our stock price.
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We have expanded our business rapidly in recent periods. If we fail to manage the expansion of our operations and
infrastructure effectively, we may be unable to execute our business plan, maintain high levels of service or address
competitive challenges adequately.
We increased our number of full-time employees from 253 as of December 31, 2013 to 784 as of December 31, 2017. Our
growth has placed, and may continue to place, a significant strain on our managerial, administrative, operational, financial and
other resources. We intend to further expand our overall business, service provider partner network, subscriber base, headcount
and operations, including by acquiring other businesses. Creating a global organization and managing a geographically
dispersed workforce will require substantial management effort and significant additional investment in our infrastructure. We will
be required to continue to improve our operational, financial and management controls and our reporting procedures to ensure
timely and accurate reporting of our operational and financial results and we may not be able to do so effectively. As such, we
may be unable to manage our expenses effectively 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 a manner 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 to retain and attract service provider partners and consumers.
The markets in which we participate are highly competitive and many companies, including large technology
companies, broadband and security service providers and other managed service providers, are actively targeting the
home automation, security monitoring, video monitoring and energy management markets. If we are unable to compete
effectively with these companies, our sales and profitability could be adversely affected.
We compete in several markets, including security, video, automation, energy management and wellness solutions. The
markets in which we participate are highly competitive and competition may intensify in the future.
Our ability to compete depends on a number of factors, including:
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our platforms and solutions’ functionality, performance, ease of use, reliability, availability and cost effectiveness relative
to that of our competitors’ products;
our success in utilizing new and proprietary technologies to offer solutions and features previously not available in the
marketplace;
our success in identifying new markets, applications and technologies;
our ability to attract and retain service provider partners;
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 to evaluate a new home automation, security monitoring, video
monitoring, energy management, or wellness solution, the consumer may be more inclined to select one of our competitors
whose product offerings are broader than those that we offer.
Our current competitors include providers of other technology platforms for the connected property with interactive security,
including Honeywell International Inc., Telular Corporation, SecureNet Technologies, LLC, Ring Inc., IPR, Inc. (formed following
the merger of ipDatatel, LLC and Resolution Products, LLC), and United Technologies Corporation, which sell solutions to
service providers, cable operators, technology retailers and other residential and commercial automation providers. We also
compete with interactive, monitored security solutions sold directly to subscribers by firms like Scout and SimpliSafe. In addition,
our service provider partners compete with managed service providers, such as cable television, telephone and broadband
companies like Comcast, AT&T Inc. and Charter Communications, Inc., and providers of point products, including Google Inc.'s
Nest Labs, Inc. which offers the Nest Protect security system as well as a smart thermostat, a smart smoke detector and video
cameras. Amazon.com offers a security camera and smart lock integration feature, Amazon Key. Samsung's SmartThings offers
a security system and a home automation and awareness hub. Apple Inc. offers a feature that allows some manufacturers’
connected devices and accessories to be controlled through its HomeKit service available in Apple’s iOS operating system.
Additionally, Lowes, Canary and other companies offer all in one video monitoring and awareness devices. In addition, we may
compete with other large technology companies that offer control capabilities among their products, applications and services,
and have ongoing development efforts to address the broader connected home market.
Many 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 and internationally, from other
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established and emerging home automation, security monitoring, video monitoring and automation, wellness, and energy
management companies as well as large technology companies. 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 may also establish
cooperative relationships among themselves or with third parties and rapidly acquire significant market share. Increased
competition could also result in price reductions and 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:
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selling at a discount;
offering products similar to our platforms 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 provider partners may switch and offer the products and services of competing companies, which would
adversely affect our sales and profitability. Competition from other companies may also adversely affect our negotiations with
service provider partners and suppliers, including, in some cases, requiring us to lower our prices. Opportunities to take market
share 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 sales tactics of other companies, which could result in the loss of service provider
partners offering our platforms and solutions and, as a result, our revenue and profitability could be adversely affected.
If we fail to compete successfully against our current and future competitors, or if our current or future competitors employ
aggressive business tactics, including those described above, demand for our platforms and solutions could decline, we could
experience cancellations of our services to consumers, or we could be required to reduce our prices or increase our 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 hosted architecture and we update our solutions regularly while our solutions are operating. If
our solutions and/or upgrades fail to operate properly, 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 and efficient 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 a catastrophic event, natural disaster, terrorist attack, 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,
computer viruses, 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 in the future. A significant or large-scale, security breach,
malfunction or interruption of our network operations centers or data back-up systems could adversely affect our ability to keep
our operations running efficiently. If a malfunction or security breach results in a wider or sustained disruption, it could have a
material adverse effect on our reputation, business, financial condition, cash flows or results 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
commercial properties. 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 one of our service provider partners or user error, we could be subject to
liability for such failures and our business could suffer.
Our platforms and solutions may contain undetected defects in the software, infrastructure, third-party components or
processes. If our platforms or solutions suffer from defects, we could experience harm to our branded reputation, claims by our
subscribers or service provider partners or lost revenue during the period required to address the cause of the defects. We may
find defects in new, acquired or upgraded solutions, resulting in loss of, or delay in, market acceptance of our platforms and
solutions, which could harm our business, financial condition, cash flows or results of operations.
Since solutions that enable our platforms are installed by our service provider partners, if they do not install or maintain such
solutions correctly, our platforms and solutions may not function properly. If the improper installation or maintenance of our
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platforms and solutions leads to service or equipment failures after introduction of, or an upgrade to, our platforms or a solution,
we could experience harm to our branded reputation, claims by our subscribers or service provider partners or lost revenue
during the period required to address the cause of the problem. Further, we rely on our service provider partners to provide the
primary source of support and ongoing service to our subscribers and, if our service provider partners fail to provide an adequate
level of support and services to our subscribers, it could have a material adverse effect on our reputation, business, financial
condition, cash flows or results of operations.
Any defect in, or disruption to, our platforms and solutions could cause consumers not to purchase additional solutions from
us, prevent potential consumers from purchasing our platforms and solutions or harm our reputation. Although our contracts with
our service provider partners limit our liability to our service provider partners for these defects, disruptions or errors, we
nonetheless could be subject to litigation for actual or alleged losses to our service provider partners or our subscribers, which
may require us to spend significant time and money in litigation or 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 or
maintain liability insurance on acceptable terms and could harm our business. Although we currently maintain some warranty
reserves, we cannot assure you that these warranty reserves will be sufficient to cover future liabilities.
We rely on our service provider partner network to acquire additional subscribers, and the inability of our service
provider partners to attract additional subscribers or retain their current subscribers could adversely affect our
operating results.
Substantially all of our revenue is generated through the sales of our platforms and solutions by our service provider
partners, who incorporate our solutions in certain of the products and packages they sell to their customers, and our service
provider partners are responsible for subscriber acquisition, as well as providing customer service and technical support for our
platforms and solutions to the subscribers. We provide our service provider partners with specific training and programs to assist
them in selling and providing support for our platforms and solutions, but we cannot assure that these steps will be effective. In
addition, we rely on our service provider partners to sell our platforms and solutions into new markets in the intelligent and
connected property space. If our service provider partners are unsuccessful in marketing, selling and supporting our platforms
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 provider partners. Recruiting and retaining qualified service provider partners and training them in
our technology and solutions requires significant time and resources. If we fail to maintain existing service provider partners or
develop relationships with new service provider partners, our revenue and operating results would be adversely affected. In
addition, to execute on our strategy to expand our sales internationally, we must develop relationships with service provider
partners that sell into these markets.
Any of our service provider partners may choose to offer a product from one of our competitors instead of our platforms and
solutions, elect to develop their own competing solutions or simply 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 to use the
intellectual property associated with our connected home solutions. Under the terms of this arrangement, Vivint has transitioned
from selling our solutions directly to its customers 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 this service provider partner’s
product; however, these monthly fees are less on a per customer basis than fees we receive from our SaaS solutions. Therefore,
we receive less revenue on a per customer basis 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 provider partners to ensure that 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 service provider partners in our markets, there are a finite number of service provider partners that are able
to perform the types of technical installations required for our platforms and solutions. In the event that 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 our business. If we are unable to expand our network of service provider partners, our business could be
harmed.
As the consumers’ product and service options grow, it is important that we enhance our service provider partner footprint
by broadening the expertise of our service provider partners, working with larger and more sophisticated service provider
partners and expanding the mainstream solutions our service provider partners offer. If we do not succeed in this effort, our
current and potential future service provider partners may be unable or unwilling to broaden their offerings to include our
connected property solutions, resulting in harm to our business.
We receive a substantial portion of our revenue from a limited number of service provider partners, and the loss of, or a
significant reduction in, orders from one or more of our major service provider partners would result in decreased
revenue and profitability.
Our success is highly dependent upon establishing and maintaining successful relationships with a variety of service
provider partners. We market and sell our platforms and solutions through a channel assisted sales model and we derive
substantially all of our revenue from these service provider partners. We generally enter into agreements with our service
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provider partners outlining the terms of our relationship, including service provider pricing commitments, installation,
maintenance and support requirements, and our sales registration process for registering potential sales to subscribers. These
contracts typically have an initial term of one year, with subsequent renewal terms 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 the
service provider partner 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 to terminate the contract immediately. While we have developed a network
of over 7,000 service provider partners to sell, install and support our platforms and solutions, we receive a substantial portion of
our revenue from a limited number of channel partners and significant customers. During the years ended December 31, 2017,
2016 and 2015, our 10 largest revenue service provider partners accounted for 60%, 60% and 63% of our revenue. Monitronics
International, Inc. represented greater than 15% but not more than 20% of our revenue in 2015 and greater than 10% but not
more than 15% of our revenue in 2016 and 2017. ADT LLC represented greater than 15% but not more than 20% of our revenue
in 2017.
We anticipate that we will continue to be dependent upon a limited number of service provider partners for a significant
portion of our revenue for the foreseeable future and, in some cases, a portion of our revenue attributable to individual service
provider partners may increase in the future. The loss of one or more key service provider partners, a reduction in sales through
any major service provider partners or the inability or unwillingness of any of our major service provider partners to pay for our
platforms and solutions would reduce our revenue and could impair our profitability.
We have relatively limited visibility regarding the consumers that ultimately purchase our solutions, and we often rely
on information from third-party service providers to help us manage our business. If these service providers fail to
provide timely or accurate information, our ability to quickly react to market changes and effectively manage our
business may be harmed.
We sell our solutions through service provider partners. These service provider partners work with consumers to design,
install, update and maintain their connected home and commercial installations and manage the relationship with our
subscribers. While we are able to track orders from service provider partners and have access to certain information about the
configurations of their Alarm.com systems that we receive through our platforms, we also rely on service provider partners 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-party nature of the data and thus may not be complete or accurate.
If we do not receive consumer information on a timely or accurate 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 functions rather than adopting our
connected property platforms. If we are unable to increase 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
connected properties, such as a thermostat that can be controlled by 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 have its
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 connected property control solution over time with minimal upfront costs, despite some of the
disadvantages of this approach, may reduce demand for our connected property solutions. If so, our service provider partners
may switch 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 target market choose to adopt point products rather than our connected
property solutions, then our business, financial condition, cash flows and results of operations will be harmed, and we may not
be able 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 effectively and 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 enter into new alliances with each other or may establish or strengthen
cooperative relationships with systems integrators, third-party consulting firms or other parties. Any such consolidation,
acquisition, alliance or cooperative relationship could adversely affect our ability to compete effectively and lead to pricing
pressure and our loss of market share and could result in a competitor with greater financial, technical, marketing, service and
other resources, all of which could harm our business, financial condition, cash flows and results of operations.
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We are dependent on our connected property solutions, and the lack of continued market acceptance of our connected
property solutions would result in lower revenue.
Our connected property 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:
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any decline in demand for our connected property solutions;
the failure of our connected property solutions to achieve continued market acceptance;
the introduction of products and technologies that serve as a replacement or substitute for, or represent an
improvement over, our connected property solutions;
technological innovations or new communications standards that our connected property solutions do not address; and
our inability to release enhanced versions of our connected property 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 and commercial solutions grows more slowly than anticipated or if demand for
connected home and commercial solutions does not grow as quickly as anticipated, whether as a result of competition, product
obsolescence, technological change, unfavorable economic conditions, uncertain geopolitical environments, budgetary
constraints of our consumers or other factors, we may not be able to continue to increase 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, cash flows and results of operations.
We generally bill our service provider partners based on the number of subscribers they have on our platforms and the
features being utilized by subscribers on a monthly basis in advance. Subscribers could elect to terminate our services in any
given month. If our efforts and our service provider partners’ efforts to satisfy our existing subscribers are not successful, we may
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 license revenue renewal rate on an annualized basis, as reflected in the section
of this Annual Report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other
Business Metrics — SaaS and License Revenue Renewal Rate.” However, our service provider partners, who resell our services
to our subscribers, have indicated that they typically have three to five-year service contracts with our 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 its contractual 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 provider partners. 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 their contracts
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 belief that 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 of their 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, cash flows or results of operations.
If we are unable to develop new solutions, sell our platforms and solutions into new markets or further penetrate our
existing markets, our revenue may not grow as expected.
Our ability to increase sales will depend, in large part, on our ability to enhance and improve our platforms and solutions,
introduce new solutions in a timely manner, sell into new markets 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 effectively train 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
platforms and solutions, 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 platforms and solutions and our ability to design our platforms 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 our competitors, 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 deliver our platform services to subscribers. It may be necessary in the future to
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renegotiate agreements relating to various aspects of these solutions or other third-party solutions. The inability to easily
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 such issues have been resolved, which could have a material adverse effect on our
business, financial condition, cash flows, results of operations and future prospects and could damage our 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 or unwilling to update their solutions, our business, financial condition, cash flows and
results of operations could be harmed. Further, if third-party solution providers that we partner with or that we would benefit from
partnering with are acquired by our competitors, they may choose not to offer their solutions on our platforms, which could
adversely affect our business, financial condition, cash flows 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, and any 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 carriers may 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 services to our
service provider partners and subscribers and may adversely affect our reputation. In addition, the inability to provide
uninterrupted services, maintain our existing contracts with our wireless carriers or enter into new contracts with such wireless
carriers could have a material adverse effect on our business, financial condition, cash flows 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 and commercial solutions is characterized by rapid technological change, frequent
introductions of new products and evolving industry standards. Our ability to attract 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
enhance our 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 devices in residential and commercial properties. We may change
aspects of our platforms 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 of the 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 to provide
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, financial condition, cash flows and results of operations.
The 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 platforms and solutions interact with the hardware and
software technology of systems and devices located at our subscribers’ properties and we depend upon cellular, broadband and
other telecommunications providers to provide communication paths to our subscribers in a timely and efficient manner. We may
be required to implement new technologies or adapt existing technologies in response to changing market conditions, consumer
preferences or industry standards, which could require significant capital expenditures. The discontinuation of cellular
communication technology or other services by telecommunications service providers can affect our services and require our
subscribers to upgrade to alternative and potentially more expensive, technologies. For example, AT&T shut down its 2G
network on December 31, 2016. To maintain our subscriber base which relied on the now obsolete AT&T 2G network we
subsidized the upgrade of the subscribers' outdated systems. If our service provider partners are not able to upgrade their
customers then those accounts may be terminated with Alarm.com.
It is also possible that one or more of our competitors 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 or services, which could put
us at a competitive disadvantage. Our inability to adapt to changing technologies, market conditions or consumer preferences in
a timely manner could materially 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, cash flows 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, generally involves several risks, including the possibility of defective parts, which
can adversely affect the reliability and reputation of our platforms and solutions, and a shortage of components and reduced
control over delivery schedules and increases in component costs, which can adversely affect our profitability. We have several
large hardware suppliers from which we procure hardware on a purchase order basis, including one supplier that supplied
products and components in an amount equal to 27% of our hardware and other revenue for the year ended December 31,
2017. If these suppliers are unable to continue to provide a timely and reliable supply, we could experience interruptions in
delivery of our platforms and solutions to our service provider partners, which could have a material adverse effect on our
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business, financial condition, cash flows and results of operations. If we were required to find alternative sources of supply,
qualification of alternative suppliers 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 condition, cash flows and 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 ability to retain or attract subscribers.
We believe that building and maintaining market awareness, brand recognition and goodwill in a cost-effective manner is
important to our overall success in achieving widespread acceptance of our existing and future solutions and is an important
element in attracting new service provider partners and subscribers. An important part of our business strategy is to increase
service provider and consumer awareness of our brand and to provide marketing leadership, services and support to our service
provider partner network. This will depend largely on our 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 further promote 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 service provider partners and strategic partners to promote our brand. If we are unable to cost-effectively
maintain and increase awareness of our brand, our business, financial condition, cash flows and results of operations could be
harmed.
We operate in the emerging and evolving connected property market, which may develop more slowly or differently
than we expect. If the connected property market does not grow as we expect, or if we cannot expand our platforms
and solutions to meet the demands of this market, our revenue may decline, fail to grow or fail to grow at an
accelerated rate, and we may incur 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, energy management, and wellness 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 even if it does
develop, whether our platforms and solutions will be accepted into the markets in which we operate. Some consumers may be
reluctant or unwilling to use our platforms and solutions for a number of reasons, including satisfaction with traditional solutions,
concerns about additional costs and lack of awareness of the benefits of our platforms and solutions. Our ability to expand the
sales of our platforms and solutions into new markets depends on several factors, including the awareness of our platforms and
solutions, the timely completion, introduction and market acceptance of our platforms and solutions, the ability to attract, retain
and effectively train sales and marketing personnel, the ability to develop relationships with service providers, the effectiveness
of our marketing programs, the costs of our platforms and solutions and the success of our competitors. If we are unsuccessful
in developing and marketing our platforms and solutions into new markets, or if consumers do not perceive or value the benefits
of our platforms and solutions, the market for our platforms and solutions 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.
The 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 technology or system failure than may be inherent in other businesses. Substantially
all of our service provider partner agreements contain provisions limiting our liability to service provider partners and our
subscribers in an 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 such litigation 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 the laws 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 provider partners, subscribers and employees, could adversely 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 our business, we collect and retain certain information pertaining to our
service provider partners, subscribers and employees, including credit card information for many of our service provider partners
and 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 our subscribers’ systems, our reputation, business, financial condition, cash
flows and results of operations 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 such information are under increasing attack by cyber-criminals
around the world. Further, as the regulatory focus on privacy issues continues to increase and worldwide laws and regulations
concerning the protection of personal information expand and become more complex, these potential risks to our business will
intensify. A significant actual or potential theft, loss, fraudulent use or misuse of service provider partner, 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 legal obligations regarding such data or a violation of our privacy and security policies with respect
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to such data could result in loss of confidential information, damage to our reputation, early termination of our service provider
partner contracts, significant costs, fines, litigation, regulatory investigations or actions and other liabilities or actions against us.
Moreover, to the extent 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 increase in attrition rates or may make it more difficult to attract
new subscribers. If any one of these risks materializes our business, financial condition, cash flows or results of operations could
be materially and adversely affected.
If our security measures are breached, including any breaches caused by cyber-attacks, our reputation may be
damaged, we may be exposed to significant liabilities under U.S. and foreign laws, and our business and results of
operations may be adversely affected.
Cyber-attacks from computer hackers and cyber criminals and other malicious Internet-based activity continue to increase
generally, and perpetrators of cyber-attacks may be able to develop and deploy viruses, worms, ransomware, malware, DNS
attacks, wireless network attacks, phishing attempts, distributed denial of service attacks and other malicious software programs
that attack our products and services, our networks or otherwise exploit any security vulnerabilities of our products, services and
networks. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not
recognized until launched against 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 platforms and solutions, and we can make no
assurance that we will be able to detect, prevent, timely and adequately address or mitigate the negative effects of cyber-attacks
or other security breaches.
Security breaches of, or sustained attacks against, our networks and infrastructure could create system disruptions and
shutdowns that could result in disruptions to our operations. Such an event could result in adverse publicity and therefore
adversely affect the market's perception of the security and reliability of our services. A cyber-attack may cause additional costs,
such as investigative and remediation costs, and the costs of providing individuals and/or data owners with notice of the breach,
legal fees and the costs of any additional fraud detection activities required by law, a court or a third-party. Additionally, some of
our customer contracts require us to indemnify customers from damages they may incur as a result of a breach of our networks
and systems. There can be no assurance that the limitation of liability provisions in our contracts for a security breach would be
enforceable or would otherwise protect us from any such liabilities or damages with respect to any particular claim. While we
maintain general liability insurance coverage and coverage for errors or omissions, we cannot assure you that such coverage
will be available in sufficient amounts to cover one or more large claims related to a breach, will continue to be available on
acceptable terms or at all. If any one of these risks materializes our business, financial condition, cash flows or results of
operations 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 our financial results. Future acquisitions of technologies, assets or
businesses, which are paid for partially or entirely through the issuance of stock or stock rights, could dilute the
ownership of our existing stockholders.
On March 8, 2017, we acquired Icontrol's Connect and Piper business units and we have acquired other businesses in the
past. For example, we acquired EnergyHub, Inc. in 2013, we acquired the assets of Horizon Analog, Inc. and Secure-i, Inc.,
respectively, in December 2014, we acquired the assets of HiValley Technology Inc. in March 2015 and we acquired certain
assets of ObjectVideo, Inc. in January 2017. We believe part of our growth will continue to be driven by acquisitions of other
companies or their technologies, assets and businesses. These acquisitions and any other acquisitions we may complete in the
future will give rise to certain risks, including:
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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 acquired company or
business;
failing to integrate the acquired technologies, or incurring significant expense to integrate acquired technologies into our
platforms 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 provider partners or subscribers;
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finding that the acquired technology, asset or business does not further our business strategy, that we overpaid for the
technology, asset or business or that we may be required to write off acquired assets or investments 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 the company; and
being unable to generate sufficient revenue and profits from acquisitions to offset the associated acquisition costs.
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 any other problems encountered with acquisitions. To the extent we do not
successfully avoid or overcome the risks or problems related to any such acquisitions, our business, financial condition, cash
flows and results of operations could be harmed. Acquisitions also could impact our financial position and capital requirements,
or could cause fluctuations in our quarterly and annual results of operations. Acquisitions could include significant goodwill and
intangible assets, which may result in future impairment charges that would reduce our stated earnings. We may incur significant
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 some combination 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 stock may 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 platforms and
solutions and investing in new and unproven technologies. We can offer no assurance that any such new business opportunities
will prove to be successful. Among other negative effects, our pursuit of such business opportunities could reduce operating
margins and require more working capital, subject us to additional federal state, and local laws and regulations, materially and
adversely affect our business, financial condition, cash flows or results of operations.
Evolving government and industry regulation and changes in applicable laws relating to the Internet and data privacy
may increase our expenditures related to compliance 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 and content. 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 over the 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 Internet use 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 platforms and solutions enable us to collect, manage and store a wide range of data related to our subscribers’
interactive security, intelligent automation, video monitoring, energy management and wellness systems. A valuable component
of our platforms and solutions is our ability to analyze this data to present the user with actionable business intelligence. We
obtain our data from a variety of sources, including our service provider partners, our subscribers and third-party providers. We
cannot assure you that the data we require for our proprietary data sets will be available from these sources in the future or that
the cost of such data will not increase. The United States federal government and various state governments have adopted or
proposed limitations on the collection, distribution, storage and use of personal information. Several foreign jurisdictions,
including the European Union and the United Kingdom, 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, the European 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 privacy protection mechanism that facilitated the
transfer of personal data to the United States in compliance with the European Commission’s Directive on Data Protection. The
United States and European Union, or EU, have implemented a new cooperative program for transferring personal data, referred
to as the Privacy Shield, that went into effect on August 1, 2016. We self-certified our compliance with the Privacy Shield
framework in September 2016. However, the validity of other transfer mechanisms, including Model Contracts, is currently being
challenged in the European Court of Justice and it is possible that the validity of the Privacy Shield will be challenged as well.
The EU has issued a new General Data Protection Regulation, or GDPR, that will go into effect on May 25, 2018. As a result of
these ongoing challenges there will continue to be significant regulatory uncertainty surrounding the validity of data transfers
from the EU to the United States, as well as the processing of personal data of EU persons. If our privacy or data security
measures fail to comply, or are perceived 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 of personal information that we hold, we
may be subject to governmental fines, individual claims, remediation expenses, and/or harm to our reputation. Moreover, if future
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laws and regulations limit our ability to use and share this data or our ability to store, process and share data over the Internet,
demand for our platforms and solutions could decrease, our costs could increase, and our business, financial condition, cash
flows and results of operations could be harmed.
Although 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 and disclosure of Protected Health Information, or PHI, we may
modify our platforms and solutions to become HIPAA compliant. Becoming fully HIPAA compliant involves adopting and
implementing privacy and security policies and procedures as well as administrative, physical and technical safeguards.
Additionally, HIPAA compliance requires certain agreements 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 and in 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 PHI is accessed, created, maintained or transmitted. Thus, if we do not
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 platforms and/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, our business 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 Chief Executive Officer, and our senior information technology managers. Our future
success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled 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 personnel could 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 and motivating existing employees, our
business and results of operations could be harmed.
We provide minimum service level commitments to certain of our service provider partners, and our failure to meet
them could cause us to issue credits for future services or pay penalties, which could harm our results of operations.
Certain of our service provider partner agreements currently, and may in the future, provide minimum service level
commitments regarding items such as uptime, functionality or performance. If we are unable to meet the stated service level
commitments for these service provider partners or suffer extended periods of service unavailability, we are or may be
contractually obligated to provide these service provider partners 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 indemnity obligations to certain of our service provider partners for certain expenses and liabilities, which
could force us to incur substantial costs.
We have indemnity obligations to certain of our service provider partners for certain claims regarding our platforms and
solutions, including security breach, product recall, epidemic failure, and product liability claims. As a result, in the case of any
such claims against these service provider partners, we could be required to indemnify them for losses resulting from such
claims or to refund amounts they have paid to us. We expect that some of our service provider partners may seek
indemnification from us in the event that such claims are brought against them. In addition, we may elect to indemnify service
provider partners where we have no contractual obligation to do so and we will evaluate each such request on a case-by-case
basis. If a service provider partner elects to invest resources in 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.
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 equity or 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 debt financing 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 more difficult 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 other
securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our
company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our
common stock. If we are unable to obtain adequate 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 be limited.
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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, 2017, we had $157.9 million of goodwill and identifiable intangible assets. Goodwill and other
identifiable intangible assets are recorded at fair value on the date 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 registered intellectual property, reduced sales of certain products or services incorporating
registered intellectual property, increased attrition and a variety of other factors. The amount of any quantified 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 of our 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 results of operations.
Comprehensive tax reform bills could adversely affect our business and financial condition.
The U.S. government has enacted comprehensive tax legislation that includes significant changes to the taxation of
business entities. These changes include, among others, (i) a permanent reduction to the corporate income tax rate, (ii) a partial
limitation on the deductibility of business interest expense, (iii) a shift of the U.S. taxation of multinational corporations from a tax
on worldwide income to a territorial system (along with certain rules designed to prevent erosion of the U.S. income tax base)
and (iv) a one-time tax on accumulated offshore earnings held in cash and illiquid assets, with the latter taxed at a lower rate.
Notwithstanding the reduction in the corporate income tax rate, the overall impact of this tax reform is uncertain, and our
business and financial condition could be adversely affected.
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 by jurisdiction. 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 tax assessments,
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 income taxes. These determinations are highly complex and require detailed analysis of the available
information and applicable statutes and regulatory materials. In the ordinary course of our business, there are many transactions
and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the
final determination 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 be harmed.
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, hurricanes, fires, power outages, floods and other catastrophic
events, and to interruption by man-made problems such as terrorism or global or regional economic, political and
social conditions.
A significant natural disaster, such as an earthquake, hurricane, fire, flood, or a significant power outage could harm our
business, financial condition, cash flows and results of operations. Natural disasters 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
significant portion of our revenue, such as metropolitan areas in North America, consumers in that region may delay or forego
purchases of our platforms and solutions from service providers in the 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 our hardware
vendors, service providers, subscribers or the economy as a whole. More generally, these geopolitical, social and economic
conditions could result in increased volatility in worldwide 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 our hardware vendors, service
provider partners 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 the aforementioned risks may be augmented if the disaster recovery plans for us, our service
provider partners and our suppliers prove to be inadequate. To the extent that any of the above results in delays or cancellations
of orders, or delays in the manufacture, deployment or shipment of our platforms and solutions, our business, financial condition,
cash flows and results of operations would be harmed.
Downturns in general economic and market conditions and reductions in spending may reduce demand for our
platforms 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 platforms and solutions. Concerns
about the systemic impact of a potential widespread recession, energy costs, geopolitical issues, the availability and cost of
credit and the global housing and mortgage markets have contributed to increased market volatility, decreased consumer
confidence and diminished growth expectations in the U.S. economy and abroad. The current unstable general economic and
market conditions have been characterized by a dramatic decline in consumer discretionary spending and have
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disproportionately affected providers of solutions that represent discretionary purchases. While the decline in consumer
spending has recently moderated, these economic conditions could still lead to continued declines in consumer spending over
the foreseeable future, and may have resulted in a resetting of consumer spending habits that may make it unlikely that such
spending will return to prior levels for the foreseeable future.
During 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 a corresponding impact on our growth prospects. In addition, there is an
increased risk during these periods that an increased percentage of our service provider partners will file for bankruptcy
protection, 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 the recovery potential of such claim. Likewise, consumer bankruptcies can
detrimentally affect the business stability of our service provider partners. Prolonged economic slowdowns and reductions in new
home construction and renovation projects may result in diminished sales of our platforms and solutions. Further worsening,
broadening or protracted extension of the economic 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 foreign governmental agencies, including, but not limited to, agencies
responsible for monitoring and enforcing employment and labor laws, workplace safety, product safety, environmental laws,
consumer protection laws, antitrust 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 possibly other anti-bribery laws, including those that comply with the Organization
for Economic Cooperation and Development, or OECD, Convention on Combating Bribery of Foreign Public Officials in
International Business Transactions and other international conventions. Anti-corruption laws are interpreted broadly and prohibit
our company from authorizing, offering, or providing directly or indirectly improper payments or benefits 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
government interactions and in several cases uses third-party representatives, including dealers, for regulatory compliance,
sales and other purposes in a variety of countries. These factors increase 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 explicitly
authorize 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 our employees, 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 States and in other jurisdictions.
Our global operations require us to import from and export to several countries, which geographically stretches our
compliance obligations. Our platforms and solutions are subject to export control and import laws and regulations, including the
U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions regulations
administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our platforms and solutions must
be made in compliance with these laws and regulations. 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 of export or import privileges;
fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of
responsible employees or managers. In addition, if our service provider partners fail to obtain appropriate import, export or re-
export licenses or authorizations, we may also be adversely affected through reputational harm 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 delay or loss of sales opportunities. In addition, changes in our platforms or solutions or changes in applicable
export or import laws and regulations may create delays in the introduction and sale of our platforms and solutions in
international markets, prevent our service provider partners with international operations from deploying our platforms and
solutions or, in some cases, prevent the export or import of our platforms and solutions to certain countries, governments or
persons altogether. Any change in export or import laws and regulations, shift in the enforcement 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 in decreased use of our platforms and solutions, or in our decreased ability to export or sell our platforms and solutions to
existing or potential service provider partners with international operations. Any decreased use of our platforms and solutions or
limitation on our ability to export or sell our platforms and solutions would likely adversely affect our business, financial condition,
cash flows 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 other sanctions under the U.S.
export regulations, including restrictions on future export activities, which could harm our business and operating results.
Regulatory restrictions could impair our access to technologies needed to improve our platforms and solutions and may also limit
or reduce the demand for our platforms and solutions outside of the United States.
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Furthermore, U.S. export control laws and economic sanctions programs prohibit the shipment of certain products and
services to countries, governments and persons that are subject to U.S. economic embargoes and trade sanctions. Even though
we take precautions to prevent our platforms and solutions from being shipped or provided to U.S. sanctions targets, our
platforms 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 or activities
targeted by such programs, could result in decreased use of our platforms and solutions, or in our decreased ability to export or
sell our platforms and solutions to existing or potential service provider partners, which would likely adversely affect our
business, financial condition, cash flows and results of operations.
Changes in laws that apply to us could result in increased regulatory requirements and compliance costs which could harm
our business, financial condition, cash flows and results of operations. In certain jurisdictions, regulatory requirements may be
more stringent than in the United States. Noncompliance with applicable regulations or requirements could subject us to
whistleblower complaints, investigations, sanctions, settlements, mandatory product recalls, enforcement actions, disgorgement
of profits, fines, damages, civil and criminal penalties or injunctions, suspension or debarment from contracting with certain
governments or other customers, the loss of export privileges, multi-jurisdictional liability, reputational harm, 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, financial condition, cash flows and results of operations could be materially harmed. In addition,
responding to any action will likely result in a materially significant diversion of management’s attention and resources and an
increase in defense costs and other professional fees. Enforcement actions and sanctions could further harm our business,
financial condition, cash flows and results of operations.
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 an adverse 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 our technology directly and indirectly infringes six patents purchased by Vivint. On
December 30, 2015, a class action lawsuit was filed against us, alleging violations of the Telephone Consumer Protection Act, or
TCPA. See the section of this Annual Report titled "Legal Proceedings" for additional information on each of these matters.
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 to accurately 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 to seek 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 be costly, or cross-license agreements relating to our and third-party intellectual
property.
Our business operates in a regulated industry.
Our business, operations and service provider partners 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 partner 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 place restrictions on, among other things, unsolicited automated
telephone calls to residential and wireless telephone subscribers by means of automatic telephone dialing systems and the use
of prerecorded or artificial voice messages. If our service provider partners 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 such wrongful
conduct by our service provider partners, and to require our service provider partners to comply with these laws and regulations,
no assurance can be given that we will not be exposed to liability as result of our service provider partners’ conduct. Further, to
the extent that any changes in law or regulation further restrict the lead generation activity of our service provider partners, these
restrictions could result in a material reduction in subscriber acquisition opportunities, reducing the growth prospects of our
business and adversely affecting our financial condition and future cash flows. In addition, most states in which we operate have
licensing laws directed specifically toward the monitored security services industry. Our business relies heavily upon cellular
telephone service to communicate signals. Cellular telephone companies are currently regulated by both federal and state
governments. Changes in laws or regulations could 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 regulations could result in substantial
fines or revocation of our operating permits and licenses, including in geographic areas where our services have substantial
penetration, which could adversely affect our business, financial condition, cash flows and results of operations. Further, if these
laws and regulations were to change or if we fail to comply with such laws and regulations as they exist today or in the future,
our business, financial condition, cash flows and results of operations could be materially and adversely affected.
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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 a reduction 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 residences
that have monitored alarm systems. There can be no assurance 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 need for 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 disconnect or 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.
We face many risks associated with our plans to expand internationally, which could harm our business, financial
condition, cash flows and results of operations.
We anticipate that our efforts to expand internationally will entail the marketing and advertising of our platforms, solutions
and brand. Revenue in countries outside of North America accounted for approximately 1% of our total revenue for the year
ended December 31, 2017 and less than 1% of our total revenue for the years ended December 31, 2016 and 2015. We also do
not have substantial experience in selling our platforms and solutions in international markets outside of North America 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 or achieve our consumer
acquisition, service provider expansion or other goals. In some international markets, consumer preferences and buying
behaviors may be different, and we may use business or pricing models that are different from our traditional model to provide
our platforms and solutions to consumers in those markets or we may be unsuccessful in implementing 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 pressures on 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 the euro, 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:
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localization of our solutions, including the addition of foreign languages and adaptation to new local practices 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 legal and 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 other tax 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 extensive experience;
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 establish operations 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 on importation and/or use. Any failure on our part to comply with
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encryption or other applicable export control requirements could result in financial penalties or other sanctions under the
U.S. export regulations, including restrictions on future export activities, which could harm our business and operating results.
Regulatory restrictions could impair our access to technologies needed to improve our platforms and solutions and may also limit
or reduce the demand for our platforms and solutions outside of the United States.
Our financial results may be adversely affected by changes in accounting principles applicable to us.
Our accounting policies are critical to the manner in which we present our results of operations and financial condition.
Many of these policies are highly complex and involve many assumptions, estimates and judgments. A change in accounting
standards or practices, in particular with respect to revenue recognition, could harm our operating results and may even affect
our reporting of transactions completed before the change is effective. GAAP rules are subject to interpretation by the Financial
Accounting Standards Board, or FASB, the SEC and other various bodies formed to promulgate and interpret appropriate
accounting principles. For example, we are currently assessing the impact of Accounting Standards Update No. 2016-02, (Topic
842), “Leases,” which requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use
assets on the balance sheet. We will be required to implement this guidance in the first quarter of 2019. We have not yet
determined the effect of the standard on our ongoing financial reporting. Refer to Note 2, “Recent Accounting Pronouncements,”
in the Notes to the Consolidated Financial Statements for additional information about this and other new accounting
pronouncements. Implementation of this new standard could have a significant effect on our financial results, and any difficulties
in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in
regulatory discipline and harm investors’ confidence in us.
Our accounting is becoming more complex, and relies upon estimates or judgments relating to our critical accounting
policies. If our accounting is erroneous or based on assumptions that change or prove to be incorrect, our operating
results could fall below the expectations of securities analysts and investors, resulting in a decline in our stock price.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and accompanying notes, and also to comply with
many complex requirements and standards. We devote substantial resources to compliance with accounting requirements and
we base our estimates on our best judgment, historical experience, information derived from third parties, and on various other
assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other
sources. However, various factors are causing our accounting to become complex. For example, as a result of our acquisition of
the Connect business unit of Icontrol, we now recognize revenue relating to the delivery of software relating to the Connect
platforms under different revenue recognition standards than those that apply to delivery of our services under the Alarm.com
platforms. Ongoing evolution of our business, and any future acquisitions, may compound these complexities. Our operating
results may be adversely affected if we make accounting errors or our judgments prove to be wrong, assumptions change or
actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations
of securities analysts and investors or guidance we may have provided, resulting in a decline in our stock price and potential
legal claims. Significant judgments, assumptions and estimates used in preparing our consolidated financial statements include
those related to revenue recognition, stock-based compensation, business combinations, and income taxes.
Risks Related to Our Intellectual Property
If we fail to protect our intellectual property and proprietary rights adequately, our business could be harmed.
We 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. We also 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 attempt to 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 our competitors may independently develop
similar or superior technology, or design around our intellectual property. In addition, the laws of some foreign countries do not
protect our proprietary 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, which could 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, cash flows 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 proprietary rights against third parties. See the section of this Annual Report titled
"Legal Proceedings" for additional information on such actions. 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 be successful in such action. Furthermore,
many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their
intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing
upon or misappropriating our intellectual property.
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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 harm our 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 on allegations 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 to similar 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, alleging that our technology directly and indirectly infringes six patents that Vivint purchased. Vivint is
seeking permanent injunctions, enhanced damages and attorney’s fees. See the section of this Annual Report titled "Legal
Proceedings" for additional information on this matter. Should Vivint prevail on its 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 sales of 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 design around 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
to Vivint’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 continue to be costly and time-consuming, divert the attention of our management and key personnel from
our business operations and dissuade potential customers from purchasing our solution, which would also materially harm our
business. During the course of litigation, we anticipate announcements of the results of hearings and motions, and other interim
developments related to the litigation. If securities analysts 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 provider partner contracts 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 royalty or licensing agreements. In addition, we currently have a limited portfolio
of issued patents compared to 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 infringement claims 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
or revenues and against which our potential patents provide no deterrence, and many other potential litigants have the capability
to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought
against them. Given that our platforms and solutions integrate with many aspects of a property, the risk that our platforms and
solutions may be subject to these allegations is exacerbated. As we seek to extend our platforms and solutions, we could be
constrained by the intellectual property rights of others. If our platforms 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 the market, 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 platforms and solutions, 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 and harm our business, financial condition, cash
flows and results of operations. If we were compelled to withdraw any of our platforms and solutions from the market, our
business, financial condition, cash flows and results of operations could be harmed.
We have indemnity obligations to certain of our service provider partners for certain expenses and liabilities resulting
from intellectual property infringement claims regarding our platforms and solutions, which could force us to incur
substantial costs.
We have indemnity obligations to certain of our service provider partners for intellectual property infringement claims
regarding our platforms and solutions. As a result, in the case of infringement claims against these service provider partners, we
could be required to indemnify them for losses resulting from such claims or to refund amounts they have paid to us. We expect
that some of our service provider partners may seek indemnification from us in connection with infringement claims brought
against them. In addition, we may elect to indemnify service provider partners 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 partner elects to invest
resources in 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 platforms and solutions may expose us to additional risks and harm our
intellectual property.
Some of our platforms 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 as a 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 such software to make any derivative works of the open source code available to others on
potentially unfavorable terms to us or at no cost.
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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 be construed in a manner that imposes unanticipated conditions or
restrictions on our ability to commercialize our platforms and solutions. In that event, we could be required to seek licenses from
third parties in order to continue offering our platforms and solutions, to re-develop our platforms and solutions, to discontinue
sales of our platforms and solutions or to release 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 be more 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. Litigation could be costly for us to defend, have a negative effect on our business, financial condition, cash
flows and results of operations or require us to devote additional research and development resources to change our solutions.
Although we are not aware of any use of open source software in our platforms and solutions that would require us to
disclose all or a portion of the source code underlying our core solutions, it is possible that such use may have inadvertently
occurred in deploying our platforms and solutions. Additionally, if a third party software provider has incorporated certain types of
open source software into software we license from such third party for our platforms and solutions without our knowledge, we
could, under certain circumstances, be required to disclose the source code to our platforms and solutions. This could harm our
intellectual property position as well as our business, financial condition, cash flows and results of operations.
Risks Related to Ownership of Our Common Stock
The market price of our common stock has been and will likely 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. Since shares 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 intraday high of
$49.49 through December 31, 2017. The market price of our common stock may decline regardless of our operating
performance, resulting in the potential for substantial losses for our stockholders, and may fluctuate significantly in response to
numerous factors, many of which are beyond our control, including the factors listed below and other factors described in this
“Risk Factors” section:
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actual or anticipated fluctuations in our financial condition and operating results;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these
projections;
failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any
securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
ratings changes by any securities analysts who follow our company;
variance in our financial performance from expectations of securities analysts;
announcements by us or our competitors of significant business developments, technical innovations, acquisitions or
new solutions;
changes in the prices of our platforms and solutions;
changes in our projected operating and financial results;
changes in laws or regulations applicable to our platforms and solutions or marketing techniques, or our industry in
general;
our involvement in any litigation, including any lawsuits threatened or filed against us;
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 in the United States and abroad.
The stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the
market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the
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operating performance of those companies. Broad market and industry fluctuations, as well as general economic, political,
regulatory and market conditions, may negatively impact the market price of our common stock. In the past, companies that
have experienced volatility in the 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 substantial costs and divert our management’s attention.
Sales of a substantial number of shares of our common stock in the public market could cause our market price to
decline.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might
occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of
additional equity securities. We are unable to predict the effect that sales, particularly sales by our directors, executive officers,
and significant stockholders, may have on the prevailing market price of our common stock. Additionally, the shares of common
stock subject to outstanding options under our equity incentive plans and the shares reserved for future issuance under our
equity incentive plans, as well as shares issuable upon vesting of restricted stock awards, will become eligible for sale in the
public market in the future, subject to certain legal and contractual limitations. Moreover, some holders of shares of our common
stock have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include
their shares in registration statements that we may file for ourselves or our stockholders. We have also registered shares of
common stock that we may issue under our employee equity incentive plans. Accordingly, these shares may be able to be sold
freely in the public market upon issuance as permitted by any applicable vesting requirements.
We are obligated to develop and maintain a system of effective internal controls over financial reporting. These internal
controls may be determined to be not effective, which may adversely affect investor confidence in our company and, as
a result, the value of our common stock.
We have been and 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 over financial reporting on an annual basis. This assessment
includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial
reporting, we will be unable to assert that our internal controls are effective and would be required to disclose any material
weaknesses identified in Management’s Report on Internal Control over Financial Reporting. While we have established certain
procedures and control over our financial reporting processes, we cannot assure you that these efforts will prevent restatements
of our financial statements in the future.
Our independent registered public accounting firm is also required, pursuant to Section 404 of the Sarbanes-Oxley Act, to
report on the effectiveness of our internal control over financial reporting beginning with our fiscal year ended December 31,
2017. This assessment includes disclosure of any material weaknesses identified by our management in our internal control
over financial reporting. For future reporting periods, our independent registered public accounting firm may issue a report that is
adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. We may not
be able to remediate any future material weaknesses, or to complete our evaluation, testing and any required remediation in a
timely fashion.
If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered
public accounting firm is unable to express an opinion that our internal controls over financial reporting are effective, investors
could lose confidence in the accuracy and completeness of our financial reports, which could cause the price of our common
stock to decline, and we could be subject to sanctions or investigations by regulatory authorities, including the SEC and Nasdaq.
Failure to remediate any material weakness in our internal control over financial reporting, or to maintain other effective control
systems required of public companies, could also restrict our future access to the capital markets.
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 trading volume 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 any control 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 of our 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 the financial markets, which could cause our share price or trading volume to decline.
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 price of 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 for general corporate purposes. Any determination to pay dividends in
the future will be at the discretion of our board of directors and subject to the restrictions on paying dividends in our 2017 Facility
and any future indebtedness. Accordingly, investors must rely on sales of their common stock after price appreciation, which
may never occur, as the only way to realize any future gains on their investments.
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Concentration of ownership among our current directors, executive officers and their affiliates may limit an investor's
ability to influence significant corporate decisions.
As of December 31, 2017, our directors and executive officers, together with their affiliates, beneficially own a significant
percentage of our outstanding capital stock. As a result, these stockholders, acting together, will have substantial influence over
the outcome of matters submitted to our stockholders for approval, including the election of directors and approval of significant
corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could
delay, defer or prevent a change in control of the company, merger, consolidation, takeover or other business combination, which
in turn could adversely affect the market price of our common stock.
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 or remove 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:
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authorize our board of directors to issue preferred stock, without further stockholder action and with voting liquidation,
dividend and other rights superior to our common stock;
require that any action to be taken by our stockholders be effected at a duly called annual or special meeting 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 to adopt, amend or
repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and
removal of directors and the ability of stockholders to take action by written consent 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 then in 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 replace members 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 by the 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 business combinations with any “interested” stockholder for a period of three years following the date on which
the stockholder became an “interested” stockholder. Any of the foregoing provisions 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, thereby
reducing 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 be initiated 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 of Delaware 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 of our 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, our amended 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 and restated 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 and consented to the foregoing provision. The forum selection clause in our amended and restated
certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our Facilities
Our principal offices, located in Tysons, Virginia, occupy 136,913 square feet of commercial space under a lease that we
entered into in August 2014 and expires in 2026. We have amended our lease to expand our square footage as we continue to
grow. We use this facility for sales and marketing, research and development, customer service and administrative purposes.
We also have offices in Bloomington, Minnesota; Centennial, Colorado; Brooklyn, New York; Boston and Needham,
Massachusetts; Wilsonville, Oregon; Lawrence, Kansas; Provo, Utah; Fort Lauderdale, Florida; Redwood City, California; Nags
Head, North Carolina; and Ottawa, Canada, 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 PROCEEDINGS
On 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 that Vivint purchased. Vivint is seeking 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. On August 19, 2016, the U.S. District Court, District of Utah stayed
the litigation pending inter partes review, or IPR, by the U.S. Patent Trial and Appeal Board, or PTAB, of five of the patents in
suit. In March 2017, the PTAB issued final written decisions relating to two patents finding all challenged claims unpatentable. In
May 2017, the PTAB issued final written decisions relating to the remaining patents that found certain claims unpatentable, while
certain other claims were not found to be unpatentable. Vivint has appealed the decisions to the U.S. Court of Appeals for the
Federal Circuit, and we have cross-appealed. The U.S. District Court, District of Utah lifted the stay on the litigation on June 26,
2017, and Vivint is proceeding with its case on four of the six patents in its complaint. Fact discovery is scheduled to close on or
about March 15, 2018, and no trial date has been set. In September 2017, the U.S. Patent and Trademark Office ordered ex
parte reexaminations of certain claims of two of the remaining patents in suit, at our request.
Should Vivint prevail on its 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 sales of 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 design around 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 to Vivint’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 continue to be costly and time-
consuming, divert the attention of our management and key personnel from our business operations and dissuade potential
customers from purchasing our solution, which would also materially harm our business. During the course of litigation, we
anticipate announcements of the results of hearings and motions, and other interim developments related to the litigation. If
securities analysts or investors regard these announcements as negative, the market price of our common stock may decline.
On December 30, 2015, a putative class action lawsuit was filed against us in the U.S. District Court for the Northern District
of California, alleging violations of the Telephone Consumer Protection Act, or TCPA. The complaint does not allege that
Alarm.com itself violated the TCPA, but instead seeks to hold us responsible for the marketing activities of our service provider
partners under principles of agency and vicarious liability. The complaint seeks monetary damages under the TCPA, injunctive
relief, and other relief, including attorney’s fees. We answered the complaint on February 26, 2016. On May 5, 2017, the court
granted plaintiffs' motion for class certification. Discovery is underway, and the matter remains pending in the U.S. District Court
for the Northern District of California. Based on the current schedule, we anticipate a trial will take place in October 2018.
On February 9, 2016, we were sued along with one of our service provider partners in the Circuit Court for the City of
Virginia Beach, Virginia by the estate of a deceased service provider partner customer alleging wrongful death, among other
claims. The suit seeks a total of $7 million in compensatory damages and $350,000 in punitive damages. We filed our answer on
March 22, 2016. Discovery is underway, and the matter remains pending. The Court has scheduled trial to begin on July 10,
2018.
On March 21, 2017, Taraneh Vessal filed a complaint against us and Monitronics International, Inc. in the United States
District Court for the Northern District of Illinois, alleging violation of the TCPA and the Illinois Consumer Fraud and Deceptive
Business Practices Act, or ICFDBA. We filed a motion to dismiss the complaint on May 12, 2017. Plaintiff filed her First Amended
Complaint on June 2, 2017, alleging similar violations of the TCPA and ICFDBA. We filed a motion to dismiss the First Amended
Complaint on June 16, 2017. On October 18, 2017, the Court granted our motion to dismiss the claims with respect to violations
of the ICFDBA without prejudice, but allowed the claims with respect to the TCPA to proceed. Discovery is underway, and the
matter remains pending.
37
On August 14, 2017, Alarm.com filed a lawsuit against ABS Capital Partners, Inc., ABS Partners V, LLC, ABS Partners VII,
LLC, and Ralph Terkowitz in the Delaware Court of Chancery, or the Chancery Court. The complaint sought declaratory and
injunctive relief preventing the defendants from using Alarm.com’s confidential information and trade secrets to compete with
Alarm.com, and preventing the defendants from executing their planned transaction to invest in two companies (ipDatatel, LLC,
or ipDatatel, and Resolution Products, Inc., or Resolution Products). The complaint alleged claims of breach of fiduciary duty,
aiding and abetting a breach of fiduciary duty, misappropriation of trade secrets, and misappropriation of confidential information,
in connection with the defendants’ planned investment. On September 22, 2017, Alarm.com filed an amended complaint against
ABS Capital Partners, Inc., ABS Partners V, LLC, and ABS Partners VII, LLC, alleging claims for misappropriation of trade
secrets and misappropriation of confidential information. The amended complaint seeks damages, declaratory relief, and
injunctive relief enjoining ABS Capital Partners, Inc., ABS Partners V, LLC, and ABS Partners VII, LLC from using Alarm.com’s
trade secrets and confidential information to compete with Alarm.com. On October 6, 2017, the defendants filed a motion to
dismiss the lawsuit. The matter remains pending.
On August 24, 2017, Alarm.com Incorporated and its wholly owned subsidiary ICN Acquisition, LLC, filed a patent
infringement complaint against ipDatatel, in the United States District Court for the Eastern District of Texas. The complaint
seeks injunctive relief to stop the further sale of the infringing ipDatatel’s products and systems, and damages for the
infringement of Alarm.com’s patents. The complaint asserts that the technology in the ipDatatel products infringe one or more
claims of Alarm.com’s patents: United States Patent Numbers 7,113,090; 7,633,385; 7,956,736; 8,478,871; and 9,141,276. If the
litigation is successful, Alarm.com will be entitled to receive monetary damages, injunctive relief, and any other relief, including
attorney’s fees, from ipDatatel. The Court has scheduled a claim construction hearing for June 2018 and commencement of trial
in March 2019. ipDatatel has not yet answered the complaint or asserted counterclaims and defenses. ipDatatel has moved for
dismissal based on alleged patent ineligibility as to each patent in suit.
On April 25, 2017, Alarm.com Incorporated and its wholly owned subsidiary ICN Acquisition, LLC, filed a patent infringement
complaint against Protect America, Inc., or Protect America, and SecureNet Technologies, LLC, or SecureNet, in the United
States District Court for the Eastern District of Virginia. The complaint seeks injunctive relief to stop the further sale of the
infringing Protect America and SecureNet products and systems, and damages for the infringement of Alarm.com’s patents. The
complaint asserts that the technology in the Protect America and SecureNet Alarm Systems products infringe one or more
claims of Alarm.com’s patents: United States Patent Numbers 7,113,090; 7,633,385; 8,395,494; 8,493,202; 8,612,591;
8,860,804; and 9,141,276. If the litigation is successful, Alarm.com will be entitled to receive monetary damages, injunctive relief,
and any other relief, including attorney’s fees, from Protect America and SecureNet. In June 2017, Alarm.com filed an amended
complaint against Protect America only and voluntarily dismissed SecureNet from the suit, reserving the right to refile. In
September 2017, Alarm.com voluntarily dismissed the amended complaint in the United States District Court of the Eastern
District of Virginia and refiled a complaint against Protect America, with substantially the same allegations, in the United States
District Court of the Eastern District of Texas. The Court has scheduled a claim construction hearing for September 2018 and
commencement of trial in May 2019. Protect America has not yet answered the complaint or asserted counterclaims and
defenses. Protect America has moved for dismissal or transfer to the Western District of Texas based on allegedly improper
venue.
In September 2014, Icontrol filed a Complaint in the United States District Court, District of Delaware, asserting that
SecureNet infringes certain U.S. Patents owned by Icontrol, patents now owned by Alarm.com through a subsidiary. In March
2015, Icontrol voluntarily agreed to dismiss the case, reserving the right to refile. In September 2015, Icontrol refiled the case
against SecureNet in the same district court alleging infringement of some of the same patents. SecureNet filed petitions for inter
partes review of the patents-in-suit before the PTAB. Proceedings as to one of the patents in suit (United States Patent Number
7,855,635) was instituted, resulting in the cancellation of some, but not all, claims of that patent. That decision is currently before
the Court of Appeals for the Federal Circuit. The PTAB has rejected the remaining applications for inter partes review. SecureNet
requested rehearing of the rejection as to one of the patents in suit, which request has been rejected by the PTAB. The Court
has scheduled a claim construction hearing for March 2018 and commencement of trial in February 2019.
In September 2014, Icontrol filed a Complaint in the United States District Court, District of Delaware, asserting that Zonoff
Inc., or Zonoff, infringes certain U.S. Patents owned by Icontrol, all of which are now owned by Alarm.com through a
subsidiary. In November 2015, Icontrol filed a second lawsuit, also in the United States District Court, District of Delaware,
alleging that Zonoff infringes additional U.S. Patents owned by Icontrol, now owned by Alarm.com through a subsidiary. The
Court held a claim construction hearing in the first case on March 14, 2016 and consolidated the cases on August 1, 2016. On
November 3, 2017, Zonoff and Alarm.com entered into a proposed consent judgment whereby Zonoff stipulated to its
infringement of the patents in suit and the validity of the patents in suit. The Court entered a consent judgment against Zonoff,
and the matter is now closed.
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 predicted with 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, litigation can have an
adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
38
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
39
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Our 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 no public market for our common stock. The following table sets forth the high
and low reported sales prices per share of our common stock for each quarter during the last two years:
Quarter ended March 31, 2016
Quarter ended June 30, 2016
Quarter ended September 30, 2016
Quarter ended December 31, 2016
Quarter ended March 31, 2017
Quarter ended June 30, 2017
Quarter ended September 30, 2017
Quarter ended December 31, 2017
High
Low
$
24.22
$
25.84
33.13
34.43
33.60
38.53
45.93
49.49
14.00
19.91
24.52
26.68
26.84
29.95
35.71
35.80
On February 15, 2018, the closing price of our common stock on The Nasdaq Global Select Market was $37.88.
Holders
As of February 15, 2018, there were 60 stockholders of record of our common stock, one of which is Cede & Co., a
nominee for Depository Trust Company, or DTC. 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 at DTC, and are considered to be
held of record by Cede & Co. as one stockholder.
Dividends
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 future earnings, 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 pay dividends on our common
stock is limited by restrictions under the terms of the agreements governing our 2017 Facility with Silicon Valley Bank, as further
disclosed under "Sources of Liquidity" in Part 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 board of directors after taking into
account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements
of current or then-existing debt instruments and other factors the board of directors deems relevant.
Use of Proceeds from Initial Public Offering of Common Stock
On 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 us and 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 stockholders affiliated 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 the sale 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 (File No. 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, were approximately $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 any class of our equity securities
or to any other affiliates. We have invested a portion of the net offering proceeds into money market securities. As of December
31, 2017, we have applied all of the offering proceeds in accordance with the planned use of proceeds from our offering as
described in our final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on June 26, 2016.
40
Stock Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of
the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by
reference into any filing of Alarm.com Holdings, Inc. under the Securities Act.
The following graph shows a comparison for the period June 26, 2015 (the date our common stock commenced trading on
The Nasdaq Global Select Market) through December 31, 2017 of the cumulative total return for (i) our common stock, (ii) the
Nasdaq Composite Index and (iii) Standard & Poor's 500 Index, or S&P 500 Index assuming an initial investment of $100 on
June 26, 2015 and reinvestment of all dividends. The returns in the graph are not intended to forecast or be indicative of
possible future performance of our common stock.
Alarm.com Holdings, Inc. $
Nasdaq Composite
S&P 500
June 26, 2015
100
100
100
December 31, 2015
99
$
99
97
December 31, 2016
165
$
106
107
December 31, 2017
224
$
136
127
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
41
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statements of operations data for the years ended December 31, 2017, 2016 and 2015 and the
selected consolidated balance sheet data as of December 31, 2017 and 2016 are derived from our audited consolidated
financial statements included elsewhere in this Annual Report. The selected consolidated statements of operations data for the
years ended December 31, 2014 and 2013 and the selected consolidated balance sheet data as of December 31, 2015, 2014
and 2013 are derived from our consolidated financial statements not included in this Annual Report. Our historical results are not
necessarily indicative of the results to be expected in the future. The selected financial data should be read together with Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in conjunction with our
consolidated financial statements, related notes, and other financial information included elsewhere in this Annual Report. The
following tables set forth our selected consolidated financial and other data for the years ended and as of December 31, 2017,
2016, 2015, 2014 and 2013 (in thousands, except share and per share data).
Consolidated Statements of Operations Data:
2017
2016
2015
2014
2013
Year Ended December 31,
Revenue:
SaaS and license revenue
Hardware and other revenue
Total revenue
Cost of revenue(1):
Cost of SaaS and license revenue
Cost of hardware and other revenue
Total cost of revenue
Operating expenses:
Sales and marketing(2)
General and administrative(2)
Research and development(2)
Amortization and depreciation
Total operating expenses
Operating income
Interest expense
Other income / (expense), net
Income before income taxes
Provision for income taxes
Net income
Dividends paid to participating securities
Income allocated to participating securities
$ 236,283
$ 173,540
$ 140,936
$ 111,515
$
102,654
338,937
87,566
261,106
67,952
208,888
55,797
167,312
82,620
47,602
130,222
35,610
80,578
116,188
43,490
55,396
72,755
17,734
189,375
33,374
(2,199)
1,066
32,241
2,990
29,251
—
(13)
30,229
69,151
99,380
38,980
57,926
44,272
6,490
147,668
14,058
(190)
513
14,381
4,227
10,154
—
(12)
25,722
51,652
77,374
32,240
35,473
40,002
5,808
113,523
17,991
(178)
(348)
17,465
5,697
11,768
(18,987)
23,007
44,172
67,179
25,836
26,113
23,193
3,991
79,133
21,000
(196)
(485)
20,319
6,817
13,502
—
16,476
38,482
54,958
21,467
29,928
13,085
3,360
67,840
7,424
(269)
57
7,212
2,688
4,524
—
—
(12,939)
(4,402)
Net income / (loss) attributable to common stockholders
$
29,238
$
10,142
$
(7,219) $
563
$
122
Per share information attributable to common
stockholders:
Net income / (loss) per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Cash dividends declared per share
2017
Year Ended December 31,
2015
2014
2016
2013
$
$
0.63
0.59
$
$
0.22
0.21
$
$
(0.30) $
(0.30) $
0.25
0.14
$
$
0.08
0.04
46,682,141
49,153,948
$
45,716,757
47,875,522
24,108,362
24,108,362
0.36
2,276,694
3,890,121
$
— $
1,443,469
2,795,345
—
— $
— $
42
2017
Year Ended December 31,
2015
2014
2016
2013
Other Financial and Operating Data:
SaaS and license revenue renewal rate(3)
Adjusted EBITDA(4)
Balance sheet and other data:
Cash and cash equivalents
Working capital(5)
Total assets
Redeemable convertible preferred stock
Total long-term obligations
Total stockholders' equity / (deficit)
_____________________
(1) Excludes amortization and depreciation.
(2) Includes stock-based compensation expense as follows:
Stock-based compensation expense data:
Sales and marketing
General and administrative
Research and development
Total stock-based compensation expense
93%
94%
93%
93%
93%
$ 71,628
$ 49,034
$ 34,370
$ 28,321
$ 28,259
2017
2016
As of December 31,
2015
2014
2013
$
$
$
96,329
119,433
371,641
—
94,311
232,827
$ 140,634
150,485
261,245
—
30,297
191,249
$ 128,358
131,971
226,095
—
26,885
170,131
$
42,572
45,854
120,932
202,456
17,572
(121,844)
$
33,583
31,599
99,487
202,456
14,923
(140,690)
2017
Year Ended December 31,
2015
2014
2016
2013
561
2,638
4,214
7,413
$
$
536
1,430
2,035
4,001
$
$
372
2,486
1,266
4,124
$
$
338
1,862
1,067
3,267
$
$
102
495
244
841
(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 subscribers on our platforms 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 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 provider partners, who resell our services to our subscribers, have indicated that they typically have three to five-year
service contracts with our 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 its contractual 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
provider partners. 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 an indicator of the lifetime value of our subscriber base.
(4) We define Adjusted EBITDA as our net income before interest and other income / (expense), net, provision for income taxes,
amortization and depreciation expense, stock-based compensation expense, goodwill and intangible impairment charges, changes
in fair value of acquisition related contingent liabilities, acquisition-related expense and legal costs incurred in connection with non-
ordinary course litigation, particularly costs involved in ongoing intellectual 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, 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 to the repurchase of an employee's stock awards. We do not adjust for ordinary course legal expenses resulting from
maintaining and enforcing our intellectual property portfolio and license agreements. Adjusted EBITDA is not a measure calculated
in accordance with GAAP. See the table below for a reconciliation of Adjusted EBITDA to net income, the most directly comparable
financial measure calculated and presented 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, 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 for our solutions. We also
use certain non-GAAP financial measures, including Adjusted EBITDA, as performance measures under our executive bonus plan.
Further, we believe 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 of acquisition-related expense and certain historical legal
expenses, excludes items that we do not consider to be indicative of our core operating performance. Accordingly, we believe that
43
Adjusted EBITDA 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 under GAAP. 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 the future, and Adjusted EBITDA
does 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 requirements for, 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
may represent 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 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 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).
2017
Year Ended December 31,
2015
2014
2016
2013
Adjusted EBITDA:
Net income
Adjustments:
Interest expense and other income / (expense), net
Provision for income taxes
Amortization and depreciation expense
Stock-based compensation expense
Goodwill and intangible asset impairment
Release of acquisition related contingent liability
Acquisition-related expense
Litigation expense
Total adjustments
Adjusted EBITDA
$
29,251
$
10,154
$
11,768
$
13,502
$
4,524
1,133
2,990
17,734
7,413
—
—
5,895
7,212
42,377
71,628
$
(323)
4,227
6,490
4,001
—
—
11,098
13,387
38,880
49,034
$
526
5,697
5,808
4,124
—
—
100
6,347
22,602
34,370
$
681
6,817
3,991
3,267
—
—
—
63
14,819
28,321
$
212
2,688
3,360
841
11,266
(5,820)
—
11,188
23,735
28,259
$
(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 deferred income taxes and requires entities to classify deferred income tax
liabilities and assets for each jurisdiction as noncurrent on the balance sheet. Due to the adoption of this pronouncement, we
retrospectively 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 in working capital as of December 31, 2014 and 2013.
44
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our
consolidated financial statements and the related notes and 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 Annual Report, including
information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and
uncertainties. You should review Item 1A. “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 differ materially from the results described
in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Alarm.com is the leading platform for the intelligently connected property. We offer a comprehensive suite of cloud-based
solutions for smart residential and commercial properties, including interactive security, video monitoring, intelligent automation,
energy management and wellness solutions. Millions of property owners rely on our technology to intelligently secure, monitor
and manage their residential and commercial properties. In the last year alone, our platforms processed more than 100 billion
data points generated by over 80 million connected devices. We believe that this scale of subscribers, connected devices and
data operations makes us the leader in the connected property market.
Our solutions are delivered through an established network of over 7,000 trusted service providers, who are experts at
selling, installing and supporting our solutions. We primarily generate Software-as-a-Service, or SaaS, and license revenue
through our service provider partners, who resell these services and pay us monthly fees. Our service provider partners have
indicated that they typically have three to five-year service contracts with residential and commercial property owners who use
our solutions. We also generate hardware and other revenue, primarily from our service provider partners and distributors. Our
hardware sales include gateway modules and other connected devices that enable our services, such as video cameras and
smart thermostats. We believe that the length of service contracts with residential and commercial property owners, combined
with our robust platforms and over 15 years of operating experience, contribute to a compelling business model.
Our technology platforms are designed to make connected properties safer, smarter and more efficient. Our solutions are
used in both smart residential and commercial properties, which we refer to as the connected property market and we have
designed our technology platforms for all market participants. This includes not only the residential and commercial property
owners who subscribe to our services, but also the hardware partners who manufacture devices that integrate with our platforms
and the service provider partners who install and maintain our solutions.
Our service provider partners can deploy our interactive security, video monitoring, intelligent automation and energy
management solutions as standalone offerings or as combined solutions to address the needs of a broad range of customers.
Our technology enables subscribers to seamlessly connect to their property through our family of mobile apps, websites, and
new engagement platforms like voice control through Amazon Echo, wearable devices like the Apple Watch, and TV platforms
such as Apple TV and Amazon Fire TV.
Executive Overview and Highlights of 2017 and 2016 Results
We primarily generate SaaS and license revenue, our largest source of revenue, through our service provider partners who
resell our services and pay us monthly fees. Our service provider partners sell, install and support Alarm.com solutions that
enable residential and commercial property owners to intelligently secure, connect, control and automate their properties. Our
service provider partners have indicated that they typically have three to five-year service contracts with residential or
commercial property owners. Our subscribers consist of all of the properties maintained by those residential and commercial
property owners to which we are delivering at least one of our solutions. We derive a portion of our revenue from licensing our
intellectual property to third parties on a per customer basis. We also generate SaaS and license revenue from monthly fees
charged to service providers on a per subscriber basis for access to our Connect platform. The Connect software for interactive
security, automation and related solutions is typically deployed and operated by the service provider in its own network
operations center. SaaS and license revenue represented 70%, 66% and 67% of our revenue in 2017, 2016 and 2015,
respectively.
We also generate revenue from the sale of hardware, including cellular radio modules, video cameras, image sensors,
thermostats and other peripherals, that enables our solutions. We have a rich history of innovation in cellular technology that
enables our robust SaaS offering. Hardware and other revenue represented 30%, 34% and 33% of our revenue in 2017, 2016
and 2015, respectively. We typically expect hardware and other revenue to fluctuate as a percentage of total revenue.
We believe there is significant opportunity to expand our international business, as approximately 1% percent of our total
revenue during the year ended December 31, 2017 originated from customers located outside of North America. Our products
are currently localized and available in 34 countries outside of North America.
45
Highlights of our financial performance for the periods covered in this Annual Report include:
•
•
•
•
SaaS and license revenue increased 36% to $236.3 million in 2017 from $173.5 million in 2016. SaaS and license
revenue increased 23% to $173.5 million in 2016 from $140.9 million in 2015.
Revenue increased 30% to $338.9 million in 2017 from $261.1 million in 2016. Revenue increased 25% to $261.1
million in 2016 from $208.9 million in 2015.
Net income was $29.3 million in 2017, $10.2 million in 2016 and $11.8 million in 2015.
Adjusted EBITDA, a non-GAAP measurement of operating performance, increased to $71.6 million in 2017 from $49.0
million in 2016. Adjusted EBITDA increased to $49.0 million in 2016 from $34.4 million in 2015.
Please see Non-GAAP Measures below in this section of this Annual Report for a discussion of the limitations of Adjusted
EBITDA (a non-GAAP measure) and a reconciliation of Adjusted EBITDA to net income, the most comparable measurement in
accordance with GAAP, for the years ended December 31, 2017, 2016 and 2015.
Recent Developments
On October 6, 2017, we refinanced the $72.0 million remaining outstanding balance under our senior line of credit with
Silicon Valley Bank, or SVB, and a syndicate of lenders, or the 2014 Facility, by entering into a new $125.0 million senior
secured revolving credit facility, or the 2017 Facility. In connection with the 2017 Facility, we borrowed $72.0 million, which was
used to repay the previously outstanding balance under the 2014 Facility.
Other Business Metrics
We regularly monitor a number of financial and operating metrics in order to measure our current performance and estimate
our future performance. Our other business metrics may be calculated in a manner different than similar other business metrics
used by other companies and include the following (dollars in thousands):
SaaS and license revenue
Adjusted EBITDA
SaaS and license revenue renewal rate
SaaS and License Revenue
Year Ended December 31,
2017
2016
2015
$
236,283
$
173,540
$
140,936
71,628
49,034
34,370
Twelve Months Ended December 31,
2017
2016
2015
93%
94%
93%
We believe that SaaS and license revenue is an indicator of the productivity of our existing service provider partners and
their ability to activate and maintain subscribers using our intelligently connected property solutions, our ability to add new
service provider partners reselling our solutions, the demand for our intelligently connected property solutions and the pace at
which the market for these solutions is growing.
Adjusted EBITDA
Adjusted EBITDA represents our net income before interest expense, other income / (expense), net, amortization and
depreciation expense, stock-based compensation expense, acquisition-related expense and legal costs incurred in connection
with non-ordinary course litigation, particularly costs involved in ongoing intellectual 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
and stock-based compensation expense. We do not adjust for ordinary course legal expenses resulting from maintaining and
enforcing our intellectual property portfolio and license agreements.
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 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 of acquisition-related adjustments and certain historical legal expenses, excludes items that we do not
46
consider to be indicative of our core operating performance. Adjusted EBITDA is not a measure calculated in accordance with
GAAP and should not be considered in isolation from, or as a substitute for, financial information prepared 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 to net income, the most comparable GAAP measurement, for the years ended December 31,
2017, 2016 and 2015.
SaaS and License Revenue Renewal Rate
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 our subscribers on one of our platforms 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 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 provider partners, who resell our services to our subscribers, have
indicated that they typically have three to five-year service contracts with our 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 its contractual 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 provider partners. 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 an indicator of the
lifetime value of our subscriber base.
Components of Operating Results
Our fiscal year ends on December 31. The key elements of our operating results include:
Revenue
We generate revenue primarily through the sale of our SaaS solutions over our cloud-based intelligently connected property
Alarm.com platform through our service provider partner channel. We also generate revenue from the sale of hardware products
that enable our solutions. We generate revenue from the sale of licenses and services to service providers for access to our
Connect software platform.
SaaS and License Revenue. We generate the majority of our SaaS and license revenue primarily from monthly recurring
fees charged to our service provider partners sold on a per subscriber basis for access to our cloud-based intelligently
connected property Alarm.com platform and related solutions. Our fees per subscriber vary based upon the service plan and
features utilized. We enter into contracts with our service provider partners 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 provider partners typically enter into contracts with their end-user customers, which we refer to as our subscribers, for
their engagement with our solutions. Our service provider partners have indicated that those contracts generally range from
three to five years in length.
We also generate SaaS and license revenue from monthly fees charged to service providers on a per subscriber basis for
access to our Connect platform. The Connect software for interactive security, automation and related solutions is typically
deployed and operated by the service provider in its own network operations center. Our agreements for the Connect platform
solution typically include software and services, such as post-contract customer support, or PCS. Under terms in our contractual
arrangements with our service provider partners, we are entitled to payment of a monthly fee that is billed per subscriber for the
month of service and we recognize revenue over the period of combined service. Our service provider partners 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 integrated solutions and a range of a la carte add-ons
for additional features. The price paid by our service provider partners 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 under which our service
provider partners 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 our subscribers.
We 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 of our 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 to the nearest
thousand, on the last day of the applicable year. Our number of subscribers does not include the customers of our service
provider partners to whom we license our intellectual property as they do not utilize one of our platforms.
We also generate SaaS and license revenue from the fees paid to us when we license our intellectual property to third
parties on a per customer basis for use of our patents. In November 2013, we entered into a license agreement with Vivint Inc.,
or Vivint, pursuant to which we granted Vivint a license to use the intellectual property associated with our intelligently connected
47
property solutions. Vivint began generating customers and paying us license revenue in the 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 to its new customers. For those subscribers Vivint added to their SaaS solution, Vivint pays us a license fee,
and for subscribers still on the Alarm.com platform, Vivint pays to utilize our SaaS Alarm.com platform. Additionally, in certain
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 demand made available for a utility’s or market’s control.
Hardware and Other Revenue. We generate hardware and other revenue from the sale of video cameras and cellular radio
modules that provide access to our cloud-based platforms, and from the sale of other devices, including image sensors and
peripherals. We sell hardware to our service provider partners as well as distributors. The purchase of hardware occurs in a
transaction that is separate 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 provider partners or distributors, net of a reserve for estimated returns.
Our terms for hardware sales typically allow our service provider partners to return hardware up to one year past the date of
original sale.
Hardware and other revenue also includes activation fees charged to service provider partners for activation of a
subscriber’s account on our platforms. We record activation fees initially as 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 other revenue
also includes fees paid by service provider partners for our marketing services.
Cost of Revenue
Our 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 operating centers. We record the payroll and payroll-related costs of the department
dedicated to providing service exclusively to a specific service provider for the Connect platform to cost of SaaS and license
revenue. 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 cellular radio 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 of hardware and other revenue when the hardware and other services are
delivered to the service provider partner, which is when title transfers. Our cost of revenue excludes amortization and
depreciation. We expect our cost of revenue to increase on an absolute dollar basis primarily from anticipated growth in SaaS
and license revenue.
Operating Expenses
Our 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 and depreciation. We
include stock-based compensation expense in connection with the grant of stock options and other forms of equity
compensation in the applicable operating expense category based on the respective equity award recipient’s function (sales and
marketing, general and administrative or research and development). We grew from 607 employees as of January 1, 2017 to
784 employees as of December 31, 2017, and we expect to continue to hire new employees to support the projected 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 partner support, advertising, promotion of
our products and services and marketing.
The number of employees in sales and marketing functions grew from 219 as of January 1, 2017 to 242 as of December 31,
2017. We expect to continue to invest in our sales and marketing 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 and increase as
a percentage of our total revenue to levels consistent with 2016 in the short term. We intend to increase the size of our sales
force and our service provider partner support team to provide additional support to our existing service provider partner base to
drive their productivity in selling our solutions as well as to enroll new service provider partners in North America and in
international markets. We also intend to increase our marketing investments in the form of marketing programs, trade shows and
training to support our service provider partners’ 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, information technology, human resources, finance and accounting personnel, including
salaries, bonuses, stock-based compensation, benefits and other personnel costs. Additional expenses included in this category
are legal costs, including those that are incurred to defend and license our intellectual property, as well as non-personnel costs,
such as travel related expenses, rent, subcontracting and professional fees, audit fees, tax services, and insurance expenses.
48
Also included in general and administrative expenses are acquisition-related expenses, which consist primarily of legal,
accounting and professional service fees directly related to acquisitions, valuation gains or losses on acquisition-related
contingent liabilities.
The number of employees in general and administrative functions grew from 68 as of January 1, 2017 to 95 as of
December 31, 2017. Excluding intellectual property litigation and acquisition-related costs, we expect general and administrative
costs to increase prospectively as our business grows. This includes cost increases related to accounting, finance, and legal
personnel, additional external legal, audit fees and other expenses associated with compliance with the Sarbanes-Oxley Act of
2002, or the Sarbanes-Oxley Act, and other regulations governing public companies. We will continue to incur additional costs
associated with being a public company including higher legal, corporate insurance and accounting expenses, including the
additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act which has resulted in
additional external audit and consulting fees. While somewhat unpredictable, we also expect to continue to incur costs related to
litigation involving intellectual property, as well as integration costs associated with the acquisition of the Connect and Piper
business units from Icontrol, which closed on March 8, 2017, which we refer to as the Acquisition.
Research and Development Expense. Research and development expense consists primarily of personnel and related
expenses for our employees working on our product development 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 320 as of January 1, 2017 to 447 as of
December 31, 2017. Our research and development efforts are focused on innovating new features and enhancing the
functionality of our platforms and the solutions we offer to our service provider partners and subscribers. We will also continue to
invest in efforts to extend our platforms to adjacent markets and internationally. We expect research and development expenses
to continue to increase on an absolute dollar basis and as a percentage of revenue in the short term to maintain our leadership
position in the development of intelligently connected property technology, and continued enhancement of our Enterprise 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-developed capitalized software. Our depreciation expense is related to investments in
property and equipment. Acquired intangible assets include developed technology, customer related intangibles, trademarks and
trade names. We expect in the near term that amortization and depreciation may fluctuate based on our acquisition activity,
development of our platforms and capitalized expenditures.
Interest Expense
Interest expense consists of interest expense associated with our credit facilities. The 2017 Facility is available to us to
refinance existing debt and for general corporate and working capital purposes as permitted under the terms of the 2017 Credit
Facility. Interest expense is expected to increase in upcoming periods as we have utilized the 2017 Facility for the Acquisition.
Other Income / (Expense), Net
Other income / (expense), net consists of our portion of the income or loss from our minority investments in other
businesses accounted for under the equity method and interest income earned on our cash and cash equivalents and our notes
receivable.
Provision for Income Taxes
We 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 calculations for 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 was below the statutory
rate primarily due to recognizing the tax windfall benefits from employee stock-based payment transactions through the income
statement provision for income taxes in the period incurred, as well as the research and development tax credits claimed. We
recognize excess tax windfall benefits on a discrete basis in the quarter in which it occurs and we anticipate that our effective tax
rate will vary from quarter to quarter depending on our stock price and exercises of stock options under our equity incentive
plans each period.
These decreases in the effective tax rate were partially offset by the effects of the Tax Cuts and Jobs Act, or the “Tax Act,”
signed into law on December 22, 2017 as well as the impact of state taxes and non-deductible meal and entertainment
expenses. The Tax Act makes significant change in U.S. tax law, including a reduction in the corporate tax rates, changes to net
operating loss carryforwards and carrybacks and a repeal of the corporate alternative minimum tax. The legislation reduced the
U.S. corporate tax rate from the current rate of 35% to 21%. As a result of the enacted Tax Act, we were required to revalue
deferred tax assets and liabilities at the rate in effect when the deferred tax balances are scheduled to reverse.
49
Results of Operations
The 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
Revenue:
SaaS and license revenue
Hardware and other revenue
Total revenue
Cost of revenue: (1)
Cost of SaaS and license revenue
Cost of hardware and other revenue
Total cost of revenue
Operating expenses:
Sales and marketing (2)
General and administrative (2)
Research and development (2)
Amortization and depreciation
Total operating expenses
Operating income
Interest expense
Other income / (expense), net
Income before income taxes
Provision for income taxes
Net income
_______________
Year Ended December 31,
2017
2016
2015
$
%
$
%
$
%
$ 236,283
102,654
70% $ 173,540
30
87,566
338,937
100
261,106
66% $ 140,936
67%
34
100
67,952
208,888
33
100
35,610
80,578
116,188
43,490
55,396
72,755
17,734
189,375
33,374
(2,199)
1,066
32,241
2,990
11
24
34
13
16
21
5
56
10
(1)
—
10
1
30,229
69,151
99,380
38,980
57,926
44,272
6,490
147,668
14,058
(190)
513
14,381
4,227
12
26
38
15
22
17
2
57
5
—
—
6
2
25,722
51,652
77,374
32,240
35,473
40,002
5,808
113,523
17,991
(178)
(348)
17,465
5,697
12
25
37
15
17
19
3
54
9
—
—
8
3
$ 29,251
9% $ 10,154
4% $ 11,768
6%
(1) Excludes amortization and depreciation.
(2) Operating expenses include stock-based compensation expense as follows (in thousands):
Year Ended December 31,
2017
2016
2015
Stock-based compensation expense data:
Sales and marketing
General and administrative
Research and development
Total stock-based compensation expense
$
$
561
$
536
$
2,638
4,214
7,413
$
1,430
2,035
4,001
$
372
2,486
1,266
4,124
The following table sets forth the components of cost of revenue as a percentage of revenue:
Components of cost of revenue as a percentage of revenue:
Cost of SaaS and license revenue as a percentage of SaaS and license revenue
Cost of hardware and other revenue as a percentage of hardware and other revenue
Total cost of revenue as a percentage of total revenue
15%
78%
34%
17%
79%
38%
18%
76%
37%
Year Ended December 31,
2017
2016
2015
50
Comparison of Years Ended December 31, 2017 to December 31, 2016 and December 31, 2016 to December 31, 2015
Revenue
Revenue
SaaS and license revenue
Hardware and other revenue
Total revenue
2017 Compared to 2016
Year Ended December 31,
% Change
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
$
$
236,283
102,654
338,937
$
$
173,540
87,566
261,106
$
$
140,936
67,952
208,888
36%
17%
30%
23%
29%
25%
The $77.8 million increase in total revenue in 2017 compared to 2016 was the result of a $62.7 million, or 36%, increase in
our SaaS and license revenue and a $15.1 million, or 17%, increase in our hardware and other revenue. The increase in our
Alarm.com segment SaaS and license revenue in 2017 was primarily due to growth in our subscriber base, including the
revenue impact from subscribers we added in 2016 and due to service providers and their subscribers on our Connect software
platform. To a lesser extent, SaaS and license revenue increased in the period due to an increase in license fees. The increase
in hardware and other revenue in 2017 compared to 2016 was due to an increase in the volume of video cameras sold including
several new product offering releases in 2017, and due to increases in volume of other peripherals sold including the system
enhancement module. Our Other segment contributed 6% of the increase in SaaS and license revenue and 12% of the increase
in hardware and other revenue in 2017 compared to 2016. The increase in SaaS and license revenue for our Other segment in
2017 was from our remote access management solution and our energy management and demand response solutions. The
increase in hardware and other revenue for our Other segment in 2017 was primarily due to an increase in video cameras sold
and hardware sold to support our remote access management solution.
2016 Compared to 2015
The $52.2 million increase in total revenue in 2016 compared to 2015 was the result of a $32.6 million, or 23%, increase in
our SaaS and license revenue and a $19.6 million, or 29%, increase in our hardware and other revenue. The increase in our
SaaS and license revenue from 2015 to 2016 was primarily due to growth in our subscriber base, including the revenue impact
from subscribers we added in 2015, as well as the increase of our subscriber base during 2016. To a lesser extent, SaaS and
license revenue increased from 2015 to 2016 due to an increase in fees paid to us for licenses to use our intellectual property.
Hardware and other revenue increased by $10.5 million from a 74% increase in the volume of video cameras sold, including our
doorbell camera, which was released in 2016. Hardware and other revenue also increased by $2.9 million from 2015 to 2016
from a 9% increase in the volume of peripherals sold, including our thermostat and cellular radio modules. Our Other segment
contributed $2.9 million, or 2%, of the increase in SaaS and license revenue and $6.2 million, or 9%, of the increase in hardware
and other revenue from 2015 to 2016. The increases in SaaS and license revenue for our Other segment were from our remote
access management solution and our energy management and demand response solution. The increases in hardware revenue
for our Other segment were primarily from our remote access management solution.
Cost of Revenue
Cost of revenue(1)
Year Ended December 31,
2016
2017
% Change
2015
2017 vs. 2016
2016 vs. 2015
Cost of SaaS and license revenue
Cost of hardware and other revenue
Total cost of revenue
$
$
35,610
80,578
116,188
$
$
30,229
69,151
99,380
$
$
25,722
51,652
77,374
18%
17%
17%
18%
34%
28%
% of total revenue
________________
(1) Excludes amortization and depreciation.
2017 Compared to 2016
34%
38%
37%
The $16.8 million increase in cost of revenue in 2017 compared to 2016 was the result of a $5.4 million, or 18%, increase in
cost of SaaS and license revenue and an $11.4 million, or 17%, increase in cost of hardware and other revenue. The increase in
cost of Alarm.com segment SaaS and license revenue related primarily to the growth in our subscriber base, which drove a
corresponding increase in amounts paid to wireless network providers and, to a lesser extent, the costs of running our network
operating centers. Cost of SaaS and license revenue as a percentage of SaaS and license revenue was 15% for 2017 and 17%
for 2016. The decrease in cost of sales relative to our revenue growth was due to the achievement of economies of scale related
51
to the growth in our subscriber base including the addition of the subscribers of our Connect software platform, which has a
higher gross margin profile but lower revenue per subscriber. The increase in cost 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
other revenue was 78% for 2017 and 79% for 2016. The decrease in cost of hardware as a percentage of hardware and other
revenue is a reflection of the mix of product sales during the periods.
2016 Compared to 2015
The $22.0 million increase in cost of revenue in 2016 compared to 2015 was the result of a $4.5 million, or 18%, increase in
cost of SaaS and license revenue and a $17.5 million, or 34%, increase in cost of hardware and other revenue. The increase in
cost of SaaS and license revenue related primarily to the growth in our subscriber base, which drove a corresponding increase
in the costs to make our SaaS platform available to our service provider partners and subscribers. Cost of SaaS and license
revenue as a percentage of SaaS and license revenue was 17% for 2016 and 18% for 2015. This decrease in cost of sales
relative to our revenue growth was due to the achievement of economies of scale from growth in our subscriber base. The
increase in cost of hardware and other revenue related primarily to our increase in hardware and other revenue and was higher
on a relative basis due to new hardware solutions such as the doorbell camera and the shift to LTE cellular technology for our
radio module. Cost of hardware and other revenue as a percentage of hardware and other revenue decreased was 79% for
2016 and 76% for 2015.
Sales and Marketing Expense
Sales and marketing
% of total revenue
2017 Compared to 2016
Year Ended December 31,
% Change
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
$
43,490
$
38,980
$
32,240
12%
21%
13%
15%
15%
The $4.5 million increase in sales and marketing expense in 2017 compared to 2016 was primarily due to increases in
headcount for our sales force, service provider partner support team, and use of consultants to support our growth and for
international expansion and marketing initiatives. As a result, our personnel and related costs for our Alarm.com segment,
including salary, benefits, stock-based compensation and travel expenses, increased by $3.5 million in 2017. This increase was
partially offset by a $1.6 million decrease in marketing expense for our Alarm.com segment due to a marketing initiative we
undertook in 2016 that did not recur in 2017. Sales and marketing expense from our Other segment increased by $2.2 million in
2017 due to an increase in employee headcount and associated personnel and related costs as well as expenses related to the
use of consultants to support our growth. The overall number of employees in our sales and marketing teams increased from
219 as of December 31, 2016 to 242 as of December 31, 2017. Sales and marketing expense as a percentage of total revenue
was 13% and 15% for 2017 and 2016, respectively.
2016 Compared to 2015
The increase in sales and marketing expense of $6.7 million in 2016 compared to 2015 was primarily due to increases in
headcount for our sales force, service provider partner support team, marketing team and use of consultants to support our
growth and for international expansion and marketing initiatives. As a result, our personnel and related costs for our Alarm.com
segment, including salary, benefits, stock-based compensation and travel expenses, increased by $3.7 million and expense for
external consultants increased by $0.6 million in 2016. In addition, costs for advertising and trade show participation increased
by $2.6 million from 2015 to 2016 due to costs incurred to feature our solutions and highlight support services we offer to our
service provider partners. Sales and marketing expense from our Other segment decreased from $5.6 million in 2015 to $5.0
million in 2016 with a $0.3 million decrease in personnel and related costs due to a decrease in our Other segment employee
headcount and a $0.3 million decrease from external consultants and marketing. The overall number of employees in our sales
and marketing teams increased from 188 as of December 31, 2015 to 219 as of December 31, 2016. Sales and marketing
expense as a percent of total revenue remained consistent and was 15% for 2016 and 2015.
General and Administrative Expense
General and administrative
% of total revenue
Year Ended December 31,
% Change
2017
2016
2015
$
55,396
$
57,926
$
35,473
2017 vs. 2016
(4)%
2016 vs. 2015
63%
16%
22%
17%
52
2017 Compared to 2016
The $2.5 million decrease in general and administrative expense in 2017 compared to 2016 was due in part to a $6.2 million
decrease in legal expenses related to ongoing intellectual property litigation within our Alarm.com segment as well as a $6.4
million decrease in acquisition-related expenses related to the Acquisition. These decreases were partially offset by a $5.0
million increase in personnel and related costs for our Alarm.com segment due to an increase in employee headcount to support
our operational growth and from the addition of the Connect and ObjectVideo Labs teams. In addition, there was a $2.3 million
increase in expense for external consultants within our Alarm.com segment to support our growth and compliance with the
regulations governing public companies as well as a $1.3 million increase in rent expense. General and administrative expenses
from our Other segment decreased by $1.0 million in 2017 compared to 2016 primarily due to a $1.3 million decrease in
personnel and related costs primarily as a result of a $1.2 million adjustment during the third quarter of 2016 to increase the fair
value of subsidiary stock awards granted to the employees of one of our subsidiaries. The overall number of employees in
general and administrative functions increased from 68 as of December 31, 2016 to 95 as of December 31, 2017.
2016 Compared to 2015
The $22.5 million increase in general and administrative expense in 2016 compared to 2015 was due to an increase of $7.0
million in legal expenses related to ongoing intellectual property litigation and $11.0 million in acquisition-related expenses
related to the Acquisition. An additional $1.3 million increase in legal expenses resulted from professional services to support our
operational growth and from maintaining and enforcing our intellectual property portfolio and license agreements. Our personnel
and related costs for our Alarm.com segment, including salary, benefits and travel expenses, increased by $1.7 million from
2015 to 2016 due to an increase in employee headcount and by $1.0 million for additional professional services to support our
operational growth and as a public company. General and administrative expense from our Other segment increased by $0.5
million from 2015 to 2016, primarily due to a $2.2 million increase in compensation expense related to the fair value of an
agreement to repurchase subsidiary units from the founder of our subsidiary that provides our remote access management
solution. This increase was partially offset by a $1.3 million decrease for personnel and related costs from a decrease in Other
segment employee headcount which also resulted in a $0.4 million decrease for office rent, external consultants and general
legal fees. The overall number of employees in general and administrative functions increased from 58 as of December 31, 2015
to 68 as of December 31, 2016.
Research and Development Expense
Research and development
% of total revenue
2017 Compared to 2016
Year Ended December 31,
% Change
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
$
72,755
$
44,272
$
40,002
64%
11%
21%
17%
19%
The $28.5 million increase in research and development expense in 2017 compared to 2016 was primarily due to an
increase in headcount of employees in research and development functions as a result of the Acquisition and the ObjectVideo
Labs acquisition. Our personnel and related costs for our Alarm.com segment increased by $19.2 million in 2017 compared to
2016. In addition, expense for external consultants and information technology to support our research and development
personnel increased by $4.0 million in 2017. Research and development expense from our Other segment increased by $2.8
million in 2017 compared to 2016, due to a $1.7 million increase in personnel and related expense and a $0.4 million increase in
expense for external consultants. The overall number of employees in research and development functions increased from 320
as of December 31, 2016 to 447 as of December 31, 2017.
2016 Compared to 2015
The $4.3 million increase in research and development expense in 2016 compared to 2015 was primarily due to an increase
in headcount of employees in research and development functions who are dedicated to continuing to innovate and enhance our
platform capabilities for both our residential and commercial subscribers. In addition, we continue to develop our suite of
enterprise tools geared toward enabling our service provider partners to grow their business. Our personnel and related costs for
our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $9.6 million
from 2015 to 2016. To support these efforts, our expense for external consultants and information technology incurred to support
our research and development personnel increased $2.6 million in 2016. Research and development expense from our Other
segment decreased by $7.9 million from 2015 to 2016, due in part to a $4.2 million charge we recorded in 2015 related to a
renegotiation of a contract with a manufacturer. In addition, our personnel and related costs for our Other segment, including
salary, benefits, stock-based compensation and travel expenses, decreased by $2.4 million and our expense for external
consultants decreased by $1.3 million. During the fourth quarter of 2015 and first quarter of 2016, we diverted resources from a
subsidiary in our Other segment that focused on the retail do-it-yourself market. As a result, certain employees previously in
research and development functions in our Other segment transitioned into our Alarm.com segment. The overall number of
53
employees in research and development functions increased from 261 as of December 31, 2015 to 320 as of December 31,
2016.
Amortization and Depreciation
Amortization and depreciation
$
17,734
$
6,490
$
5,808
173%
12%
% of total revenue
5%
2%
3%
Year Ended December 31,
% Change
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
2017 Compared to 2016
The $11.2 million increase in amortization and depreciation in 2017 compared to 2016 was primarily due to customer
relationships, developed technology and trade name intangibles acquired in connection with the Acquisition and the ObjectVideo
Labs acquisition in the first quarter of 2017.
2016 Compared to 2015
The $0.7 million increase in amortization and depreciation in 2016 compared to 2015 was primarily due to increases in our
leasehold improvements and computer and network equipment purchased for our new corporate headquarters in Tysons,
Virginia to accommodate our growth in headcount and for the expansion of our network operations centers.
Interest Expense
Interest expense
% of total revenue
2017 Compared to 2016
Year Ended December 31,
% Change
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
$
(2,199)
$
(190)
$
(178)
1,057%
7%
(1)%
— %
— %
The $2.0 million increase in interest expense in 2017 compared to 2016 was primarily due to interest incurred on the
additional $67.0 million drawn under our 2014 Facility and 2017 Facility during the first quarter of 2017 to fund the Acquisition.
2016 Compared to 2015
Interest expense was consistent in 2016 and 2015 as the outstanding principal balance and applicable interest rate of our
debt from our 2014 Facility remained unchanged.
Other Income / (Expense), Net
Other income / (expense), net
$
1,066
$
513
$
(348)
108%
(247)%
% of total revenue
—%
—%
— %
Year Ended December 31,
% Change
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
2017 Compared to 2016
Included in other income / (expense), net was interest income earned on our cash balance and interest income earned on
notes receivable partially offset from a loss of an equity method investment that is in the start-up phase of its operations.
2016 Compared to 2015
Included in other income / (expense), net was interest income earned on our cash balance and interest income earned on
notes receivable partially offset from a loss of an equity method investment that is in the start-up phase of its operations.
54
Provision for Income Taxes
Provision for Income Taxes
% of total revenue
2017 Compared to 2016
Year Ended December 31,
% Change
2017
2016
2015
2017 vs. 2016
2016 vs. 2015
$
2,990
$
4,227
$
5,697
(29)%
(26)%
1%
2%
3%
Our effective tax rate decreased to 9.3% in 2017 from 29.4% in 2016. The decrease in the effective tax rate was primarily
related to recognizing the tax windfall benefits from the exercise of employee stock options through the income statement
provision for income taxes in the period incurred. We adopted the accounting provision that simplified the tax for employee
stock-based payment transactions in the first quarter of 2017. Accordingly, previous tax windfall benefits were required to be
recorded in additional paid-in capital. Additionally, our benefit from income taxes increased due to our 2016 research and
development tax credit study that was finalized during the second quarter of 2017, resulting in a higher 2016 and 2017 tax credit
benefit than we had been previously recording.
These decreases in the effective tax rate were partially offset by the effects of the Tax Act signed into law on December 22,
2017. As a result of the enacted law, we were required to revalue deferred tax assets and liabilities at the rate in effect when the
deferred tax balances are scheduled to reverse. This revaluation resulted in an additional $8.8 million of income tax expense
and a corresponding reduction in the deferred tax asset.
2016 Compared to 2015
Our effective tax rate decreased from 32.6% in 2015 to 29.4% in 2016, primarily related to a larger research and
development tax credit recorded in 2016 as compared to 2015.
Quarterly Results of Operations (Unaudited)
The following table shows selected unaudited quarterly consolidated statement of operations data for each of our eight most
recently completed quarters, as well as the percentage 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 financial statements and include all
adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair statement of financial information in
accordance with generally accepted 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 operating results for a full year.
55
The selected consolidated statements of operation data in amounts and as a percentage of total revenue are presented
below (amounts in thousands):
Mar. 31,
2016
June 30,
2016
Sept. 30,
2016
Dec.31,
2016
Mar. 31,
2017
June 30,
2017
Sept. 30,
2017
Dec. 31,
2017
Three Months Ended
Revenue:
SaaS and license revenue
$
40,012
$
42,010
$
44,630
$
46,888
$
50,226
$
58,928
$
61,924
$
65,205
Hardware and other revenue
Total revenue
Cost of revenue:
Cost of SaaS and license
revenue
Cost of hardware and other
revenue
Total cost of revenue
Total operating expenses
Net income
Net income per share:
Basic
Diluted
As a percent of total revenue:
Revenue:
SaaS and license revenue
Hardware and other revenue
Total revenue
Cost of revenue:
Cost of SaaS and license
revenue
Cost of hardware and other
revenue
Total cost of revenue
Total operating expenses
Net income
Quarterly Trends
19,031
59,043
22,413
64,423
23,216
67,846
22,906
69,794
23,968
74,194
27,060
85,988
28,038
89,962
23,588
88,793
6,781
7,211
7,787
8,450
8,092
8,500
9,545
9,473
14,335
21,116
33,666
2,738
0.06
0.06
$
$
$
$
17,972
25,183
36,432
1,873
0.04
0.04
$
$
$
$
18,579
26,366
38,645
2,567
0.06
0.05
$
$
$
$
18,265
26,715
38,925
2,976
0.06
0.06
$
$
$
$
18,543
26,635
43,074
3,963
0.09
0.08
$
$
$
$
21,335
29,835
50,257
9,865
0.21
0.20
$
$
$
$
22,288
31,833
47,728
15,103
0.32
0.31
$
$
$
$
18,412
27,885
48,316
320
0.01
0.01
$
$
$
$
68%
32%
100%
11%
24%
36%
57%
5%
65%
35%
100%
11%
28%
39%
57%
3%
66%
34%
100%
11%
27%
39%
57%
4%
67%
33%
100%
12%
26%
38%
56%
4%
68%
32%
100%
11%
25%
36%
58%
5%
69%
31%
100%
10%
25%
35%
58%
11%
69%
31%
100%
11%
25%
35%
53%
17%
73%
27%
100%
11%
21%
31%
54%
—%
Our 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 service provider partners’ ability to resell our services and due to service providers and
their subscribers on our Connect software platform. Hardware and other revenue fluctuates from quarter to quarter based on the
timing of hardware orders from our service providers and hardware distributors.
The cost of revenue, in absolute dollars, has increased over time corresponding to the increase in revenue. The cost of
revenue as a percent of revenue is lower in quarters when SaaS and license 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 to the
achievement of economies of scale related to the growth in our subscriber base including the addition of the subscribers of our
Connect software platform, which has a higher gross margin profile but lower revenue per subscriber. Our cost of SaaS and
license revenue as a percentage of SaaS and license revenue has been between 14% and 18% for all periods presented.
Operating expenses have generally increased over time. Our most significant operating expenses are employee-related
costs, including salaries, benefits and stock-based compensation. Research and development personnel have attributed to
approximately 67% of our headcount increase over the eight quarters presented. We continue to invest in research and
development to enhance our SaaS solution capabilities for both our residential and commercial subscribers and to enhance our
suite of enterprise tools that enable our service provider partners to expand their business.
56
Segment Information
We have two reportable segments: Alarm.com and Other. Our Alarm.com segment represents our cloud-based platforms for
the intelligently connected property and related solutions that contributed approximately 94%, 94% and 97% of our revenue for
the years ended December 31, 2017, 2016 and 2015. Our Other segment is focused on researching, developing and offering
residential and commercial automation solutions and energy management products and services in adjacent markets. The
consolidated subsidiaries that make up our Other segment are in the investment stage and have incurred significant operating
expenses relative to their revenue.
On March 8, 2017, we completed the Acquisition. Connect provides an interactive security and home automation software
platform for service providers. Piper provides an all-in-one video and home automation hub. On January 1, 2017, we completed
the acquisition of ObjectVideo Labs from ObjectVideo, Inc., or ObjectVideo. ObjectVideo was a pioneer in the fields of video
analytics and computer vision with technology that extracted meaning and intelligence from video streams in real-time to enable
object tracking, pattern recognition and activity identification. We anticipate that the ObjectVideo Labs engineering team's
capabilities and expertise will accelerate our research and development of video services and video analytic applications.
Connect's and ObjectVideo Labs' financial results from the closing of the respective acquisitions through December 31, 2017 are
included in the Alarm.com segment. Piper's financial results from the closing of the acquisition through December 31, 2017 are
included in the Other segment.
Our Alarm.com segment increased from 557 employees as of January 1, 2017 to 710 employees as of December 31, 2017.
Our Other segment increased from 50 employees as of January 1, 2017 to 74 employees as of December 31, 2017. Inter-
segment revenue includes sales of hardware between our segments.
The following table presents our revenue, inter-segment revenue and operating expenses by segment (in thousands):
Year Ended December 31,
SaaS and
License
Revenue
2017
Hardware
and Other
Revenue
Operating
Expenses
SaaS and
License
Revenue
2016
Hardware
and Other
Revenue
Operating
Expenses
SaaS and
License
Revenue
2015
Hardware
and Other
Revenue
Operating
Expenses
$ 227,583
$
92,445
$ 171,436
$ 168,732
$
79,049
$ 133,818
$ 139,036
$
63,716
$
91,544
8,700
—
—
15,154
(2,945)
(2,000)
17,939
4,808
—
—
—
—
14,018
(2,863)
(2,638)
13,850
1,928
—
—
(28)
—
7,124
(924)
(1,964)
21,979
—
—
Alarm.com
Other
Inter-segment Alarm.com
Inter-segment Other
Total
$ 236,283
$ 102,654
$ 189,375
$ 173,540
$
87,566
$ 147,668
$ 140,936
$
67,952
$ 113,523
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated
financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial
statements requires us to make estimates and 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 the reported amounts of revenue,
costs and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and
on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions, and to the extent that there are differences between our estimates and
actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be
affected. Our most critical accounting policies are summarized below. See Note 2 to our consolidated financial statements for a
description of our other significant accounting policies.
Revenue Recognition and Deferred Revenue
We derive our revenue from three primary sources: the sale of cloud-based SaaS services on our integrated Alarm.com
platform, the sale of licenses and services on the Connect software platform and the sale of hardware products. We sell our
platform and hardware solutions to service provider partners that resell our solutions and hardware to residential and commercial
property owners, who are the service provider partners’ customers. Our subscribers consist of all of the properties maintained by
those residential and commercial property owners to which we are delivering at least one of our solutions. We also sell our
hardware to distributors who resell the hardware to service provider partners. We enter into contracts with our service provider
partners that establish pricing for access to our platform solutions and for the sale of hardware. These contracts typically have
an initial term of one year, with subsequent renewal terms of one year. Our service provider partners typically enter into contracts
with our subscribers, which our service provider partners have indicated range from three to five years in length. Our service
provider partners are free to market and sell our products under their own guidelines at prices to the consumer that they
establish independently.
57
Our hardware includes cellular radio modules that enable access to our cloud-based platforms, as well as video cameras,
image sensors and other peripherals. Our service provider partners may purchase our hardware in anticipation of installing the
hardware in a residential or commercial property when they create a new subscriber account, or for use in existing subscriber
properties. The purchase of hardware occurs in a transaction that is separate and typically in advance of the purchase of our
platform services. Service provider partners transact with us to purchase 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 access to our
platform solutions is enabled and the delivery of the services commences. The purchase of platform solutions and the purchase
of hardware are separate transactions because at the time of sale of the hardware, the service provider partner is not obligated
to and may not purchase a platform solution for the hardware sold, and the level and duration of platform solutions, if any, to be
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 partner, 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 partner to be persuasive evidence that an agreement exists, and the
fees to be fixed or determinable if the fees are contractually agreed to with our service provider partners. Collectibility is
evaluated based on a number of factors, including a credit review of new service provider partners, and the payment history of
existing service provider partners. If collectibility is not reasonably assured, revenue is deferred until collection becomes
reasonably assured, which is generally upon the receipt of payment.
SaaS and License Revenue
We generate the majority of our SaaS and license revenue primarily from monthly fees charged to our service provider
partners sold on a per subscriber basis for access to our Alarm.com platform and related solutions. Our fees per subscriber vary
based upon the service plan and features utilized.
Under terms in our contractual arrangements with our service provider partners, we are entitled to payment and recognize
revenue based on a monthly fee that is billed in advance of the 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 is neither a
minimum required initial service term nor a stated renewal term in our contractual arrangements, we recognize revenue over the
period of service, which is monthly. Our service provider partners typically incur and pay the same monthly fee per subscriber
account for the entire period a subscriber account is active.
We also generate SaaS and license revenue from monthly fees charged to service providers sold on a per subscriber basis
for access to our Connect software platform. The Connect software for interactive security, automation and related solutions is
typically deployed and operated by the service provider in its own network operations center. Our agreements for the Connect
platform solution typically include software and services, such as post-contract customer support, or PCS. Software sales that
include multiple elements are typically allocated to the various elements based on vendor-specific objective evidence of fair
value, or VSOE. There have been no separate sales of PCS, as PCS is always bundled with the software license for the
Connect platform solution. Therefore, the VSOE of fair value for PCS cannot be established. The entire Connect arrangement
fee is recognized ratably over the period during which the services are expected to be performed or the PCS period, whichever
is longer, once the software is delivered and services have commenced, if all the other basic revenue recognition criteria have
been met. Under the terms of our contractual arrangements with our service provider partners, we are entitled to the payment of
a monthly fee for Connect that is billed per subscriber for the month of service. We recognize revenue over the period of service,
which is monthly. Our service provider partners 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 platform solutions including a range of solutions and a range of a la carte
add-ons for additional features. The fee paid by our service provider partners 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 our
service provider partners 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 third
parties on a per customer basis for use of our patents. In addition, in certain 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 demand made available for a utility’s or market’s control.
58
Hardware and Other Revenue
We generate hardware and other revenue primarily from the sale of video cameras and cellular radio modules that provide
access to our cloud-based platforms and, to a lesser extent, the sale of other devices, including image sensors and peripherals.
We recognize hardware and other revenue when the hardware is received by our service provider partner or distributor, 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 provider partners or distributors, and are not contingent on resale to end-users, or to service
provider partners in the case of sales of hardware to distributors. Our terms for hardware sales sold directly to either service
provider partners 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 provider partners under terms between the two parties. We record a reserve against revenue for
hardware returns based on historical returns, which was 2%, of hardware and other revenue for each of the years ended
December 31, 2017, 2016 and 2015. We evaluate 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 significantly differed from our estimated
reserve.
Hardware and other revenue also includes activation fees charged to service provider partners for activation of a new
subscriber account on our platforms, as well as fees paid by service provider partners for our marketing services. Our service
provider partners use services on our platforms, such as support tools and applications, to assist in the installation of our
solutions in subscriber properties. This installation marks the beginning of the service period on our platforms and on occasion,
we earn activation revenue for fees charged for this service. The activation fee is non-refundable, separately negotiated and
specified in our contractual arrangements with our service provider partners and is charged to the service provider partner for
each subscriber activated on our platforms. Activation fees are 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 deferred revenue
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 these activation 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 following twelve months, or
longer as appropriate, until the ten-year expected term is complete.
Fair Value Measurements
The accounting standard for fair value measurements provides a framework for measuring fair value and requires
disclosures regarding fair value measurements. Fair value is defined 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 transaction between
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 are not active; and
Level 3 - Unobservable inputs supported by little or no market activity.
The Level 3 liability for the subsidiary unit awards relates to agreements established with employees of our subsidiaries for
cash awards contingent upon the subsidiary companies meeting certain financial milestones such as revenue, working capital,
EBITDA and EBITDA margin. We account for these subsidiary awards using fair value and establish liabilities for the future
payment for the repurchase of subsidiary units under the terms of the agreements based on estimating revenue, working capital,
EBITDA and EBITDA margin of the subsidiary units over the periods of the awards through the anticipated repurchase dates. We
estimated the fair value of each 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 each liability 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 the
respective payment dates, we will remeasure the liability, using the same valuation approach based on the applicable
subsidiary's revenue, an unobservable input, and we will record any changes in the employee's compensation expense. Some of
the awards are subject to the employees' continued employment and therefore recorded on a straight-line basis over the
remaining service period. The Level 3 liability for the subsidiary unit awards was $3.2 million as of December 31, 2017, which
represented approximately 2% of the total liabilities included within the 2017 consolidated balance sheet.
Based on this assessment of fair value, we remeasured the Level 3 liabilities, and recorded $0.4 million in general and
administrative expense for the year ended December 31, 2017. We have not made any material changes in the accounting
methodology used to determine the fair value of the subsidiary unit awards. We do not expect any material changes in the near
term to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the subsidiary
unit awards as of December 31, 2017. However, if changes in these assumptions occur, and, should those changes be
significant, we may be exposed to additional realized losses in general and administrative expense.
59
Stock-Based Compensation
We compensate our executive officers, board of directors, employees and consultants with stock-based compensation plans
under our 2015 Equity Incentive Plan, or 2015 Plan. We record stock-based compensation expense based upon the award’s
grant date fair value and use an accelerated attribution method, net of actual forfeitures, in which compensation cost for each
vesting tranche in an award is recognized ratably from the service inception date to the vesting date for that tranche. We
estimate the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, which requires
us to estimate 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 consistent with 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 “simplified method” 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 volatility is based on historical volatilities of our stock and publicly traded stock of comparable
companies over the estimated expected term of the stock options.
We do not expect any material changes in the near term to the underlying assumptions used to calculate stock-based
compensation expense for the year ended December 31, 2017. However, if changes in these assumptions occur, and, should
those changes be significant, they could have a material impact on our stock-based compensation expense.
Business Combinations
We are required to allocate the purchase price of acquired companies to the identifiable tangible and intangible assets
acquired and liabilities assumed at the acquisition date based upon their estimated fair values. The net assets and results of
operations of an acquired entity are included in our consolidated financial statements from the acquisition date. Acquisition-
related costs are expensed as incurred. Goodwill as of the acquisition date represents the excess of the purchase consideration
of an acquired business over the fair value of the underlying 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, proprietary technology 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 used in 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 when completed, 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 liabilities assumed.
During the measurement period, we may record adjustments to the assets acquired and liabilities assumed. Any
adjustments to provisional amounts that are identified during the measurement period are recorded in the reporting period in
which the adjustment amounts are determined. Upon the conclusion of the measurement period, any subsequent adjustments
are recorded to earnings.
Goodwill, Intangible Assets and Long-lived Assets
Goodwill
Goodwill 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 of liabilities 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 subject to 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 our goodwill at the reporting unit level. We perform either a qualitative analysis or a quantitative
analysis every year depending on the changes to our goodwill balance as well as changes in our business and the economy.
Qualitative factors we consider include, but are not limited to, macroeconomic conditions, industry and market conditions,
company specific events, changes in circumstances and market capitalization. In January 2017, the FASB issued ASU 2017-04,
"Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment" removing Step 2 of the goodwill
impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment amount will now be the amount
by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. We elected to
early adopt ASU 2017-04, therefore, a Step 2 analysis will not be performed in the event that a reporting unit fails Step 1 of the
impairment test.
60
For our 2017 annual impairment review, we performed a quantitative assessment for our Alarm.com reporting unit, our only
reporting unit with a goodwill balance. This reporting unit had a fair value that exceeded its carrying value by more than 100%,
therefore, we concluded that there was no goodwill impairment as of October 1, 2017. Our assessment was performed as of
October 1, 2017, and we have determined there have been no triggering events from our assessment date through
December 31, 2017.
Intangible Assets and Long-lived Assets
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 are amortized 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 carrying value and an
impairment loss would be recognized for the amount by which the carrying amount exceeds the fair value.
We 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 the asset 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.
For the year ended December 31, 2017, we determined there were no indicators of impairment of our intangible assets with
definite lives or long-lived assets.
Accounting for Income Taxes
We 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 of deferred 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 liabilities are
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 differences are 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 positive and negative 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 as of December 31, 2017 and 2016.
Accordingly, we have not recorded a valuation allowance as of December 31, 2017 and 2016.
We are subject to income taxes in the United States and foreign jurisdictions based upon our business operations in those
jurisdictions. Significant judgment is required in evaluating uncertain tax positions. We record uncertain tax positions in
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 the technical 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 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.
Recent Accounting Pronouncements
See Note 2 of our consolidated financial statements for information related to recently issued accounting standards.
Liquidity and Capital Resources
Working Capital
The following table summarizes our cash and cash equivalents, accounts receivable, net and working capital, for the
periods indicated (in thousands):
Cash and cash equivalents
Accounts receivable, net
Working capital
As of December 31,
2016
2017
$
96,329
40,634
119,433
$
140,634
29,810
150,485
2015
128,358
21,348
131,971
$
61
We define working capital as current assets minus current liabilities. Our cash and cash equivalents as of December 31,
2017 are available for working capital purposes. We do not enter into investments for trading purposes, and our investment
policy 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 deposit accounts that generate very low returns.
Liquidity and Capital Resources
As of December 31, 2017, we had $96.3 million in cash and cash equivalents. We consider all highly liquid instruments
purchased with an original maturity from the date of purchase of three months or less to be cash equivalents.
We believe our existing cash and cash equivalents and our future cash flows from operating activities will be sufficient to
meet our anticipated operating cash needs for at least the next 12 months. Over the next twelve months, we expect our capital
expenditure requirements to be approximately $5.3 million, primarily related to purchases of computer software and equipment.
Our future working 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 human resources and capital equipment, future acquisitions and
investments, and the timing and extent of our introduction of new solutions and platform and solution enhancements. To the
extent 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 bank credit 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 likely have 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 our current stockholders.
Sources of Liquidity
To 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 $126.1 million in net cash, primarily from our initial public offering, or IPO, and also
the sale of our preferred stock and to a lesser extent, from the proceeds of sales of common stock and stock option exercises.
Our 2017 Facility is a revolving credit facility with SVB, as administrative agent, and a syndicate of lenders to finance
working capital and certain permitted acquisitions and investments. The 2017 Facility is available to us to refinance existing debt
and for general corporate and working capital purposes including acquisitions, and has a current borrowing capacity of $125.0
million. We have the option to increase the borrowing capacity of the 2017 Facility to $175.0 million with the consent of the
lenders.
As of December 31, 2017, $71.0 million was outstanding under the 2017 Facility, no letters of credit were utilized and $54.0
million remained available for borrowing under the 2017 Facility. The 2017 Facility contains various financial and other covenants
that require us to maintain a maximum consolidated leverage ratio and a fixed charge coverage ratio, and limit our capacity to
incur other indebtedness, liens, make certain payments including dividends, and enter into other transactions without approval of
the lenders. The 2017 Facility is secured by substantially all of our assets, including our intellectual property. As of December 31,
2017, we were in compliance with all covenants under the 2017 Facility. Our outstanding amounts under the 2017 Facility are
due at maturity in October 2022.
Dividends
We did not declare or pay dividends in 2017 or 2016. On 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 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. We paid these
dividends on June 26, 2015 to our 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 future earnings, 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 pay dividends on our common
stock is limited by restrictions under the terms of the agreements governing the 2017 Facility. Payment of future cash dividends,
if any, will be at the discretion of the board of directors after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other
factors the board of directors deems relevant.
62
Historical Cash Flows
The following table sets forth our cash flows for the periods indicated (in thousands):
Cash flows from operating activities
Cash flows used in investing activities
Cash flows from financing activities
Operating Activities
Year Ended December 31,
2016
2015
2017
$
$
57,187
(168,795)
67,303
$
22,600
(11,426)
1,102
28,019
(17,632)
75,399
Cash flows from operating activities have typically been generated from our net income and by changes in our operating
assets and liabilities, particularly from accounts receivable and inventory, adjusted for non-cash expense items such as
amortization and depreciation, deferred income taxes and stock-based compensation.
For 2017, cash flows from operating activities were $57.2 million, an increase of $34.6 million from 2016, as the result of
a $19.1 million increase in net income and a $17.9 million increase in non-cash items, partially offset by a $2.4 million reduction
in cash from operating assets and liabilities.
The $17.9 million increase in non-cash items was primarily due to an $11.2 million increase in amortization and depreciation
primarily due to the additional amortization of customer relationships, developed technology and trade name intangibles
acquired from the Acquisition and the ObjectVideo Labs acquisition in the first quarter of 2017. Additionally, there was a $3.4
million increase in stock-based compensation resulting from additional grants of stock options and restricted stock units during
2017, as well as a $2.2 million increase in the change in deferred income taxes primarily due to a reduction in the carrying value
of our net deferred tax assets resulting from the Tax Act. The $2.4 million reduction in cash from operating assets and liabilities
was primarily due to differences in timing of collection of receipts and payments of disbursement as well as a decrease in the
change in our deferred rent balance resulting from the move to our corporate headquarters in 2016.
For 2016, cash flows from operating activities were $22.6 million, a decrease of $5.4 million from 2015, as the result of
a $9.0 million decrease in cash from operating assets and liabilities and a $1.6 million decrease in net income, partially offset by
a $5.2 million increase in non-cash items.
The $9.0 million reduction in cash provided by operating assets and liabilities was primarily due to an increase in the change
in the accounts receivable balance of $5.3 million, net of reserves, due to the timing of service provider payments. Additionally,
there was an increase in the change in the inventory balances due to the (i) increase in hardware sales related to new products,
including the doorbell camera, and (ii) timing of in-transit inventory.
The $5.2 million increase in non-cash items was due in part to (i) a $2.9 million change in deferred income taxes, (ii) a $0.7
million increase in amortization and depreciation for fixed assets, intangibles, tooling and patents and (iii) a $0.7 million
increase in stock-based compensation resulting from additional grants of stock options and restricted stock units.
Investing Activities
Our investing activities include acquisitions, capital expenditures, notes receivable issued to companies with offerings
complementary to ours and proceeds from the repayment of those notes receivable. Our capital expenditures have primarily
been for general business use, including leasehold improvements as we have expanded our office space to accommodate our
growth in headcount, computer equipment used internally, and expansion of our network operations centers.
For 2017, our cash flows used in investing activities was $168.8 million as compared to $11.4 million in 2016. The $157.4
million increase in cash used in investing activities was primarily due to our payment of $154.3 million, net of cash acquired, for
our acquisitions in the first quarter of 2017. In addition, we issued $8.0 million in loans to distribution partners in 2017 as
compared to $3.1 million in 2016. These increases in cash used in investing activities were partially offset by a $1.6
million increase in receipts of payments on notes receivable in 2017 as compared to 2016.
For 2016, our cash flows used in investing activities was $11.4 million as compared to $17.6 million in 2015. The $6.2
million decrease in cash used in investing activities was primarily due to our payment of $5.6 million, net of cash acquired, for
our purchase of certain assets of HiValley Technology, Inc., or SecurityTrax, in 2015. Additionally, cash used in investing
activities decreased by $2.4 million due to receipts of payments on notes receivable in 2016 that did not occur in 2015.
63
Financing Activities
Cash generated by financing activities includes proceeds from the sale of common stock related to our IPO in 2015,
borrowings under credit facilities, and proceeds from the issuance of common stock from employee stock option exercises and
from our employee stock purchase plan. Cash used in financing activities includes repurchases of common stock, repayments of
debt, dividends paid on our preferred stock and common stock prior to the completion of our IPO and payments of offering costs
in connection with our IPO.
For 2017, cash flows from financing activities was $67.3 million compared to $1.1 million in 2016. The $66.2 million increase
in cash flows from financing activities was primarily due to the $139.0 million of proceeds borrowed under the credit facilities
partially offset by repayments of $74.7 million under the credit facilities that did not occur in 2016 related to the Acquisition in
March 2017 and the refinancing of the 2014 Facility in October 2017.
For 2016, cash flows from financing activities was $1.1 million compared to $75.4 million in 2015. The $74.3 million
decrease in cash flows from financing activities was primarily due to the $98.0 million of net proceeds received from the sale of
our common stock in our IPO in 2015, partially offset by dividends of $20.0 million paid in 2015.
Contractual Obligations
The following table presents aggregate information about our material contractual obligations and the periods in which those
future payments were due as of December 31, 2017. Future events could cause actual payments to differ from these estimates.
As of December 31, 2017, the following table summarizes our contractual obligations and the effect such obligations are
expected to have on our liquidity and cash flow in future periods (in thousands):
Contractual Obligations
1 Year
2 to 3 Years
4 to 5 Years
More Than
5 Years
Total
Debt:
Principal payments
Interest payments1
Unused line fee payments
Operating lease commitments
Subsidiary unit award liabilities2
Other long-term liabilities
Other commitments3
$
— $
— $
71,000
$
— $
2,479
110
6,898
2,802
190
1,596
4,964
219
11,323
—
1,120
316
4,373
193
10,395
—
—
—
—
—
16,894
—
336
—
71,000
11,816
522
45,510
2,802
1,646
1,912
Total contractual obligations
$
14,075
$
17,942
$
85,961
$
17,230
$
135,208
_______________
(1) The 2017 Facility incurs interest at a variable rate. The projected variable interest payments assume no change in the Eurodollar Base
Rate, or LIBOR, from December 31, 2017.
(2) Represents the current portion of our expected cash payments for our liability to repurchase subsidiary unit awards for our
professional residential property management and vacation rental management subsidiary.
(3) Represents amounts due under multi-year, non-cancelable contracts with third-party vendors, as well as other commitments.
The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that
specify all significant terms, including fixed or minimum 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 under agreements that we can
cancel without a significant penalty.
As of December 31, 2017, we had no outstanding letters of credit under our 2017 Facility.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes
referred to as structured finance or special purpose entities that 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 financing arrangements.
In addition, we do not engage in trading activities involving non-exchange traded contracts.
64
Debt Obligations
We previously had a $75.0 million revolving credit facility with SVB, as administrative agent, and a syndicate of lenders that
had a maturity date in November 2018, or the 2014 Facility. As of December 31, 2016, the outstanding balance of the 2014
Facility was $6.7 million. On March 7, 2017, we drew $67.0 million under the 2014 Facility to partially fund the Acquisition.
During the year ended December 31, 2017, we repaid $1.7 million of the outstanding balance of the 2014 Facility.
On October 6, 2017, we refinanced the $72.0 million remaining outstanding balance under the 2014 Facility, by entering into
a new $125.0 million senior secured revolving credit facility, or the 2017 Facility, with SVB, as administrative agent, PNC Bank,
National Association, as documentation agent, and a syndicate of lenders. Upon entry into the 2017 Facility, we borrowed $72.0
million, which was used to repay the previously outstanding balance under the 2014 Facility. From October 6, 2017 to
December 31, 2017, no additional amounts were drawn under the 2017 Facility and $1.0 million of the outstanding balance has
been repaid. The 2017 Facility matures in October 2022 and includes an option to further increase the borrowing capacity to
$175.0 million with the consent of the lenders. Costs incurred in connection with the 2017 Facility were capitalized and are
amortized as interest expense over the term of the 2017 Facility. The 2017 Facility is secured by substantially all of our assets,
including our intellectual property.
The outstanding principal balance on the 2017 Facility accrues interest at a rate equal to, at our option, either (1) LIBOR,
plus an applicable margin based on our consolidated leverage ratio, or (2) the highest of (a) the Wall Street Journal prime rate,
(b) the Federal Funds rate plus 0.50%, or (c) LIBOR plus 1.00% plus an applicable margin based on our consolidated leverage
ratio. For the year ended December 31, 2017, we elected for the outstanding principal balance to accrue interest at LIBOR plus
1.50%, LIBOR plus 1.75%, LIBOR plus 2.00%, 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, greater than or equal to 2.00:1.00 but less than 3.00:1.00
and greater than or equal to 3.00:1.00, respectively. For the years ended December 31, 2017, 2016 and 2015, the effective
interest rate on the credit facilities was 3.44%, 2.82% and 2.63%.
The carrying value of the 2017 Facility was $71.0 million as of December 31, 2017. The 2017 Facility includes a variable
interest rate that approximates market rates and, as such, we determined that the carrying amount of the 2017 Facility
approximates its fair value as of December 31, 2017. The 2017 Facility also carries an unused line commitment fee of 0.20%.
The 2017 Facility contains various financial and other covenants that require us to maintain a maximum consolidated leverage
ratio not to exceed 3.50:1.00 and a consolidated fixed charge coverage ratio of at least 1.25:1.00. During the year ended
December 31, 2017, we were in compliance with all financial and non-financial covenants and there were no events of default.
The 2017 Facility also contains customary conditions to borrowings and events of default and contains various negative
covenants, including covenants that restrict our ability to dispose of assets, merge with or acquire other entities, incur
indebtedness, incur encumbrances, make certain payments including dividends, make investments or engage in transactions
with affiliates without approval of the lenders.
Non-GAAP Measures
We define Adjusted EBITDA as our net income before interest expense and other income / (expense), net, provision for
income taxes, amortization and depreciation, stock-based compensation expense, acquisition-related expense and legal costs
incurred in connection with non-ordinary course litigation, particularly costs involved in ongoing intellectual 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, stock-based compensation expense related to stock options and other forms of equity compensation,
including, but not limited to, the sale of common stock. We do not adjust for ordinary course legal expenses resulting from
maintaining and enforcing our intellectual property portfolio and license agreements. Adjusted EBITDA is not a measure
calculated in accordance with GAAP. See the table below for a reconciliation of Adjusted EBITDA to net income, the most
directly comparable financial measure calculated and presented 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, 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 for our solutions. We
also use certain non-GAAP financial measures, including Adjusted EBITDA, as performance measures under our executive
bonus plan. Further, we believe 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 of acquisition-related expense and certain
historical 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 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 under GAAP. 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 the future, and
Adjusted EBITDA does 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 requirements for, 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
65
payments that may represent 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 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 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):
Adjusted EBITDA:
Net income
Adjustments:
Interest expense and other income / (expense), net
Provision for income taxes
Amortization and depreciation expense
Stock-based compensation expense
Acquisition-related expense
Litigation expense
Total adjustments
Adjusted EBITDA
Year Ended December 31,
2017
2016
2015
$
29,251
$
10,154
$
11,768
1,133
2,990
17,734
7,413
5,895
7,212
42,377
(323)
4,227
6,490
4,001
11,098
13,387
38,880
$
71,628
$
49,034
$
526
5,697
5,808
4,124
100
6,347
22,602
34,370
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market 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 the result of fluctuations in interest rates, as well as to a lesser extent,
foreign exchange rates and inflation.
Interest Rate Risk
We 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 under our various facilities, taking into account our funding requirements,
and our expectation for short-term rates in the future. As of December 31, 2017 and 2016, an increase or decrease in the
interest rate on our credit facilities with SVB by 100 basis points would increase or decrease our annual interest expense by
approximately $0.7 million and $0.1 million, respectively.
Foreign Currency Exchange Risk
Because 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 is material 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 by transactional foreign currency conversions.
Inflation Risk
We 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 inflationary pressures, 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 of operations.
66
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALARM.COM HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm(cid:3)
Consolidated Financial Statements
Consolidated Statements of Operations(cid:3)
Consolidated Balance Sheets
Consolidated Statements of Cash Flows(cid:3)
Consolidated Statements of Equity
Notes to the Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 2017, 2016 and 2015
Page
68
70
71
72
74
75
105
67
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Alarm.com Holdings, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Alarm.com Holdings, Inc. and its subsidiaries as of
December 31, 2017 and 2016, and the related consolidated statements of operations, equity and cash flows for each of the
three years in the period ended December 31, 2017, including the related notes and financial statement schedule listed in the
accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express
opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
68
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
February 27, 2018
We have served as the Company’s auditor since 2009, which includes periods before the Company became subject to SEC
reporting requirements.
69
ALARM.COM HOLDINGS, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Year Ended December 31,
2017
2016
2015
Revenue:
SaaS and license revenue
Hardware and other revenue
Total revenue
Cost of revenue(1):
Cost of SaaS and license revenue
Cost of hardware and other revenue
Total cost of revenue
Operating expenses:
Sales and marketing
General and administrative
Research and development
Amortization and depreciation
Total operating expenses
Operating income
Interest expense
Other income / (expense), net
Income before income taxes
Provision for income taxes
Net income
Dividends paid to participating securities
Income allocated to participating securities
Net income / (loss) attributable to common stockholders
Per share information attributable to common stockholders:
Net income / (loss) per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Cash dividends declared per share
_______________
$
236,283
$
173,540
$
102,654
338,937
35,610
80,578
116,188
43,490
55,396
72,755
17,734
189,375
33,374
(2,199)
1,066
32,241
2,990
29,251
—
(13)
87,566
261,106
30,229
69,151
99,380
38,980
57,926
44,272
6,490
147,668
14,058
(190)
513
14,381
4,227
10,154
—
(12)
140,936
67,952
208,888
25,722
51,652
77,374
32,240
35,473
40,002
5,808
113,523
17,991
(178)
(348)
17,465
5,697
11,768
(18,987)
—
$
$
$
$
29,238
$
10,142
$
(7,219)
0.63
0.59
$
$
0.22
0.21
$
$
(0.30)
(0.30)
46,682,141
49,153,948
45,716,757
47,875,522
24,108,362
24,108,362
— $
— $
0.36
(1) Exclusive of amortization and depreciation shown in operating expenses below.
See accompanying notes to the consolidated financial statements.
70
ALARM.COM HOLDINGS, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31,
2017
2016
$
96,329
$
140,634
40,634
14,177
12,796
29,810
10,543
9,197
163,936
190,184
23,459
94,286
63,591
18,444
7,925
20,180
4,568
24,723
16,752
4,838
$
371,641
$
261,245
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventory, net
Other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Deferred tax assets
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable, accrued expenses and other current liabilities
$
29,084
$
28,300
Accrued compensation
Deferred revenue
Total current liabilities
Deferred revenue
Long-term debt
Other liabilities
Total liabilities
Commitments and contingencies (Note 12)
Stockholders’ equity
12,127
3,292
44,503
9,386
71,000
13,925
138,814
8,814
2,585
39,699
10,040
6,700
13,557
69,996
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding
as of December 31, 2017 and December 31, 2016.
—
—
Common stock, $0.01 par value, 300,000,000 shares authorized; 47,215,720 and 46,172,318 shares
issued; and 47,202,310 and 46,142,483 shares outstanding as of December 31, 2017 and
December 31, 2016, respectively.
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
472
321,032
(88,677)
232,827
$
371,641
$
461
308,697
(117,909)
191,249
261,245
See accompanying notes to the consolidated financial statements.
71
ALARM.COM HOLDINGS, INC.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash from operating activities:
Provision for doubtful accounts
Reserve for product returns
Amortization on patents and tooling
Amortization and depreciation
Amortization of debt issuance costs
Deferred income taxes
Change in fair value of contingent liability
Undistributed losses from equity investees
Stock-based compensation
Disposal of property and equipment
Changes in operating assets and liabilities (net of business acquisitions):
Accounts receivable
Inventory
Other assets
Accounts payable, accrued expenses and other current liabilities
Deferred revenue
Other liabilities
Cash flows from operating activities
Cash flows used in investing activities:
Business acquisitions, net of cash acquired
Additions to property and equipment
Investment in cost and equity method investees
Issuances of notes receivable
Receipt of payment on notes receivable
Purchases of licenses to patents
Cash flows used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock from initial public offering, net of
underwriting discount and commission
Proceeds from credit facility
Repayments of credit facility
Payments of debt issuance costs
Payments of long-term consideration for business acquisitions
Dividends paid to common stockholders
Dividends paid to employees for unvested shares
Dividends paid to redeemable convertible preferred stockholders
Payments of offering costs
Repurchases of common stock
Proceeds from early exercise of stock-based awards
Issuances of common stock from equity based plans
Cash flows from financing activities
Net (decrease) / increase in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the period
$
Year Ended December 31,
2016
2015
2017
$
29,251
$
10,154
$
11,768
453
2,055
965
17,734
97
2,488
—
120
7,413
828
(1,911)
(3,335)
(2,542)
3,774
(517)
314
57,187
(154,289)
(10,464)
(42)
(8,000)
4,000
—
(168,795)
—
139,000
(74,700)
(438)
—
—
—
—
—
(9)
—
3,450
67,303
(44,305)
140,634
96,329
$
648
2,071
786
6,490
103
263
(230)
81
4,001
—
(11,181)
(4,068)
(837)
10,458
636
3,225
22,600
—
(9,055)
(139)
(3,073)
2,441
(1,600)
(11,426)
—
—
—
(131)
(417)
—
—
—
—
(11)
—
1,661
1,102
12,276
128,358
140,634
$
276
1,559
391
5,808
108
(2,670)
(470)
681
3,347
—
(5,910)
378
(2,725)
5,966
1,081
8,431
28,019
(5,632)
(10,347)
(247)
(406)
—
(1,000)
(17,632)
97,976
—
—
—
(417)
(1,013)
(57)
(18,930)
(2,632)
(1)
129
344
75,399
85,786
42,572
128,358
See accompanying notes to the consolidated financial statements.
72
ALARM.COM HOLDINGS, INC.
Consolidated Statements of Cash Flows - Continued
(in thousands)
Supplemental disclosures:
Cash paid for interest
Cash paid for income taxes, net of refunds
Noncash investing and financing activities:
Conversion of redeemable convertible preferred stock to common stock
Assumed options from business acquisition
Cash not yet paid for business acquisitions
Contingent liability from business acquisition
Cash not yet paid for capital expenditures
Reclassification of deferred offering costs to additional paid-in capital
Year Ended December 31,
2016
2015
2017
$
$
$
2,010
1,805
— $
1,375
—
—
322
—
$
181
6,021
— $
—
—
—
1,235
—
175
8,508
202,456
—
417
230
625
5,024
See accompanying notes to the consolidated financial statements.
73
ALARM.COM HOLDINGS, INC.
Consolidated Statements of Equity
(in thousands)
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-In-
Capital
Treasury
Stock
Accumulated
Deficit
Total
Stockholders’
(Deficit) / Equity
Balance as of January 1, 2015
— $
Issuance of common stock from initial
public offering, net of issuance costs
Conversion of redeemable convertible
preferred stock to common stock
Common stock issued in connection
with equity based plans
Vesting of common stock subject to
repurchase
Stock-based compensation expense
Tax benefit from stock-based awards,
net
Modification of employee stock-based
award and repurchase of common
stock
Dividends paid to common
stockholders
Dividends paid to employees with
unvested common stock
Dividends paid to redeemable
convertible preferred stockholders
Net income
—
—
—
—
—
—
—
—
—
—
—
Balance as of December 31, 2015
— $
Common stock issued in connection
with equity based plans
Vesting of common stock subject to
repurchase
Stock-based compensation expense
Tax benefit from stock-based awards,
net
Retirement of treasury stock
Net income
—
—
—
—
—
—
Balance as of December 31, 2016
— $
Adoption of accounting standard on
employee share based payments
Common stock issued in connection
with equity based plans
Vesting of common stock subject to
repurchase
Stock-based compensation expense
Stock options assumed from
acquisition
Net income
—
—
—
—
—
—
Balance as of December 31, 2017
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,614
$
26
$
7,168
$
(42) $
(128,996) $
(121,844)
7,525
75
92,878
35,018
350
202,106
277
126
—
—
3
2
—
—
(75)
(1)
—
—
—
—
—
—
—
—
341
451
3,347
700
(45)
(673)
(38)
(8,454)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(340)
(19)
(10,476)
11,768
45,485
$
455
$
297,781
$
(42) $
(128,063) $
593
64
—
—
—
—
5
1
—
—
—
—
1,656
253
4,001
5,048
(42)
—
—
—
—
—
42
—
—
—
—
—
—
10,154
46,142
$
461
$
308,697
$
— $
(117,909) $
—
1,045
15
—
—
—
—
11
—
—
—
—
31
3,439
77
7,413
1,375
—
—
—
—
—
—
—
(19)
—
—
—
—
29,251
47,202
$
472
$
321,032
$
— $
(88,677) $
92,953
202,456
344
453
3,347
700
(46)
(1,013)
(57)
(18,930)
11,768
170,131
1,661
254
4,001
5,048
—
10,154
191,249
12
3,450
77
7,413
1,375
29,251
232,827
See accompanying notes to the consolidated financial statements.
74
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2017, 2016 and 2015
Note 1. Organization
Alarm.com Holdings, Inc. (referred to herein as Alarm.com, the Company, or we) is the leading platform for the intelligently
connected property. We offer a comprehensive suite of cloud-based solutions for the smart residential and commercial property,
including interactive security, video monitoring, intelligent automation and energy management. Millions of property owners rely
on our technology to intelligently secure, monitor and manage their residential and commercial properties. Our solutions are
delivered through an established network of over 7,000 trusted service provider partners, who are experts at selling, installing
and supporting our solutions. We derive revenue from the sale of our cloud-based Software-as-a-Service, or SaaS, services,
license fees, software, hardware, activation fees and other revenue. Our fiscal year ends on December 31. We completed our
initial public offering, or IPO, on July 1, 2015.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
Our consolidated financial statements include our accounts and those of our majority-owned and controlled subsidiaries
after elimination of intercompany accounts and transactions. 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, or VIE. Voting interest 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. The usual 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 means other 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 determine significant 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’s undistributed gains and
losses in our consolidated statements of operations. We evaluate our cost and equity method investments for impairment
whenever events or circumstances indicate that carrying amount of such investments may not be recoverable.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America, or GAAP, requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Our estimates, judgments and assumptions are continually evaluated based on available information and
experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those
estimates. Estimates are used when accounting for revenue recognition, allowances for doubtful accounts, allowance for
hardware returns, estimates of obsolete inventory, long-term incentive compensation, stock-based compensation, income taxes,
legal reserves, contingent consideration and goodwill and intangible assets.
Cash and Cash Equivalents
We 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, 2017 and 2016, we have invested $65.6 million and $135.2 million in cash
equivalents in the form of money market funds with one financial institution. We consider these money market funds to be
Level 1 financial instruments (see Note 10).
Accounts Receivable
Accounts 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. Revenue in countries outside of North America accounted for 1% of our
total revenue for the year ended December 31, 2017 and less than 1% of our total revenue for the years ended December 31,
2016 and 2015. As of December 31, 2017 and 2016, approximately 4% and 3% of accounts receivable balances were related to
service providers partners outside of North America. Our accounts receivable are stated at estimated realizable value. We utilize
the allowance method to provide for doubtful accounts based on management’s evaluation of the collectibility of the amounts
due. Our estimate is based on historical collection experience and a review of the current status of accounts receivable. Each of
our service provider partners is evaluated for creditworthiness through a credit review process at the inception of the
arrangement or if risk indicators arise during our arrangement at such other time. Our terms for hardware sales to our service
provider partners and distributors typically allow for returns for up to one year. We apply our estimate as a percentage of sales
75
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
monthly, based on historical data, as a reserve against revenue to account for our provision for returns. We have not
experienced write-offs for uncollectible accounts or sales returns that have differed significantly from our estimates.
Notes Receivable
Notes receivable are presented net of an allowance for uncollectibility, if any. We accrue interest on notes receivable based
on the contractual terms of the note. Outstanding notes receivable that are aged 30 days or more from the contractual payment
date are considered past due. We do not accrue interest on notes receivable that are considered impaired or are greater than 90
days past due based on their contractual payment terms. Notes receivable may be placed on nonaccrual status earlier if, in
management’s opinion, a timely collection of the full principal and interest becomes uncertain. After a note receivable has been
placed in nonaccrual status, interest will be recognized when cash is received. A note receivable may be returned to accrual
status after all of the customer’s delinquent balances of principal and interest have been settled, and collection of all remaining
contractual amounts due is reasonably assured. As of December 31, 2017 and 2016, there were no allowances for
uncollectibility and there were no notes receivable in nonaccrual status.
Inventory
Our 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, or FIFO, basis when the inventory is shipped from our
manufacturer and received by our service provider partners. We periodically evaluate our inventory quantities for obsolescence
based on criteria such as customer demand and changing technology and record an obsolescence write-off when necessary.
Internal-Use Software
We capitalize the costs directly related to the development of internal-use software for our platforms during the application
development stage of the projects. Such costs primarily include payroll and payroll-related costs for engineers and product
development employees directly associated with the development project. Our internal-use software 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 in weekly software builds on our platforms. We depreciate the asset on a straight-line basis over a period of
three years, which is the estimated useful life. We update our software for our SaaS multi-tenant platforms on a weekly basis
utilizing continuous agile development methods, which primarily consists of bug-fixes and user interface changes. We evaluate
whether a project should be capitalized if it adds significant functionality to our platforms. Maintenance activities or minor
upgrades are expensed in the period performed.
External Software
Costs incurred in researching and developing a computer software product that will be marketed and sold are charged to
expense when incurred until technological feasibility is established. Technological feasibility is established upon completion of a
detailed program design or, in its absence, completion of a working model (a beta version). After technological feasibility is
established, certain payroll and payroll-related costs are capitalized for engineers and product development employees directly
associated with the development project. Cost capitalization ceases when the product is available for general release. The
Connect software is typically developed in an agile environment with frequent revisions to product release features and
functions. Agile development results in a short duration between completion of the detailed program design and beta release.
Accordingly, as of December 31, 2017, we do not have any capitalized external software due to the shorter development cycle
associated with agile development.
Revenue Recognition and Deferred Revenue
We derive our revenue from three primary sources: the sale of cloud-based SaaS services on our integrated Alarm.com
platform, the sale of licenses and services on the Connect software platform and the sale of hardware products. We sell our
platform and hardware solutions to service provider partners that resell our solutions and hardware to residential and commercial
property owners, who are the service provider partners’ customers. Our subscribers consist of all of the properties maintained by
those residential and commercial property owners to which we are delivering at least one of our solutions. We also sell our
hardware to distributors who resell the hardware to service provider partners. We enter into contracts with our service provider
partners that establish pricing for access to our platform solutions and for the sale of hardware. These contracts typically have an
initial term of one year, with subsequent renewal terms of one year. Our service provider partners typically enter into contracts
with our subscribers, which our service provider partners have indicated range from three to five years in length.
Our hardware includes cellular radio modules that enable access to our cloud-based platforms, as well as video cameras,
image sensors and other peripherals. Our service provider partners may purchase our hardware in anticipation of installing the
hardware in a residential or commercial property when they create a new subscriber account, or for use in existing subscriber
properties. The purchase of hardware occurs in a transaction that is separate and typically in advance of the purchase of our
76
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
platform services. Service provider partners transact with us to purchase 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 access to our
platform solutions is enabled and the delivery of the services commences. The purchase of platform solutions and the purchase
of hardware are separate transactions because at the time of sale of the hardware, the service provider partner is not obligated
to and may not purchase a platform solution for the hardware sold, and the level and duration of platform solutions, if any, to be
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 partner, 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 partner to be persuasive evidence that an agreement exists, and the
fees to be fixed or determinable if the fees are contractually agreed to with our service provider partners. Collectibility is
evaluated based on a number of factors, including a credit review of new service provider partners, and the payment history of
existing service provider partners. If collectibility is not reasonably assured, revenue is deferred until collection becomes
reasonably assured, which is generally upon the receipt of payment.
SaaS and License Revenue
We generate the majority of our SaaS and license revenue primarily from monthly fees charged to our service provider
partners sold on a per subscriber basis for access to our cloud-based intelligently connected property platform and related
solutions. Our fees per subscriber vary based upon the service plan and features utilized.
Under terms in our contractual arrangements with our service provider partners, we are entitled to payment and recognize
revenue based on a monthly fee that is billed in advance of the 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 is neither a
minimum required initial service term nor a stated renewal term in our contractual arrangements, we recognize revenue over the
period of service, which is monthly. Our service provider partners typically incur and pay the same monthly fee per subscriber
account for the entire period a subscriber account is active.
We also generate SaaS and license revenue from monthly fees charged to service providers sold on a per subscriber basis
for access to our Connect software platform. The Connect software for interactive security, automation and related solutions is
typically deployed and operated by the service provider in its own network operations center. Our agreements for the Connect
platform solution typically include software and services, such as post-contract customer support, or PCS. Software sales that
include multiple elements are typically allocated to the various elements based on vendor-specific objective evidence of fair
value, or VSOE. There have been no separate sales of PCS, as PCS is always bundled with the software license for the
Connect platform solution. Therefore, the VSOE of fair value for PCS cannot be established. The entire Connect arrangement
fee is recognized ratably over the period during which the services are expected to be performed or the PCS period, whichever is
longer, once the software is delivered and services have commenced, if all the other basic revenue recognition criteria have
been met. Under the terms of our contractual arrangements with our service provider partners, we are entitled to the payment of
a monthly fee for Connect that is billed per subscriber for the month of service. We recognize revenue over the period of service,
which is monthly. Our service provider partners 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 platform solutions including a range of solutions and a range of a la carte
add-ons for additional features. The fee paid by our service provider partners 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 our
service provider partners 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 third
parties on a per customer basis for use of our patents. In addition, in certain 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
demand made available for a utility’s or market’s control.
77
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
Hardware and Other Revenue
We generate hardware and other revenue primarily from the sale of video cameras and cellular radio modules that provide
access to our cloud-based platforms and, to a lesser extent, the sale of other devices, including image sensors and peripherals.
We recognize hardware and other revenue when the hardware is received by our service provider partner or distributor, 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 provider partners or distributors, and are not contingent on resale to end-users, or to service
provider partners in the case of sales of hardware to distributors. Our terms for hardware sales sold directly to either service
provider partners 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 provider partners under terms between the two parties. We record a reserve against revenue for hardware
returns based on historical returns, which was 2% of hardware and other revenue for the years ended December 31, 2017, 2016
and 2015. We evaluate 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 significantly differed from our estimated reserve.
Hardware and other revenue also includes activation fees charged to service provider partners for activation of a new
subscriber account on our platforms, as well as fees paid by service provider partners for our marketing services. Our service
provider partners use services on our platforms, such as support tools and applications, to assist in the installation of our
solutions in subscriber properties. This installation marks the beginning of the service period on our platforms and on occasion,
we earn activation revenue for fees charged for this service. The activation fee is non-refundable, separately negotiated and
specified in our contractual arrangements with our service provider partners and is charged to the service provider partner for
each subscriber activated on our platforms. Activation fees are 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 deferred revenue
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 these activation 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 following twelve 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 $10.5 million and $11.2 million as of December 31, 2017 and 2016, respectively.
Cost of Revenue
Our 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 centers which are expensed as incurred. We record the payroll and payroll-
related costs of the department dedicated to providing service exclusively to a specific service provider for the Connect platform
to cost of SaaS and license revenue. 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 cellular radio modules and image sensors, and
procurement costs for our video cameras, which we purchase from an original equipment manufacturer, and other devices. Our
cost of revenue excludes amortization and depreciation.
Fair Value Measurements
The accounting standard for fair value measurements provides a framework for measuring fair value and requires
disclosures regarding fair value measurements. Fair value is defined 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 transaction between
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 are not active; and
Level 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 maturity and liquidity of those instruments.
Assets and Liabilities Measured at Fair Value on a Recurring Basis - in 2017, 2016 and 2015, we recorded liabilities for
subsidiary unit awards and a contingent consideration liability related to acquisitions at fair value on a recurring basis.
Assets Measured at Fair Value on a Nonrecurring Basis - We measure certain assets, including property and equipment,
goodwill, intangible and long-lived assets, cost and equity method investments at fair value on a nonrecurring basis. These
assets are recognized at fair value when they are deemed to be other-than-temporarily impaired.
78
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
Concentration of Credit Risk
The 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 and cash equivalents are held at financial institutions that management
believes to be of high credit quality. Our cash and cash equivalent accounts may exceed federally insured limits at times. 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 provider partners and maintain an allowance for doubtful accounts. The majority of our accounts
receivable balance is due from our service provider partners in North America. We assess the concentrations of credit risk with
respect to accounts receivables based on one industry and geographic region and believe that our reserve for uncollectible
accounts is appropriate based on our history and this concentration.
Stock-Based Compensation
We compensate our executive officers, board of directors, employees and consultants with stock-based compensation plans
under our 2015 Equity Incentive Plan, or 2015 Plan. We record stock-based compensation expense based upon the award’s
grant date fair value and use an accelerated attribution method, net of actual forfeitures, in which compensation 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 over five years and are settled in shares of our common stock. During 2017, 2016 and 2015, we
recognized compensation expense of $7.4 million, $4.0 million and $4.1 million, respectively, and associated income tax benefit
of $12.7 million, $5.0 million and $0.7 million, respectively, in connection with our stock-based compensation plans. We account
for stock-based compensation 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 the same 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.
Our Employee Stock Purchase Plan, or 2015 ESPP, allows eligible employees to purchase shares of our common stock at
90% of the fair market value of the closing price on the purchase date. The maximum number of shares of our common stock
that a participant may purchase during any calendar year is limited to the lesser of 10% of the participant's base compensation
for that year or the number of shares with a fair market value of $15,000. The 2015 ESPP is considered compensatory for
purposes of share-based compensation expense. Compensation expense is recognized for the amount of the discount, net of
actual forfeitures, over the six-month purchase period.
401(k) Defined Contribution Plan
We 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 is 100% of employee contributions up to 6% of salary and up to a $3,000
maximum match. We recognized compensation expense of $1.8 million, $1.2 million and $1.0 million for the years ended
December 31, 2017, 2016 and 2015 related to our matching contributions.
Business Combinations
We are required to allocate the purchase price of acquired companies to the identifiable tangible and intangible assets
acquired and liabilities assumed at the acquisition date based upon their estimated fair values. The net assets and results of
operations of an acquired entity are included in our consolidated financial statements from the acquisition date. Acquisition-
related costs are expensed as incurred. Goodwill as of the acquisition date represents the excess of the purchase consideration
of an acquired business over the fair value of the underlying 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, proprietary technology 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 used in 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 when completed, 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 liabilities assumed.
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
Goodwill, Intangible Assets and Long-lived Assets
Goodwill
Goodwill 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 of liabilities 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 subject to 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 our goodwill at the reporting unit level. We perform either a qualitative analysis or a quantitative
analysis every year depending on the changes to our goodwill balance as well as changes in our business and the economy.
Qualitative factors we consider include, but are not limited to, macroeconomic conditions, industry and market conditions,
company specific events, changes in circumstances and market capitalization. In January 2017, the FASB issued ASU 2017-04,
"Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment," which removes Step 2 of the
goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment amount will now be the
amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. We
elected to early adopt ASU 2017-04, therefore, a Step 2 analysis will not be performed in the event that a reporting unit fails Step
1 of the impairment test.
For our 2017 annual impairment review, we performed a quantitative assessment for our Alarm.com reporting unit, our only
reporting unit with a goodwill balance. This reporting unit had a fair value that exceeded its carrying value by more than 100%,
therefore, we concluded that there was no goodwill impairment as of October 1, 2017. Our assessment was performed as of
October 1, 2017, and we have determined there have been no triggering events from our assessment date through
December 31, 2017.
Intangible Assets and Long-lived Assets
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 are amortized over their estimated useful lives. We evaluate the
recoverability of our intangible assets with definite lives and long-lived assets for impairment whenever events or circumstances
indicate that the carrying amount of the assets may not be recoverable. Recoverability of intangible assets with definite lives and
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 the asset 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.
For the year ended December 31, 2017, we determined there were no impairments of our intangible assets with definite
lives or long-lived assets.
Advertising Costs
We expense advertising costs as incurred. Advertising costs totaled $4.1 million, $4.6 million and $3.7 million for the years
ended December 31, 2017, 2016 and 2015. Advertising costs are included within sales and marketing expenses on our
consolidated statements of operations.
Accounting for Income Taxes
We 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 of deferred 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 liabilities are
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 differences are 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 positive and negative 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 as of December 31, 2017 and 2016.
Accordingly, we have not recorded a valuation allowance as of December 31, 2017 and 2016.
We are subject to income taxes in the United States and foreign jurisdictions based upon our business operations in those
jurisdictions. Significant judgment is required in evaluating uncertain tax positions. We record uncertain tax positions in
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
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
the tax positions will be sustained based on the technical 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 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.
Comprehensive Income
Our comprehensive income for each of the years ended December 31, 2017, 2016 and 2015 was equal to our net income
disclosed in the consolidated statements of operations.
Earnings per Share, or EPS
Our basic net income / (loss) per share attributable to common stockholders is calculated by dividing the net income
attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.
Our diluted net income / (loss) 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 income / (loss) per share calculation, options to purchase common stock, redeemable convertible preferred stock,
restricted stock units 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 income / (loss) per share. These participating securities include redeemable
convertible preferred stock and unvested shares issued upon the early exercise of options that are subject to repurchase, both of
which have non-forfeitable rights to participate in any dividends declared on our common stock. The two-class method requires a
portion of net income to be allocated to the participating securities to determine the net income / (loss) attributable to common
stockholders. Net income / (loss) attributable to the common stockholders is equal to the net income less dividends paid on
redeemable convertible preferred stock and unvested shares with any remaining earnings allocated in accordance with the
bylaws between the outstanding common and preferred stock as of the end of each period.
Recent Accounting Pronouncements
Adopted
On March 30, 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-09, “Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of
the accounting for employee share-based payment transactions, including the income tax consequences, classification of
awards as either equity or liabilities, and classification on the statement of cash flows. The update is effective for fiscal years
beginning after December 15, 2016, including interim periods within those fiscal years, and we adopted ASU 2016-09 during the
first quarter of 2017.
The adoption of this standard had the following impact on our financial statements:
•
•
Tax windfall benefits or deficiencies from stock-based awards are now recorded in provision for income taxes in the
period incurred, whereas previous guidance required the tax windfall benefits to be recorded in additional paid-in
capital. This change has been applied prospectively.
Tax windfall benefits from stock-based awards after adoption are reported in cash flows from operating activities in the
statement of cash flows. For comparability, we elected to retrospectively apply this guidance which resulted in a
reclassification of $5.1 million and $0.9 million from tax windfall benefit from stock options (a financing activity) to
deferred income taxes (an operating activity) for the years ended December 31, 2016 and 2015, respectively.
• We elected to record forfeitures as they occur in our calculation of stock-based compensation expense. In prior periods,
we estimated forfeitures for the calculation of stock-based compensation expense. We adopted this change using the
modified retrospective method, which resulted in an increase of less than $0.1 million to accumulated deficit, additional
paid-in capital and deferred tax assets as of January 1, 2017.
• Cash flows from tax windfall benefits from stock-based awards will no longer factor into the calculation of the number of
shares for diluted earnings per share. This change was applied prospectively and did not have a material impact on
diluted earnings per share for the year ended December 31, 2017.
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 net realizable value," thereby simplifying the current guidance under which an
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different
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) or below the floor (net
realizable value less an approximately normal profit margin) which is unnecessarily complex. The amendment does not change
other guidance on measuring inventory. The amendment is effective for annual periods, including periods within those annual
periods beginning after December 15, 2016 with early adoption permitted. We adopted this pronouncement prospectively in the
first quarter of 2017, and the adoption of this pronouncement did not have a material effect on our financial statements.
On January 26, 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for
Goodwill Impairment," which removes step two of the goodwill impairment test, which requires a hypothetical purchase price
allocation. A goodwill impairment amount will now be the amount by which a reporting unit's carrying value exceeds its fair value,
not to exceed the carrying amount of goodwill. The amendment is effective for annual or interim goodwill impairment tests in
fiscal years beginning after December 15, 2019 with early adoption permitted for goodwill impairment tests performed after
January 1, 2017. We adopted this guidance prospectively in the first quarter of 2017. Our goodwill impairment test is performed
annually on October 1. Based on our October 1, 2017 goodwill impairment test, we concluded that our goodwill was not
impaired. Therefore, the adoption of this pronouncement had no impact on our financial statements.
Not Yet Adopted
Revenue from Contracts with Customers (Topic 606):
In May 2014, the FASB and International Accounting Standards Board jointly issued ASU 2014-09, "Revenue from Contracts
with Customers (Topic 606)," a new revenue recognition standard that provides a framework for addressing revenue issues,
improves the comparability of revenue recognition practices across industries, provides useful information to users of financial
statements through improved disclosure requirements and simplifies the presentation of financial statements. From March to
December 2016, amendments to Topic 606 were issued to clarify numerous accounting topics, including, but not limited to: (i) the
implementation guidance on principal versus agent considerations, (ii) the identification of performance obligations, (iii) the
licensing implementation guidance, (iv) the objective of the collectibility criterion, (v) the application of the variable consideration
guidance and modified retrospective transition method, (vi) the way in which impairment testing is performed and (vii) the
disclosure requirements for revenue recognized from performance obligations. This guidance permits the use of either a full
retrospective method or a modified retrospective method. We will adopt Topic 606 on January 1, 2018, using the modified
retrospective transition method. The modified retrospective transition method applies only to the most current period presented
along with a cumulative-effect adjustment at the date of adoption. As a result of the January 1, 2018 adoption of Topic 606, we
identified and implemented appropriate changes to our business processes and controls to support the recognition and
disclosure requirements under the new standard.
Our assessment of Topic 606 focused on our (i) standard service provider partner agreements, (ii) the largest non-standard
service provider partner agreements, including distributors of our hardware and licensees of our intellectual property, (iii)
subsidiaries’ service provider partner agreements and, (iv) commissions paid to employees. Based on our assessment, we do
not believe Topic 606 will have a material impact on our revenue recognition policies.
The adoption of the new standard will change our current treatment of commissions paid to employees, which we currently
expense as incurred. Under the new standard, we will capitalize a portion of our commission costs as an incremental cost of
obtaining a contract and will amortize our commission costs over a period of three years, which is consistent with the period over
which the products and services related to the commission are transferred to the customer. The three-year period was
determined based on our review of historical enhancements and upgrades to our products and services. These changes in the
treatment of commissions paid to employees are not expected to have a material impact on our consolidated financial
statements.
Other Accounting Standards:
On May 10, 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of
Modification Accounting," which amends the scope of modification accounting for share-based payment arrangements. The
update provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity
would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification
accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the
modification. The amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years, with early adoption permitted. We are required to adopt ASU 2017-09 in the first quarter of 2018 and we do not
anticipate the adoption will have a material impact on our financial statements.
On January 5, 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805) - Clarifying the Definition of a
Business," which provides guidance to assist entities in evaluating when a set of transferred assets and activities is a business.
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
To be considered a business, an acquisition would have to include an input and a substantive process that together significantly
contribute to the ability to create outputs. The amendment is effective for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years, with early adoption permitted. We are required to adopt ASU 2017-01 no later than the
first quarter of 2018. This guidance is not expected to have a material impact on our consolidated financial statements and
related disclosures.
On June 16, 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," which provides
guidance designed to provide financial statement users with more information about the expected credit losses on financial
instruments and other commitments to extend credit held by a reporting entity at each reporting date. When determining such
expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and
requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The
amendment is effective on a modified retrospective basis for fiscal years beginning after December 15, 2019, and interim periods
within those fiscal years. Early adoption is permitted for fiscal years and interim periods beginning after December 15, 2018. We
are currently assessing the impact this pronouncement may have on our trade receivables and notes receivables.
On February 25, 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize operating
and financing lease liabilities and corresponding right-of-use assets on the balance sheet. The update also requires improved
disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from
leases. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods
within those fiscal years, with early adoption permitted. We are required to adopt ASU 2016-02 no later than the first quarter of
2019, and we are currently assessing the impact of this pronouncement on our financial statements. We have begun to evaluate
our existing leases which all have been classified as operating leases under Topic 840. We anticipate using some of the
available practical expedients upon adoption. We have not yet determined the amount of operating and financing lease liabilities
and corresponding right-of-use assets we will record on our balance sheet; however, we anticipate that most of our operating
lease commitments will be subject to the new standard.
Note 3. Accounts Receivable, Net
The components of accounts receivable, net are as follows (in thousands):
Accounts receivable
Allowance for doubtful accounts
Allowance for product returns
Accounts receivable, net
December 31,
2017
2016
$
$
44,554
(1,449)
(2,471)
40,634
$
$
33,406
(1,282)
(2,314)
29,810
For the years ended December 31, 2017, 2016 and 2015, we recorded a provision for doubtful accounts of $0.5 million, $0.6
million and $0.3 million, respectively.
For the years ended December 31, 2017, 2016 and 2015, we recorded a $2.1 million, $2.1 million and $1.6 million reserve
for product returns in our hardware and other revenue, respectively. Historically, we have not experienced write-offs for
uncollectible accounts or sales returns that have differed significantly from our estimates.
Note 4. Inventory, Net
The components of inventory, net are as follows (in thousands):
Raw materials
Finished goods
Total inventory, net
December 31,
2017
2016
$
$
7,484
6,693
14,177
$
$
4,313
6,230
10,543
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
Note 5. Property and Equipment, Net
Furniture and fixtures, computer software and equipment and leasehold improvements are recorded at cost and presented
net of depreciation. Furniture and fixtures and computer software and equipment are depreciated on a straight-line basis over
lives ranging from three to five years. Internal-use software is amortized on a straight-line basis over a three-year period. During
the application development phase, we categorize capitalized costs in our construction in progress account until the build is 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 shorter of the lease terms or the asset lives.
The components of property and equipment, net are as follows (in thousands):
Furniture and fixtures
Computer software and equipment
Internal-use software
Construction in progress
Leasehold improvements
Land
Total property and equipment
Accumulated depreciation
Property and equipment, net
December 31,
2017
2016
3,699
11,624
1,643
4,605
16,351
398
38,320
(14,861)
23,459
$
$
3,090
9,988
1,514
1,009
13,466
398
29,465
(9,285)
20,180
$
$
Depreciation expense related to property and equipment for the years ended December 31, 2017, 2016 and 2015 was $5.4
million, $4.7 million and $3.6 million, respectively. Amortization expense related to internal-use software of $0.4 million, $0.4
million and $0.3 million was included in those expenses for the years ended December 31, 2017, 2016 and 2015, respectively.
Within the Alarm.com segment, we disposed of and wrote off $0.8 million of capitalized costs to research and development
expenses within the consolidated statements of operations primarily related to the design of internal-use software that no longer
met the requirements for capitalization during the year ended December 31, 2017.
Note 6. Acquisitions
Connect and Piper Business Units from Icontrol Networks, Inc.
On March 8, 2017, in accordance with the asset purchase agreement we entered into with Icontrol Networks, Inc., or
Icontrol, on June 23, 2016, we acquired certain assets and assumed certain liabilities of the Connect line of business and all of
the outstanding equity interests of the two subsidiaries through which Icontrol conducted its Piper line of business, or the
Acquisition. Connect provides an interactive security and home automation platform for service providers. Piper provides an all-
in-one video and home automation hub. We expect the addition of new technology infrastructure, talent, key relationships and
hardware devices to help accelerate our development of intelligent, data-driven smart residential and commercial property
services.
The cash consideration was $148.5 million, after the estimated working capital adjustment, of which $14.5 million was
deposited in escrow and will be released in accordance with the asset purchase agreement for indemnification obligations of
Icontrol stockholders and the final determination of closing working capital. We used $81.5 million of cash on hand and drew
$67.0 million under our senior line of credit with Silicon Valley Bank, or SVB, and a syndicate of lenders to fund the Acquisition.
The Acquisition also included non-cash consideration. In accordance with the terms of the asset purchase agreement, we
were obligated to assume the Icontrol 2013 Equity Incentive Plan and Icontrol 2003 Stock Plan, or collectively, the Icontrol Plans,
and converted the 2,001,387 unvested employee stock options into 70,406 Alarm.com stock options using a conversion ratio
stated in the agreement to convert the original exercise price and number of options. The fair value of the unvested stock options
on the date of the Acquisition was $1.7 million calculated using a Black-Scholes model with a volatility and risk-free interest rate
over the expected term of the options and the closing price of the Alarm.com common stock on the date of acquisition. We
applied our graded vesting accounting policy to the fair value of these assumed options and determined $1.4 million of the fair
value was attributable to pre-combination services and was included as a component of total purchase consideration. The
remaining $0.3 million of the fair value was determined to be attributable to post-combination services and will be recognized
over the remaining service periods of the stock options.
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
The table below sets forth the purchase consideration and the fair value allocation of the tangible and intangible net assets
acquired (in thousands):
Calculation of Purchase Consideration:
Cash paid, net of working capital adjustment
Assumed stock options
Total consideration
Estimated Tangible and Intangible Net Assets:
Cash
Accounts receivable
Current assets
Long-term assets
Customer relationships
Developed technology
Trade name
Current liabilities
Long-term liabilities
Goodwill
Total estimated tangible and intangible net assets
March 8, 2017
$
$
$
$
148,500
1,375
149,875
211
11,421
883
4,446
93,260
4,770
170
(1,608)
(288)
36,610
149,875
Goodwill of $36.6 million reflects the value of acquired workforce and synergies we expect to achieve from integrating
support for Connect's security service providers and for the Connect platform. The goodwill will be deductible for tax purposes.
We allocated goodwill to reporting units based on expected benefit from our synergies, and have allocated the goodwill to the
Alarm.com segment.
The purchase price allocation for the Acquisition was finalized during the third quarter of 2017. The final fair value of the
assets and liabilities related to the Acquisition reflects an increase of $0.1 million in tangible assets, net and a decrease of $0.1
million in goodwill based on working capital adjustments identified by us.
Fair Value of Net Assets Acquired and Intangibles
In accordance with ASC 805, the business units acquired in the Acquisition constituted a business and the assets and
liabilities were recorded at their respective fair values as of March 8, 2017. We developed our estimate of the fair value of
intangible net assets using a multi-period excess earnings method for customer relationships, the relief from royalty method for
the developed technology and the relief from royalty method for the trade name.
Customer Relationships
We recorded the customer relationships intangible separately from goodwill based on determination of the length, strength
and contractual nature of the relationship that Connect shared with its customers. We valued two groups of customer
relationships using the multi-period excess earnings method, an income approach. We used several assumptions in the income
approach, including attrition and renewal rate, margin and discount rate. We are amortizing the first customer relationship,
valued at $92.5 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life
of twelve years and the second group of customer relationships, valued at $0.8 million, on the same basis, over an estimated
useful life of four years.
Developed Technology
Developed technology primarily consists of intellectual property of proprietary software that is marketed for sale. The
Connect platform is software for interactive security, automation and related solutions that is typically deployed and operated by
the service provider in its own network operations center. We valued the developed technology by applying the relief from royalty
method, an income approach. We used several assumptions in the relief from royalty method, which included royalty rate and
discount rate. We are amortizing the Connect developed technology, valued at $4.4 million, on an attribution method based on
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
the discounted cash flows of the model over an estimated useful life of three years. Other developed technologies, valued at
$0.3 million, were also acquired.
Trade Name
We determined that there was no fair value for the Connect trade name as the largest service provider partner for Connect
had re-branded the interactive security and automation platform and marketed it under the service provider partner's own name.
We valued the other trade names acquired using a relief from royalty method. We used several assumptions in the income
approach, including royalty and discount rates. We are amortizing the other trade names, valued at $0.2 million, on an attribution
basis derived from the discounted cash flows of the model over an estimated useful life of three years.
Deferred Tax Asset
The equity interests in the subsidiaries we acquired provided for a carryover tax basis in goodwill and intangible assets that
arose from a previous acquisition. We have recorded a deferred tax asset of $4.1 million that represents the excess of the
carryover tax basis in those previously acquired goodwill and intangible assets over the fair value of goodwill and intangible
assets we recorded on the date of the Acquisition.
ObjectVideo
On January 1, 2017, in accordance with an asset purchase agreement, we acquired certain assets of ObjectVideo, Inc., or
ObjectVideo, that constituted a business now called ObjectVideo Labs, LLC, or ObjectVideo Labs, including products, technology
portfolio and engineering team. ObjectVideo is a pioneer in the fields of video analytics and computer vision with technology that
extracts meaning and intelligence from video streams in real-time to enable object tracking, pattern recognition and activity
identification. We anticipate that the ObjectVideo Labs engineering team's capabilities and expertise will accelerate our research
and development of video services and video analytic applications. In addition, ObjectVideo Labs will continue to perform
advanced research and engineering services for the federal government. The consideration included $6.0 million of cash paid at
closing.
The table below sets forth the purchase consideration and the fair value allocation of the tangible and intangible net assets
acquired (in thousands):
Calculation of Purchase Consideration:
Cash paid, net of working capital adjustment
Estimated Tangible and Intangible Net Assets:
Developed technology
Current liabilities
Goodwill
Total estimated tangible and intangible net assets
January 1, 2017
$
$
$
6,000
3,800
(58)
2,258
6,000
Goodwill of $2.3 million reflects the value of acquired workforce and expected synergies from pairing ObjectVideo Labs'
video analytics capabilities with our offerings. The goodwill will be deductible for tax purposes.
The purchase price allocation for the ObjectVideo Labs acquisition was finalized during the third quarter of 2017. The final
fair value of the assets and liabilities related to the ObjectVideo Labs acquisition reflects an increase of $0.4 million in developed
technology and a decrease of $0.4 million in goodwill as well as a corresponding change to amortization of the developed
technology based on our use of the replacement cost method to value the developed technology.
Fair Value of Net Assets Acquired and Intangibles
In accordance with ASC 805, the assets and liabilities of ObjectVideo Labs we acquired were recorded at their respective
fair values as of January 1, 2017, the date of the acquisition. We developed our estimate of the fair value of intangible assets
using the replacement cost method for the developed technology.
86
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
Developed Technology
Developed technology recorded separately from goodwill consists of intellectual property such as proprietary software used
internally for revenue producing activities. ObjectVideo Labs proprietary software consists of source code and video analytics
testing programs used internally to provide video analytics consulting services and research and development to customers and
for the SaaS Alarm.com platform. We valued the developed technology by applying the replacement cost method. We used
several assumptions in this cost approach, which included analyzing costs that a company would expect to incur to recreate an
asset of equivalent utility. We are amortizing the developed technology, valued at $3.8 million, on a straight-line basis over an
estimated useful life of two years which coincides with the rapidly developing technology of video analytics.
Unaudited Pro Forma Information
The following unaudited pro forma data is presented as if the Acquisition and ObjectVideo Labs were included in our
historical consolidated statements of operations beginning January 1, 2016. These pro forma results do not necessarily
represent what would have occurred if all the business combinations had taken place on January 1, 2016, 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: (i) we adjusted the pro forma amounts for income taxes, (ii) we applied interest expense as if the
additional borrowing for the acquisitions were as of January 1, 2016, (iii) we adjusted for amortization expense assuming the fair
value adjustments to intangible assets had been applied beginning January 1, 2016, and (iv) we adjusted for transaction fees
incurred and reclassified them to January 1, 2016.
The 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 historical financial information on a supplemental pro forma basis, as follows (in
thousands):
Revenue
Net income
Net income per diluted share
Business Combinations in Operations
Pro forma
Year Ended December 31,
2017
2016
$
$
350,007
33,191
0.68
$
$
322,238
6,173
0.13
The operations of each of the business combinations discussed above were included in the consolidated financial
statements as of each of their respective acquisition dates. The following table presents the revenue and earnings of the
business combinations in the year of acquisition as reported within the consolidated financial statements (in thousands):
Revenue
Net loss
Year Ended
December 31, 2017
33,418
$
(4,072)
For the Acquisition, we included the results of Connect's operations since its acquisition date in the Alarm.com segment and
the results of Piper's operations since its acquisition date in the Other segment. We included the results of ObjectVideo Labs
operations since its acquisition date in the Alarm.com segment.
Note 7. Goodwill and Intangible Assets, Net
The changes in goodwill by reportable segment are outlined below (in thousands):
Balance as of January 1, 2016
Goodwill acquired
Balance as of December 31, 2016
Goodwill acquired
Balance as of December 31, 2017
Alarm.com
Other
Total
24,723
—
24,723
38,868
63,591
$
$
— $
—
—
—
— $
24,723
—
24,723
38,868
63,591
$
$
87
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
On January 1, 2017, we acquired ObjectVideo Labs and recorded $2.3 million of goodwill in the Alarm.com segment. On
March 8, 2017, in connection with the Acquisition, we recorded $36.6 million of goodwill in the Alarm.com segment. There were
no impairments of goodwill recorded during the years ended December 31, 2017, 2016 or 2015. As of December 31, 2017, the
accumulated balance of goodwill impairments was $4.8 million, which is related to our acquisition of EnergyHub in 2013.
The following table reflects changes in the net carrying amount of the components of intangible assets (in thousands):
Balance as of January 1, 2016
Amortization
Balance as of December 31, 2016
Intangible assets acquired
Amortization
Balance as of December 31, 2017
Customer
Relationships
4,449
$
(1,086)
3,363
93,260
(8,097)
88,526
$
$
$
Developed
Technology
Trade Name
Other
Total
1,486
(438)
1,048
8,570
(4,086)
5,532
$
$
273
(116)
157
170
(99)
228
$
$
$
110
(110)
—
—
—
— $
6,318
(1,750)
4,568
102,000
(12,282)
94,286
We recorded $12.3 million, $1.8 million and $2.2 million of amortization related to our intangible assets for the years ended
December 31, 2017, 2016 and 2015, respectively. There were no impairments of long-lived assets during the years ended
December 31, 2017, 2016 and 2015.
The following tables reflect the weighted-average remaining life and carrying value of finite-lived intangible assets (in
thousands):
December 31, 2017
Customer relationships
Developed technology
Trade name
Other
Total intangible assets
Customer relationships
Developed technology
Trade name
Other
Total intangible assets
Gross
Carrying
Amount
103,926
13,959
1,084
234
119,203
Gross
Carrying
Amount
10,666
5,390
914
234
17,204
$
$
$
$
Accumulated
Amortization
$
Net Carrying
Value
88,526
5,532
228
—
94,286
(15,400) $
(8,427)
(856)
(234)
(24,917) $
December 31, 2016
Net
Carrying
Value
Accumulated
Amortization
$
(7,303) $
(4,342)
(757)
(234)
(12,636) $
3,363
1,048
157
—
4,568
$
$
Weighted-
Average
Remaining Life
10.8
2.1
3.3
0.0
Weighted-
Average
Remaining Life
3.8
4.1
4.3
0.0
The following table reflects the future estimated amortization expense for intangible assets (in thousands):
Year Ended December 31,
2018
2019
2020
2021
2022 and thereafter
Total future amortization expense
Amortization
15,219
$
13,644
12,217
11,062
42,144
94,286
$
88
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
Note 8. Investments in Other Entities
Investments in and Loans to a Platform Partner
We 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 to market and integrate them onto our connected property Alarm.com
platform.
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 not control the product design, software development, manufacturing,
marketing, or sales functions of the platform partner and therefore, we do not direct the activities of the platform partner that most
significantly impact its economic performance. We account for this investment under the cost method. As of December 31, 2017
and 2016, the fair value of this cost method investment 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, 2017 and 2016, our $1.0
million cost method investment in the platform partner was recorded in other assets in our consolidated balance sheets.
Note 9. Other Assets
Patent Licenses
From time to time, we enter into agreements to license patents. The carrying value, net of amortization, was $2.4 million and
$3.2 million as of December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016, $0.5 million and $0.7 million
was included in other current assets and $1.9 million and $2.5 million was included in other assets, respectively. We have $4.9
million of historical cost in patent licenses related to such agreements. We are amortizing the patent licenses over the estimated
useful lives of the patents, which range from three years to eleven years. Amortization expense on patent licenses was $0.7
million, $0.6 million and $0.4 million for the years ended December 31, 2017, 2016 and 2015, respectively, and was included in
cost of SaaS and license revenue in our consolidated statements of operations.
Loan to a Distribution Partner
In September 2016, we entered into dealer and loan agreements with a distribution partner. The dealer agreement enables
the distribution partner to resell our SaaS services and hardware to their subscribers. Under the loan agreements, we agreed to
loan the distribution partner up to $4.0 million, collateralized by all assets owned by the distribution partner. The advance period
for the loan was amended in August 2017 and now begins each year on September 1 and ends each year on December 31.
Interest on the outstanding principal accrues at a rate per annum equal to the greater of 6.0% or the Eurodollar Base Rate, or
LIBOR, plus 4.0%, as determined on the first date of each annual advance period. The repayment of principal and accrued
interest is due in three installments beginning in July and ending in August following the advance period. The term date of the
loan is August 31, 2019; however, the borrower has the option to extend the term of the loan for two successive terms of one
year each.
During the third quarter of 2017, the distribution partner repaid the entire $4.2 million balance of principal and interest due
for this note receivable under the first advance period, in accordance with the provisions of the loan agreement. From September
2017 to December 2017, our distribution partner drew $4.0 million under the second advance period.
The note receivable balance, which is recorded in other current assets, was $4.0 million and $3.0 million as of
December 31, 2017 and 2016, respectively.
In April 2017, we entered into a subordinated credit agreement with an affiliated entity of the distribution partner and loaned
the affiliated entity $3.0 million, with a maturity date of November 21, 2022. Interest on the outstanding principal balance accrues
at a rate of 8.5% per annum and requires monthly interest payments. The $3.0 million loan receivable balance was included in
other assets as of December 31, 2017.
For the year ended December 31, 2017, we recognized approximately $1.2 million of revenue from the distribution partners
associated with these loans.
89
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
Note 10. Fair Value Measurements
The following presents our assets and liabilities measured at fair value on a recurring basis (in thousands):
Fair value measurements in:
Assets:
Money market account
Total
Liabilities:
Subsidiary unit awards
Contingent consideration liability from acquisition
Total
Fair value measurements in:
Assets:
Money market account
Total
Liabilities:
Subsidiary unit awards
Contingent consideration liability from acquisition
Total
Fair Value Measurements on a Recurring Basis as of
December 31, 2017
Level 1
Level 2
Level 3
Total
65,620
65,620
$
$
— $
—
— $
— $
— $
— $
—
— $
— $
— $
3,160
—
3,160
$
$
65,620
65,620
3,160
—
3,160
Fair Value Measurements on a Recurring Basis as of
December 31, 2016
Level 1
Level 2
Level 3
Total
135,204
135,204
$
$
— $
—
— $
— $
— $
— $
—
— $
— $
— $
135,204
135,204
2,768
—
2,768
$
$
2,768
—
2,768
$
$
$
$
$
$
$
$
The following table summarizes the change in fair value of the Level 3 liabilities for subsidiary unit awards and the
contingent consideration liability from acquisition (in thousands):
Fair Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2017
Contingent
Consideration
Liability from
Acquisition
Subsidiary Unit
Awards
Year Ended December 31, 2016
Contingent
Consideration
Liability from
Acquisition
Subsidiary Unit
Awards
Beginning of period balance
Total losses / (gains) included in earnings
Ending of period balance
$
$
2,768
392
3,160
$
$
— $
—
— $
532
2,236
2,768
$
$
230
(230)
—
The money market account is included in our cash and cash equivalents in our consolidated balance sheets. Our money
market assets are valued using quoted prices in active markets.
The liability for the subsidiary unit awards relates to agreements established with employees of our subsidiaries for cash
awards contingent upon the subsidiary companies meeting certain financial milestones such as revenue, working capital,
EBITDA and EBITDA margin. We account for these subsidiary awards using fair value and establish liabilities for the future
payment for the repurchase of subsidiary units under the terms of the agreements based on estimating revenue, working capital,
EBITDA and EBITDA margin of the subsidiary units over the periods of the awards through the anticipated repurchase dates. We
estimated the fair value of each 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 each liability 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 the
respective payment dates, we will remeasure these liabilities, using the same valuation approach based on the applicable
subsidiary's revenue, an unobservable input, and we will record any changes in the employee's compensation expense. Some of
the awards are subject to the employees' continued employment and therefore recorded on a straight-line basis over the
remaining service period. The liability balances are included in either accounts payable, accrued expenses and other current
liabilities or 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, was determined based on revenue and adjusted EBITDA for the year ended December
31, 2017. From the first quarter of 2015 to the third quarter of 2017, we estimated the fair value of the contingent consideration
90
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
liability by using a Monte Carlo simulation model for determining projected revenue by using an expected distribution of potential
outcomes. The fair value of contingent consideration liability was calculated with thousands of projected revenue outcomes, the
results of which are averaged and then discounted to estimate the present value. At each reporting date, we remeasured the
contingent consideration liability, using the same valuation approach based on our subsidiary’s revenue, an unobservable input.
Based on the results for the year ended December 31, 2017, we do not expect to payout any of the contingent consideration
during the first quarter of 2018, and therefore, we did not record a liability related to this contingent consideration in our
consolidated balance sheet as of December 31, 2017 and 2016, as the fair value of the contingent consideration liability was
zero.
We monitor the availability of observable market data to assess the appropriate classification of financial instruments within
the fair value hierarchy. Changes in economic conditions 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 the beginning of the
reporting period. There were no transfers between Levels 1, 2 or 3 during the years ended December 31, 2017, 2016 and 2015.
We also monitor the value of the investments for other-than-temporary impairment on a quarterly basis. No other-than-temporary
impairments occurred during the years ended December 31, 2017, 2016 and 2015.
Note 11. Liabilities
The components of accounts payable, accrued expenses and other current liabilities are as follows (in thousands):
Accounts payable
Accrued expenses
Subsidiary unit awards
Other current liabilities
Accounts payable, accrued expenses and other current liabilities
The components of other liabilities are as follows (in thousands):
Deferred rent
Other liabilities
Other liabilities
Note 12. Debt, Commitments and Contingencies
December 31,
2017
2016
17,008
4,301
2,802
4,973
29,084
$
$
18,289
5,298
2,506
2,207
28,300
December 31,
2017
2016
12,279
1,646
13,925
$
$
11,056
2,501
13,557
$
$
$
$
The debt, commitments and contingencies described below would require us, or our subsidiaries, to make payments to third
parties under certain circumstances.
Debt
We previously had a $75.0 million revolving credit facility with SVB, as administrative agent, and a syndicate of lenders that
had a maturity date in November 2018, or the 2014 Facility. As of December 31, 2016, the outstanding balance of the 2014
Facility was $6.7 million. On March 7, 2017, we drew $67.0 million under the 2014 Facility to partially fund the Acquisition. During
the nine months ended September 30, 2017, we repaid $1.7 million of the outstanding balance of the 2014 Facility.
On October 6, 2017, we refinanced the $72.0 million remaining outstanding balance under the 2014 Facility, by entering into
a new $125.0 million senior secured revolving credit facility, or the 2017 Facility, with SVB, as administrative agent, PNC Bank,
National Association, as documentation agent, and a syndicate of lenders. Upon entry into the 2017 Facility, we borrowed $72.0
million, which was used to repay the previously outstanding balance under the 2014 Facility. From October 6, 2017 to
December 31, 2017, no additional amounts were drawn under the 2017 Facility and $1.0 million of the outstanding balance has
been repaid. The 2017 Facility matures in October 2022 and includes an option to further increase the borrowing capacity to
$175.0 million with the consent of the lenders. Costs incurred in connection with the 2017 Facility were capitalized and are
amortized as interest expense over the term of the 2017 Facility. The 2017 Facility is secured by substantially all of our assets,
including our intellectual property.
91
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
The outstanding principal balance on the 2017 Facility accrues interest at a rate equal to, at our option, either (1) LIBOR,
plus an applicable margin based on our consolidated leverage ratio, or (2) the highest of (a) the Wall Street Journal prime rate,
(b) the Federal Funds rate plus 0.50%, or (c) LIBOR plus 1.00% plus an applicable margin based on our consolidated leverage
ratio. For the year ended December 31, 2017, we elected for the outstanding principal balance to accrue interest at LIBOR plus
1.50%, LIBOR plus 1.75%, LIBOR plus 2.00%, 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, greater than or equal to 2.00:1.00 but less than 3.00:1.00
and greater than or equal to 3.00:1.00, respectively. For the years ended December 31, 2017, 2016 and 2015, the effective
interest rate on the credit facilities was 3.44%, 2.82% and 2.63%.
The carrying value of the 2017 Facility was $71.0 million as of December 31, 2017. The 2017 Facility includes a variable
interest rate that approximates market rates and, as such, we classified the liability as Level 2 within the fair value hierarchy and
determined that the carrying amount of the 2017 Facility approximates its fair value as of December 31, 2017. The 2017 Facility
also carries an unused line commitment fee of 0.20%. The 2017 Facility contains various financial and other covenants that
require us to maintain a maximum consolidated leverage ratio not to exceed 3.50:1.00 and a consolidated fixed charge coverage
ratio of at least 1.25:1.00. During the year ended December 31, 2017, we were in compliance with all financial and non-financial
covenants and there were no events of default.
Commitments and Contingencies
Repurchase of Subsidiary Units
In 2011, we formed a subsidiary that offers to professional residential property management and vacation rental
management companies technology solutions for remote monitoring and control of properties, including access control and
energy management. Since its formation, we granted an award of subsidiary stock to the founder and president. The vesting of
the award is based upon the subsidiary meeting certain minimum financial targets from the date of commercial availability, which
was determined to be June 1, 2013, until the fourth anniversary. In 2016, we amended the term of the award, extending the
valuation date for the first payment in cash to December 31, 2017, amending the financial targets and allowing for payments in
cash from 2018 through 2020 based on collection of financed customer receivables that existed as of the valuation date. We
recorded a liability of $2.8 million in accounts payable, accrued expenses and other current liabilities and $0.4 million in other
liabilities related to this commitment in our consolidated balance sheet as of December 31, 2017. We recorded a liability of $2.5
million in accounts payable, accrued expenses and other current liabilities and a liability of $0.3 million in other liabilities related
to this commitment in our consolidated balance sheet as of December 31, 2016.
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 (see Note 10).
Leases
We lease office space and office equipment under non-cancelable operating leases with various expiration dates through
2026. We recognize rent expense for lease payments on a straight-line basis over the expected lease term and amortize tenant
improvement allowances over the term of the lease. In August 2014, we signed a lease for new office space in Tysons, Virginia,
where we relocated our headquarters in February 2016. The lease term ends in 2026 and includes a five-year renewal option, an
$8.0 million tenant improvement allowance and scheduled rent increases. During 2016, we entered into amendments to this
lease which provided for 30,662 square feet of additional office space and an additional $1.7 million in tenant improvement
allowance. We took possession of the additional space in February 2017 and we were allowed to utilize the tenant improvement
allowance for design prior to moving into the space.
As of December 31, 2017, we have utilized the entire $9.7 million tenant improvement allowance. Rent expense was $6.2
million, $4.8 million and $4.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.
92
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
The following table presents the future minimum lease payments under the non-cancelable operating leases as of
December 31, 2017 (in thousands):
Year Ended December 31,
2018
2019
2020
2021
2022
2023 and thereafter
Total
Indemnification Agreements
Minimum Lease Payments
6,898
$
5,845
5,478
5,260
5,135
16,894
45,510
$
We have various agreements that may obligate us to indemnify the other party to the agreement with respect to certain
matters. Generally, these indemnification provisions are included 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 these indemnification
agreements, we do not believe any potential liability that might arise from such indemnity provisions is probable or material.
Letters of Credit
As of December 31, 2017 and 2016, we had no outstanding letters of credit under our credit facilities.
Legal Proceedings
On 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 that Vivint purchased. Vivint is seeking 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. On August 19, 2016, the U.S. District Court, District of Utah stayed
the litigation pending inter partes review, or IPR, by the U.S. Patent Trial and Appeal Board, or PTAB, of five of the patents in
suit. In March 2017, the PTAB issued final written decisions relating to two patents finding all challenged claims unpatentable. In
May 2017, the PTAB issued final written decisions relating to the remaining patents that found certain claims unpatentable, while
certain other claims were not found to be unpatentable. Vivint has appealed the decisions to the U.S. Court of Appeals for the
Federal Circuit, and we have cross-appealed. The U.S. District Court, District of Utah lifted the stay on the litigation on June 26,
2017, and Vivint is proceeding with its case on four of the six patents in its complaint. Fact discovery is scheduled to close on or
about March 15, 2018, and no trial date has been set. In September 2017, the U.S. Patent and Trademark Office ordered ex
parte reexaminations of certain claims of two of the remaining patents in suit, at our request.
Should Vivint prevail on its 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 sales of 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 design around such patents, and required to pay ongoing royalties and 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 believe
we 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 December 30, 2015, a putative class action lawsuit was filed against us in the U.S. District Court for the Northern District
of California, alleging violations of the Telephone Consumer Protection Act, or TCPA. The complaint does not allege that
Alarm.com itself violated the TCPA, but instead seeks to hold us responsible for the marketing activities of our service provider
partners under principles of agency and vicarious liability. The complaint seeks monetary damages under the TCPA, injunctive
relief, and other relief, including attorney’s fees. We answered the complaint on February 26, 2016. On May 5, 2017, the court
granted plaintiffs' motion for class certification. Discovery is underway, and the matter remains pending in the U.S. District Court
for the Northern District of California. Based on the current schedule, we anticipate a trial will take place in October 2018. 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 provider partners in the Circuit Court for the City of
Virginia Beach, Virginia by the estate of a deceased service provider partner customer alleging wrongful death, among other
claims. The suit seeks a total of $7 million in compensatory damages and $350,000 in punitive damages. We filed our answer on
March 22, 2016. Discovery is underway, and the matter remains pending. The Court has scheduled trial to begin on July 10,
2018. Based on currently available information, we determined a loss is not probable or reasonably estimable at this time.
93
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
On March 21, 2017, Taraneh Vessal filed a complaint against us and Monitronics International, Inc. in the United States
District Court for the Northern District of Illinois, alleging violation of the TCPA and the Illinois Consumer Fraud and Deceptive
Business Practices Act, or ICFDBA. We filed a motion to dismiss the complaint on May 12, 2017. Plaintiff filed her First Amended
Complaint on June 2, 2017, alleging similar violations of the TCPA and ICFDBA. We filed a motion to dismiss the First Amended
Complaint on June 16, 2017. On October 18, 2017, the Court granted our motion to dismiss the claims with respect to violations
of the ICFDBA without prejudice, but allowed the claims with respect to the TCPA to proceed. Discovery is underway, and the
matter remains pending. Based on currently available information, we determined a loss is not probable or reasonably estimable
at this time.
On August 14, 2017, Alarm.com filed a lawsuit against ABS Capital Partners, Inc., ABS Partners V, LLC, ABS Partners VII,
LLC, and Ralph Terkowitz in the Delaware Court of Chancery, or the Chancery Court. The complaint sought declaratory and
injunctive relief preventing the defendants from using Alarm.com’s confidential information and trade secrets to compete with
Alarm.com, and preventing the defendants from executing their planned transaction to invest in two companies (ipDatatel, LLC,
or ipDatatel, and Resolution Products, Inc., or Resolution Products). The complaint alleged claims of breach of fiduciary duty,
aiding and abetting a breach of fiduciary duty, misappropriation of trade secrets, and misappropriation of confidential information,
in connection with the defendants’ planned investment. On September 22, 2017, Alarm.com filed an amended complaint against
ABS Capital Partners, Inc., ABS Partners V, LLC, and ABS Partners VII, LLC, alleging claims for misappropriation of trade
secrets and misappropriation of confidential information. The amended complaint seeks damages, declaratory relief, and
injunctive relief enjoining ABS Capital Partners, Inc., ABS Partners V, LLC, and ABS Partners VII, LLC from using Alarm.com’s
trade secrets and confidential information to compete with Alarm.com. On October 6, 2017, the defendants filed a motion to
dismiss the lawsuit. The matter remains pending.
On August 24, 2017, Alarm.com Incorporated and its wholly owned subsidiary ICN Acquisition, LLC, filed a patent
infringement complaint against ipDatatel, in the United States District Court for the Eastern District of Texas. The complaint seeks
injunctive relief to stop the further sale of the infringing ipDatatel’s products and systems, and damages for the infringement
of Alarm.com’s patents. The complaint asserts that the technology in the ipDatatel products infringe one or more claims
of Alarm.com’s patents: United States Patent Numbers 7,113,090; 7,633,385; 7,956,736; 8,478,871; and 9,141,276. If the
litigation is successful, Alarm.com will be entitled to receive monetary damages, injunctive relief, and any other relief, including
attorney’s fees, from ipDatatel. The Court has scheduled a claim construction hearing for June 2018 and commencement of trial
in March 2019. ipDatatel has not yet answered the complaint or asserted counterclaims and defenses. ipDatatel has moved for
dismissal based on alleged patent ineligibility as to each patent in suit.
On April 25, 2017, Alarm.com Incorporated and its wholly owned subsidiary ICN Acquisition, LLC, filed a patent infringement
complaint against Protect America, Inc., or Protect America, and SecureNet Technologies, LLC, or SecureNet, in the United
States District Court for the Eastern District of Virginia. The complaint seeks injunctive relief to stop the further sale of the
infringing Protect America and SecureNet products and systems, and damages for the infringement of Alarm.com’s patents. The
complaint asserts that the technology in the Protect America and SecureNet Alarm Systems products infringe one or more claims
of Alarm.com’s patents: United States Patent Numbers 7,113,090; 7,633,385; 8,395,494; 8,493,202; 8,612,591; 8,860,804; and
9,141,276. If the litigation is successful, Alarm.com will be entitled to receive monetary damages, injunctive relief, and any other
relief, including attorney’s fees, from Protect America and SecureNet. In June 2017, Alarm.com filed an amended complaint
against Protect America only and voluntarily dismissed SecureNet from the suit, reserving the right to refile. In September 2017,
Alarm.com voluntarily dismissed the amended complaint in the United States District Court of the Eastern District of Virginia and
refiled a complaint against Protect America, with substantially the same allegations, in the United States District Court of the
Eastern District of Texas. The Court has scheduled a claim construction hearing for September 2018 and commencement of trial
in May 2019. Protect America has not yet answered the complaint or asserted counterclaims and defenses. Protect America has
moved for dismissal or transfer to the Western District of Texas based on allegedly improper venue.
In September 2014, Icontrol filed a Complaint in the United States District Court, District of Delaware, asserting that
SecureNet infringes certain U.S. Patents owned by Icontrol, patents now owned by Alarm.com through a subsidiary. In March
2015, Icontrol voluntarily agreed to dismiss the case, reserving the right to refile. In September 2015, Icontrol refiled the case
against SecureNet in the same district court alleging infringement of some of the same patents. SecureNet filed petitions for inter
partes review of the patents-in-suit before the PTAB. Proceedings as to one of the patents in suit (United States Patent Number
7,855,635) was instituted, resulting in the cancellation of some, but not all, claims of that patent. That decision is currently before
the Court of Appeals for the Federal Circuit. The PTAB has rejected the remaining applications for inter partes review, and
SecureNet requested rehearing of the rejection as to one of the patents in suit, which request has been rejected by the PTAB.
The Court has scheduled a claim construction hearing for March 2018 and commencement of trial in February 2019.
In September 2014, Icontrol filed a Complaint in the United States District Court, District of Delaware, asserting that Zonoff
Inc., or Zonoff, infringes certain U.S. Patents owned by Icontrol, all of which are now owned by Alarm.com through a
subsidiary. In November 2015, Icontrol filed a second lawsuit, also in the United States District Court, District of Delaware,
alleging that Zonoff infringes additional U.S. Patents owned by Icontrol, now owned by Alarm.com through a subsidiary. The
Court held a claim construction hearing in the first case on March 14, 2016 and consolidated the cases on August 1, 2016. On
94
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
November 3, 2017, Zonoff and Alarm.com entered into a proposed consent judgment whereby Zonoff stipulated to its
infringement of the patents in suit and the validity of the patents in suit. The Court entered a consent judgment against Zonoff,
and the matter is now closed.
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 predicted with 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 material adverse 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 a liability, 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 the event of a material unfavorable result in one or more claims, we will not incur material costs.
Note 13. Stockholders’ equity
Authorized shares
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 Restated Certificate of Incorporation, effective upon the closing of our IPO on July 1,
2015, and authorized us to issue up to 300,000,000 shares of common stock and 10,000,000 shares of undesignated preferred
stock.
IPO
Upon the closing of our IPO on July 1, 2015, all outstanding shares of previously issued redeemable convertible preferred
stock converted into an aggregate of 35,017,884 shares of common stock. Additionally, we issued 7,525,000 shares of common
stock in our IPO.
Dividend
On June 12, 2015, our board of directors declared a cash dividend to our stockholders of record on our common and
previously issued redeemable convertible preferred stock in the amount of (1) $0.36368 per share of common stock 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. The dividends were paid in June 2015.
Common and Preferred Stock
As of December 31, 2017 and 2016, there were 47,215,720 and 46,172,318 shares of common stock issued, and
47,202,310 and 46,142,483 shares of common stock outstanding, respectively. As of December 31, 2017 and 2016, there were
no preferred shares issued and outstanding. Each outstanding share of common stock is entitled to one vote per share.
Note 14. Stock-Based Compensation
Stock-based compensation expense is included in the following line items in the consolidated statements of operations (in
thousands):
Stock-based compensation expense data:
Sales and marketing
General and administrative
Research and development
Total stock-based compensation expense
Year Ended December 31,
2016
2015
2017
$
$
561
2,638
4,214
7,413
$
$
536
1,430
2,035
4,001
$
$
372
2,486
1,266
4,124
95
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
The following table summarizes the components of non-cash stock-based compensation expense (in thousands):
Year Ended December 31,
2016
2015
2017
Stock options and assumed options
Restricted stock units
Restricted stock awards
Employee stock purchase plan
Compensation related to the sale of common stock
Compensation related to the cash settlement of stock options
Total stock-based compensation expense
Tax benefit from stock-based awards
$
$
$
3,913
3,366
19
115
—
—
7,413
12,719
$
$
$
3,783
141
—
77
—
—
4,001
5,048
$
$
$
3,154
—
—
—
193
777
4,124
700
2015 Equity Incentive Plan
We issue stock options pursuant to our 2015 Plan. The 2015 Plan allows for the grant of stock options to employees and for
the grant of nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, or RSUs,
performance-based stock awards, and other forms of equity compensation to our employees, directors and non-employee
directors and consultants.
In June 2015, our board of directors adopted and our stockholders approved our 2015 Plan pursuant to which we initially
reserved a total of 4,700,000 shares of common stock for issuance under the 2015 Plan, which included shares of our common
stock previously reserved for issuance under our Amended and Restated 2009 Stock Incentive Plan, or the 2009 Plan. The
number of shares of common stock reserved for issuance under the 2015 Plan will automatically increase on January 1 each
year, for a period 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 31 of the 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 made
under the 2009 Plan. As of December 31, 2017, 7,980,705 shares remained available for future grant under the 2015 Plan.
Stock Options
Stock options under the 2015 Plan have been granted at exercise prices based on the closing price of our common stock on
the date of grant. Stock options under the 2009 Plan were granted at exercise prices as determined by the board of directors to
be the fair market value of our common stock. Our stock options generally vest over a five-year period and each option, if not
exercised or forfeited, expires on the tenth anniversary of the grant date.
Certain stock options granted under the 2015 Plan and previously granted under the 2009 Plan may be exercised before the
options have vested. Unvested shares issued as a result of early exercise 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 initially recorded
as a current liability and are reclassified to common stock and additional paid-in capital as the awards vest and our repurchase
right lapses. There were 13,281 and 29,835 unvested shares of common stock outstanding subject to our right of repurchase as
of December 31, 2017 and 2016, respectively. We repurchased 1,492 and 2,156 unvested shares of common stock related to
early exercised stock options in connection with employee terminations during the years ended December 31, 2017 and 2016,
respectively. We recorded $0.1 million and $0.2 million in accounts payable, accrued expenses and other current liabilities on our
consolidated balance sheets for the proceeds from the early exercise of the unvested stock options as of December 31, 2017
and 2016, respectively.
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 a terminated 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 options based on the fair value of the award as of the grant date. We recognize
stock-based compensation expense using the accelerated attribution method, net of actual forfeitures, in which compensation
cost for each vesting tranche in an award is recognized ratably from the service inception date to the vesting date for that
tranche.
We 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 consistent with the
expected term of our stock options. The expected term represents the period of time the stock options are expected to be
96
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
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 “simplified method” 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 volatility is based on historical volatilities of our stock and publicly traded stock of comparable
companies over the estimated expected term of the stock options.
There were 252,100, 653,900 and 540,548 stock options granted during the years ended December 31, 2017, 2016 and
2015, respectively. We declared and paid dividends in June 2015 in anticipation of our IPO, which we closed on July 1, 2015.
Subsequent to the IPO, we do not expect to declare or pay dividends on a recurring basis. As such, we assume that the dividend
rate is zero.
The following table summarizes the assumptions used for estimating the fair value of stock options granted:
Volatility
Expected term
Risk-free interest rate
Dividend rate
Year Ended December 31,
2016
47.6 - 50.6%
5.6 - 6.3 years
1.3 - 1.9%
—%
2017
44.4 - 61.6%
6.3 years
2.0 - 2.2%
—%
2015
48.5 - 51.8%
4.5 - 6.3 years
1.3 - 1.9%
—%
The following table summarizes stock option activity:
Outstanding as of December 31, 2016
Granted
Exercised
Forfeited
Expired
Outstanding as of December 31, 2017
Vested and expected to vest as of December 31, 2017
Exercisable as of December 31, 2017
Number of
Options
3,547,528
252,100
(1,011,174)
(97,415)
(4,063)
2,686,976
2,700,257
1,733,849
Weighted
Average Exercise
Price Per Share
$
$
$
$
6.91
31.69
2.55
12.53
11.99
10.67
10.64
6.38
Weighted Average
Remaining
Contractual Life
(in years)
6.4
Aggregate
Intrinsic Value
(in thousands)
74,267
$
34,999
72,823
73,258
54,398
6.4
6.4
5.6
$
$
$
The weighted average grant date fair value for our stock options granted during the years ended December 31, 2017, 2016
and 2015 was $14.95, $8.77 and $5.90, respectively. The total fair value of stock options vested during the years ended
December 31, 2017, 2016 and 2015 was $3.5 million, $2.2 million and $2.7 million, respectively. The aggregate intrinsic value of
stock options exercised during the years ended December 31, 2017, 2016 and 2015 was $35.0 million, $14.1 million and $3.3
million, respectively. As of December 31, 2017, the total compensation cost related to nonvested awards not yet recognized was
$4.2 million, which will be recognized over a weighted average period of 2.2 years. Cash received from exercises of stock
options was $2.6 million, $1.1 million and $0.5 million during the years ended December 31, 2017, 2016 and 2015, respectively.
Stock Options Assumed from Acquisition
On March 8, 2017, we completed the Acquisition and assumed the Icontrol Plans. The assumed unvested stock options are
exercisable for 70,406 shares of Alarm.com common stock. On March 15, 2017, we filed a Form S-8 Registration Statement
related to the Acquisition. The registration also covers an additional 2,308,615 shares of common stock that were automatically
added to the shares authorized for issuance under the 2015 Plan pursuant to an evergreen provision contained in the 2015 Plan
and an additional 461,723 shares of common stock that were automatically added to the shares authorized for issuance under
the 2015 ESPP, pursuant to an evergreen provision contained in the 2015 ESPP.
In accordance with the terms of the asset purchase agreement, we were obligated to assume the Icontrol Plans, and
converted the 2,001,387 unvested employee stock options into 70,406 Alarm.com stock options using a conversion ratio stated
in the agreement to convert the original exercise price and number of options. The fair value of the unvested stock options on the
date of the Acquisition was $1.7 million calculated using a Black-Scholes model with a volatility and risk-free interest rate over
the expected term of the options and the closing price of the Alarm.com common stock on the date of acquisition. We applied our
graded vesting accounting policy to the fair value of these assumed options and determined $1.4 million of the fair value was
attributable to pre-combination services and was included as a component of total purchase consideration. The remaining $0.3
97
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
million of the fair value was determined to be attributable to post-combination services and will be recognized over the remaining
service periods of the stock options.
The following table summarizes the assumptions used for estimating the fair value of stock options assumed from the
Connect business unit of Icontrol:
Volatility
Expected term
Risk-free interest rate
Dividend rate
Year Ended December 31,
2017
42.7 - 44.4%
2.5 - 5.0 years
1.4 - 2.0%
—%
The following table summarizes the assumed stock option activity:
Number of
Options
Weighted
Average Exercise
Price Per Share
Outstanding as of December 31, 2016
Options assumed from Connect
Exercised
Forfeited
Expired
Outstanding as of December 31, 2017
Vested and expected to vest as of December 31, 2017
Exercisable as of December 31, 2017
— $
70,406
(7,232)
(21,514)
(21)
41,639
41,639
18,973
$
$
$
—
5.48
5.57
4.70
4.55
5.88
5.88
5.24
Weighted Average
Remaining
Contractual Life
(in years)
0.0
Aggregate
Intrinsic Value
(in thousands)
—
$
252
1,327
1,327
617
7.2
7.2
6.9
$
$
$
The weighted average grant date fair value for the assumed stock options granted the year ended December 31, 2017 was
$4.78. The total fair value of assumed stock options vested during the year ended December 31, 2017 was $0.1 million. The
aggregate intrinsic value of assumed stock options exercised during the year ended December 31, 2017 was $0.3 million. As of
December 31, 2017, the total compensation cost related to the nonvested awards not yet recognized was $0.1 million, which will
be recognized over a weighted average period of 1.2 years.
Restricted Stock Awards
In March 2017, we assumed 1,622 stock options from Connect upon completion of the Acquisition, which were early
exercised according to the provisions of the Icontrol Plans for which the employees had not yet provided service for the
applicable vesting periods. We canceled those stock options and issued restricted stock awards, or RSAs, with no exercise price
at the fair value of Alarm.com common stock upon the closing of the Acquisition and recorded less than $0.1 million of
compensation expense during the year ended December 31, 2017. We expect these RSAs to vest over two years and we will
recognize compensation expense for the fair value of the awards in stock-based compensation. We repurchased 750 RSAs in
connection with employee terminations during the year ended December 31, 2017. There were no repurchases of RSAs during
the year ended December 31, 2016.
Restricted Stock Units
There was an aggregate of 534,146 and 61,482 RSUs granted to certain of our employees during the years ended
December 31, 2017 and 2016, respectively. We granted no RSUs during the year ended December 31, 2015. The RSUs vest
over a five-year period from the vesting commencement date, which is generally the grant date. We account for RSUs based on
the fair value of the award as of the grant date. We recognize stock-based compensation expense using the accelerated
attribution method, net of actual forfeitures, in which compensation cost for each vesting tranche in an award is recognized
ratably from the grant date to the vesting date for that tranche. The condition for vesting of the RSUs is based on continued
employment. As of December 31, 2017, the total unrecognized compensation expense related to RSU awards granted amounted
to $15.9 million, which is expected to be recognized over a weighted average period of 2.9 years.
98
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
The following table summarizes RSU activity:
Outstanding as of December 31, 2016
Granted
Vested
Forfeited
Outstanding as of December 31, 2017
Vested and expected to vest as of December 31, 2017
Employee Stock Purchase Plan
Number of
RSUs
Weighted
Average Grant
Date Fair Value
Aggregate
Intrinsic Value
(in thousands)
61,482
534,146
—
(37,360)
558,268
558,268
$
$
$
30.00
35.03
—
31.56
34.71
34.71
$
$
$
1,711
—
21,075
21,075
Our board of directors adopted our 2015 ESPP in June 2015. As of December 31, 2017, 1,604,310 shares have been
reserved for future grant under the 2015 ESPP, with provisions 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 shares available 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 of common 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 fair market 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 a participant 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 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. For the years ended December 31, 2017 and 2016, an aggregate of 25,616 and
31,797 shares were purchased by employees for which we recognized $0.1 million and $0.1 million of compensation expense,
respectively. There were no purchases of shares during the year ended December 31, 2015 and less than $0.1 million
compensation expense was recognized over the purchase period. Compensation expense is recognized for the amount of the
discount, net of actual forfeitures and voluntary withdrawals, over the six-month purchase period.
Note 15. Earnings Per Share
Basic and Diluted Earnings Per Share
The components of basic and diluted EPS are as follows (in thousands, except share and per share amounts):
Net income
Less: dividends paid to participating securities
Less: income allocated to participating securities
Net income / (loss) available for common stockholders (A)
Weighted average common shares outstanding — basic (B)
Dilutive effect of stock options, RSUs and RSAs
Weighted average common shares outstanding — diluted (C)
Net income / (loss) per share:
Basic (A/B)
Diluted (A/C)
Year Ended December 31,
2016
2015
2017
$
$
29,251
—
(13)
29,238
46,682,141
2,471,807
49,153,948
$
$
10,154
—
(12)
10,142
45,716,757
2,158,765
47,875,522
11,768
(18,987)
—
(7,219)
24,108,362
—
24,108,362
0.63
0.59
$
$
0.22
0.21
$
$
(0.30)
(0.30)
$
$
$
$
99
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
Diluted 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 were anti-dilutive due to our net loss attributable to common stockholders. The
following securities have been excluded from the calculation of diluted weighted average common shares outstanding as the
inclusion of these securities would have an anti-dilutive effect:
Stock options
RSAs
RSUs
Common stock subject to repurchase
Note 16. Significant Service Provider Partners
Year Ended December 31,
2016
2015
2017
258,917
129
188,050
13,281
197,350
—
25,640
29,835
522,997
—
—
96,368
During the years ended December 31, 2017, 2016 and 2015, our 10 largest revenue service provider partners accounted for
60%, 60% and 63% of our consolidated revenue. One of our service provider partners within the Alarm.com segment individually
represented greater than 15% but not more than 20% of our revenue for the year ended December 31, 2017. Another one of our
service provider partners in the Alarm.com segment individually represented greater than 10% but not more than 15% of our
revenue for the years ended December 31, 2017 and 2016 and represented greater than 15% but not more than 20% of our
revenue for the year ended December 31, 2015.
One individual service provider partner in the Alarm.com segment represented more than 10% of accounts receivable as
of December 31, 2017. No individual service provider partner represented more than 10% of accounts receivable as of
December 31, 2016.
Note 17. Income Taxes
The Tax Cuts and Jobs Act, or the “Tax Act,” was signed into law on December 22, 2017. This legislation makes significant
change in U.S. tax law, including a reduction in the corporate tax rate, changes to net operating loss carryforwards and
carrybacks and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the
current rate of 35% to 21%. As a result of the enacted Tax Act, we were required to revalue deferred tax assets and liabilities at
the rate in effect when the deferred tax balances are scheduled to reverse. This revaluation resulted in an additional $8.8 million
of income tax expense and a corresponding reduction in the deferred tax asset.
Additionally, on December 22, 2017, the Securities and Exchange Commission staff also issued Staff Accounting Bulletin
No. 118, or "SAB 118," to address the application of U.S. GAAP in situations when a registrant does not have the necessary
information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the
Tax Act. Specifically, SAB 118 provides a measurement period for companies to evaluate the impacts of the Tax Act on their
financial statements. We consider the $8.8 million of income tax expense recorded to be a provisional amount primarily because
we continue to evaluate the tax effects of the Tax Act on taxes related to our international operations, the realizability of deferred
tax assets, remeasurement of certain temporary differences at the new tax rates and the impact of other retroactive provisions.
The components of our income tax expense are as follows (in thousands):
Year Ended December 31,
2016
2015
2017
Current
Federal
State
Foreign
Total Current
Deferred
Federal
State
Foreign
Total Deferred
Total
$
$
584
(88)
6
502
3,837
(1,368)
19
2,488
2,990
$
$
7,227
1,829
—
9,056
(4,283)
(546)
—
(4,829)
4,227
$
$
7,730
1,519
—
9,249
(3,372)
(180)
—
(3,552)
5,697
100
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
The difference between the income tax expense at the federal statutory rate and income tax expense in the consolidated
statements of operations is as follows:
Year Ended December 31,
2016
2015
2017
Federal statutory rate
State income tax expense, net of federal benefits
Nondeductible meals and entertainment
Research and development tax credits
Tax windfall benefits
Change in tax rate due to tax reform
Other
Effective rate
35.0%
0.1
0.6
(16.1)
(36.5)
27.2
(1.0)
9.3%
35.0%
4.9
1.6
(10.8)
—
—
(1.3)
29.4%
35.0%
4.5
1.2
(8.9)
—
—
0.8
32.6%
The components of our net deferred tax assets (liabilities) are as follows (in thousands):
Deferred tax assets, non-current
Provision for doubtful accounts
Accrued expenses
Deferred revenue
Deferred rent
Stock-based compensation
Acquisition costs
Subsidiary unit compensation
Equity investments
Net operating losses
Tax credits
Intangible assets and prepaid patent licenses
Other
Total deferred tax assets, non-current
Deferred tax liabilities, non-current
Intangible assets and prepaid patent licenses
Depreciation
Contingent liability
Total deferred tax liabilities, non-current
Net deferred tax assets, non-current
$
December 31,
2017
2016
714
2,362
2,455
3,384
3,613
3,310
1,413
116
1,357
2,546
156
160
21,586
$
1,046
2,622
3,627
4,671
3,468
4,482
1,566
182
2,678
—
—
107
24,449
(74)
(2,917)
(171)
(3,162) $
$
18,424
(2,780)
(4,649)
(268)
(7,697)
16,752
$
$
A reconciliation of the beginning and ending amounts of unrecognized tax benefits (without related interest expense) is as
follows (in thousands):
Year Ended December 31,
2016
2015
2017
Beginning balance
Additions based on tax positions of the current year
Additions based on tax positions of prior year
Additions resulting from acquisitions
Decreases due to lapse of applicable statute of limitations
Decreases related to settlements of prior year tax positions
Ending balance
$
$
681
718
373
277
(76)
—
1,973
$
$
506
197
79
—
—
(101)
681
$
$
208
152
146
—
—
—
506
Our effective income tax rates were 9.3%, 29.4% and 32.6% for the years ended December 31, 2017, 2016 and 2015,
respectively. Our effective tax rates were below the statutory rate primarily due to recognizing the tax windfall benefits from
101
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
employee stock-based payment transactions through the income statement provision for income taxes in the period incurred, as
well as the research and development tax credits claimed, partially offset by the impact of state taxes and non-deductible meal
and entertainment expenses. We adopted the accounting provision that simplified the tax accounting for employee share-based
payment transactions in the first quarter of 2017. Prior to adoption of the new accounting provision, tax windfall benefits were
required to be recorded in additional paid-in capital. These decreases in the effective tax rate were partially offset by the effects
of the Tax Act, which required us to revalue deferred tax assets and liabilities at the rate in effect when the deferred tax balances
are scheduled to reverse.
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 tax assets 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 existing deferred tax
assets as of December 31, 2017 and 2016. Accordingly, we have not recorded a valuation allowance as of December 31, 2017
and 2016.
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 to be
realized upon settlement. We recorded unrecognized tax benefits of $1.0 million, $0.2 million and $0.3 million for research and
development tax credits claimed during the years ended December 31, 2017, 2016 and 2015, respectively. We also recorded an
unrecognized tax benefit of $0.3 million within our Canadian subsidiary related to an existing net operating loss acquired as part
of the Acquisition.
As of December 31, 2017 and 2016, we accrued less than $0.1 million of total interest related to unrecognized tax benefits.
We recognize interest and penalties related to unrecognized tax benefits 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 twelve months. Our cumulative liability for uncertain tax positions was $2.0 million and
$0.7 million as of December 31, 2017 and 2016, respectively, and if recognized, would reduce our income tax expense and the
effective tax rate.
We file income tax returns in the United States and Canada. We are no longer subject to U.S. income tax examinations for
years prior to 2014, with the exception that operating loss carryforwards generated prior to 2014 may be subject to tax audit
adjustment. We are generally no longer subject to state and local income tax examinations by tax authorities for years prior to
2014.
As of December 31, 2017, we had federal net operating loss carryforwards of approximately $6.0 million as well as state net
operating loss carryforwards of approximately $1.9 million, which are scheduled to begin to expire in 2030. As of December 31,
2017, we had federal research and development tax credit carryforwards of approximately $2.2 million, which are scheduled to
begin to expire in 2037. As of December 31, 2017, we had state research and development tax credit carryforwards of
approximately $1.4 million, which are scheduled to begin to expire in 2021.The federal net operating loss carryforward arose in
connection with the 2013 acquisition of EnergyHub. Utilization of net operating loss carryforwards may be subject to annual
limitations due to ownership change limitations as provided by the Internal Revenue Code of 1986, as amended.
Note 18. Segment Information
We have two reportable segments:
•
Alarm.com segment
• Other segment
Our chief operating decision maker is our chief executive officer. Management determined the operational data used by the
chief operating decision maker is that of the two reportable segments. Management bases strategic goals and decisions on
these segments and the data presented below is used to measure financial results.
Our Alarm.com segment represents our cloud-based platforms for the intelligently connected property and related solutions
that contributed approximately 94%, 94% and 97% of our revenue for the years ended December 31, 2017, 2016 and 2015. Our
Other segment is focused on researching, developing and offering residential and commercial automation solutions and energy
management products and services in adjacent markets. Inter-segment revenue includes sales of hardware between our
segments.
102
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
Management evaluates the performance of its segments and allocates resources to them based on operating income (loss)
as compared to prior periods and current performance levels. The reportable segment operational data is presented in the table
below (in thousands):
SaaS and license revenue
Hardware and other revenue
Total revenue
Operating income / (loss)
Assets
SaaS and license revenue
Hardware and other revenue
Total revenue
Operating income / (loss)
Assets
SaaS and license revenue
Hardware and other revenue
Total revenue
Operating income / (loss)
$
$
$
$
$
$
Alarm.com
227,583
92,445
320,028
41,439
352,766
Alarm.com
168,732
79,049
247,781
21,282
246,798
Alarm.com
139,036
63,716
202,752
38,437
Year Ended December 31, 2017
Intersegment
Alarm.com
Intersegment
Other
Other
8,700
15,154
23,854
(8,248)
18,875
$
— $
— $
(2,945)
(2,945)
(175)
—
(2,000)
(2,000)
358
—
Year Ended December 31, 2016
Intersegment
Alarm.com
Intersegment
Other
Other
4,808
14,018
18,826
(7,229)
14,447
$
— $
— $
(2,863)
(2,863)
(312)
—
(2,638)
(2,638)
317
—
Year Ended December 31, 2015
Intersegment
Alarm.com
Intersegment
Other
Other
$
1,928
7,124
9,052
(20,151)
(28) $
(924)
(952)
(279)
— $
(1,964)
(1,964)
(16)
Total
236,283
102,654
338,937
33,374
371,641
Total
173,540
87,566
261,106
14,058
261,245
Total
140,936
67,952
208,888
17,991
Depreciation and amortization expense was $17.4 million, $6.3 million and $5.5 million for the Alarm.com segment for the
years ended December 31, 2017, 2016 and 2015, respectively. Depreciation and amortization expense was $0.3 million, $0.2
million and $0.3 million for the Other segment for the years ended December 31, 2017, 2016 and 2015, respectively. Additions to
property and equipment were $9.3 million, $5.7 million and $10.2 million for the Alarm.com segment for the years ended
December 31, 2017, 2016 and 2015, respectively. Additions to property and equipment were $0.1 million, less than $0.1 million
and $0.2 million for the Other segment for the years ended December 31, 2017, 2016 and 2015, respectively.
We derived substantially all revenue from North America for the years ended December 31, 2017, 2016 and 2015.
Substantially all our long-lived assets were in North America as of December 31, 2017 and 2016.
Note 19. Related Party Transactions
Our 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 of our 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 of ownership interest.
We account for this investment using the equity method (see Note 8). During the years ended December 31, 2017, 2016 and
2015, we recorded $0.7 million, $1.3 million and $0.8 million of cost of hardware and other revenue in connection with this
installation partner. As of December 31, 2017 and 2016, the accounts payable balance to our installation partner was less than
$0.1 million and $0.1 million. In September 2014, we loaned $0.3 million to our installation partner under a secured promissory
note that accrues interest at 8.0%. Interest is payable monthly with the entire principal balance plus accrued but unpaid interest
due at maturity in September 2018. We recorded less than $0.1 million of interest income related to this note receivable in each
of the years ended December 31, 2017, 2016 and 2015.
103
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2017, 2016 and 2015
Note 20. Quarterly Financial Data (Unaudited)
The following table shows selected unaudited quarterly consolidated statement of operations data for each of our eight most
recently completed quarters. In the opinion of management, 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 normal recurring adjustments and
accruals, necessary for the fair statement of financial information in accordance with GAAP. 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 operating results for a full year. The selected consolidated statements of operation data in amounts are presented
below (in thousands, except per share data):
Three Months Ended
Total revenue
Total cost of revenue
Net income
Net income / (loss) per share:
Basic
Diluted
Mar. 31,
2016
$ 59,043
21,116
June 30,
2016
$ 64,423
25,183
Sept. 30,
2016
$ 67,846
26,366
Dec. 31,
2016
$ 69,794
26,715
Mar. 31,
2017
$ 74,194
26,635
June 30,
2017
$ 85,988
29,835
Sept. 30,
2017
$ 89,962
31,833
Dec. 31,
2017
$ 88,793
27,885
$
$
$
2,738
0.06
0.06
$
$
$
1,873
0.04
0.04
$
$
$
2,567
0.06
0.05
$
$
$
2,976
0.06
0.06
$
$
$
3,963
0.09
0.08
$
$
$
9,865
$ 15,103
0.21
0.20
$
$
0.32
0.31
$
$
$
320
0.01
0.01
104
Schedule II – Valuation and Qualifying Accounts and Reserves
Alarm.com Holdings, Inc.
Schedule II
Valuation and Qualifying Accounts and Reserves
(In thousands)
Description
Year ended December 31, 2017
Allowance for doubtful accounts
Allowance for product returns
Year ended December 31, 2016
Allowance for doubtful accounts
Allowance for product returns
Year ended December 31, 2015
Allowance for doubtful accounts
Allowance for product returns
Balance at
Beginning of
Year
Additions
Charged
Against
Revenue
Additions
Charged to
Other
Accounts
Deductions
Balance at
End of Year
$
$
1,282
2,314
1,315
2,116
1,397
1,838
— $
2,055
—
2,071
—
1,559
453
—
648
—
276
—
$
(286) $
(1,898)
(681)
(1,873)
(358)
(1,281)
1,449
2,471
1,282
2,314
1,315
2,116
105
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We 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, summarized and reported,
within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to
the company’s management, including its chief executive officer and chief financial officer, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily
applies its judgment 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 of December 31, 2017. Based on the evaluation of our disclosure
controls and procedures as of December 31, 2017, our Chief Executive Officer and Chief Financial Officer concluded that, 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
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our management, under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2017 based on the framework in Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of its evaluation,
management concluded that our internal control over financial reporting was effective as of December 31, 2017. Our
independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited our financial statements included in
this Annual Report on Form 10-K and the effectiveness of our internal control over financial reporting as of December 31, 2017.
The report of PricewaterhouseCoopers LLP is incorporated by reference to Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter ended
December 31, 2017 that have materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and
procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their
objectives and are effective at the reasonable assurance level. However, our management does not expect that 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 and operated, 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 there are 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 can provide 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 making can 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 of two 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 future events, 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 inadequate because
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 INFORMATION
None.
106
PART III.
We will file a definitive Proxy Statement for our Annual Meeting, or our 2018 Proxy Statement, with the SEC, pursuant to
Regulation 14A, not later than 120 days after the end of our 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 2018 Proxy Statement that specifically
address the items set forth herein are incorporated by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is hereby incorporated by reference to the sections of our 2018 Proxy Statement under
the captions “Information Regarding Committees of the 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 our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. A current copy of the Code of Conduct is available 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, our Code of Conduct that are required to be disclosed pursuant to SEC rules.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference to the sections of our 2018 Proxy Statement under
the captions “Executive Compensation” and “Director Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 is hereby incorporated by reference to the sections of our 2018 Proxy Statement under
the captions “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance under
Equity Compensation Plans.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 13 is hereby incorporated by reference to the sections of our 2018 Proxy Statement under
the captions “Transactions with Related Persons” and “Director Independence.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is hereby incorporated by reference to the section of our 2018 Proxy Statement under
the caption “Principal Accountant Fees and Services.”
107
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report:
PART IV.
(1) Consolidated Financial Statements and Reports 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) Exhibits
Exhibit
Description
2.1
2.2
2.3
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Agreement 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, 2013
Asset Purchase Agreement by and among ICN Acquisition, LLC,
Icontrol Networks, Inc., the Seller Stockholders, Fortis Advisors
LLC, and the Registrant as Guarantor, dated as of June 23, 2016
Amendment No. 1 to Asset Purchase Agreement by and among
ICN Acquisition, LLC, Icontrol Networks, Inc., the Seller
Stockholders, Fortis Advisors LLC, and the Registrant as
Guarantor, dated November 15, 2016
Amended and Restated Certificate of Incorporation of the
Registrant
Amended and Restated Bylaws of the Registrant
Form of Common Stock Certificate of the Registrant
Amended and Restated Registration Rights Agreement by and
among the Registrant and certain of its stockholders, dated July 11,
2012
Deed of Lease between Registrant and 8150 Leesburg Pike,
L.L.C., dated April 21, 2009, as amended July 21, 2010, April 28,
2011, January 10, 2012, June 5, 2012, December 7, 2012, March
12, 2013 and May 29, 2013
Deed of Office Lease Agreement between Registrant and
Marshall Property LLC, dated August 8, 2014
First Amendment to Deed of Office Lease Agreement by and
between Alarm.com Incorporated and Marshall Property LLC,
dated May 29, 2015
Second Amendment to Deed of Office Lease Agreement by and
between Alarm.com Incorporated and Marshall Property LLC,
dated October 19, 2015
Third Amendment to Deed of Office Lease Agreement by and
between Alarm.com Incorporated and Marshall Property LLC,
dated May 6, 2016
Fourth Amendment to Deed of Office Lease Agreement by and
between Alarm.com Incorporated and Marshall Property LLC,
dated September 15, 2016
Fifth Amendment to Deed of Office Lease Agreement by and
between Alarm.com Incorporated and Marshall Property LLC,
dated January 31, 2017
10.8†
Amended and Restated 2009 Stock Incentive Plan, Form of Non-
Qualified Stock Option Agreement and Form of Early Exercise
Notice and Restricted Stock Purchase Agreement thereunder
10.9†
2015 Equity Incentive Plan
10.10†*
Form of Option Grant Package under 2015 Equity Incentive Plan
Incorporated by Reference
File Number Exhibit
File Date
Schedule /
Form
S-1
333-204428
2.1
May 22, 2015
8-K
001-37461
2.1
June 23, 2016
8-K
001-37461
2.1
November 16,
2016
8-K
8-K
S-1
S-1
001-37461
3.1
July 2, 2015
001-37461
333-204428
333-204428
3.2
4.1
4.2
July 2, 2015
May 22, 2015
May 22, 2015
S-1
333-204428
10.1
May 22, 2015
S-1
333-204428
10.2
May 22, 2015
10-Q
001-37461
10.1
10-Q
001-37461
10.2
10-Q
001-37461
10.3
10-Q
001-37461
10.3
10-K
001-37461
10.7
August 15,
2016
August 15,
2016
August 15,
2016
November 14,
2016
March 16,
2017
S-1
333-204428
10.3
May 22, 2015
10-Q
001-37461
10.1
August 14,
2015
10.11†
Form of RSU Notice and Agreement under 2015 Equity Incentive
Plan
S-1/A
333-204428
10.6
June 11, 2015
10.12†
Form of Early Exercise Restricted Stock Purchase Agreement
10-K
001-37461
10.7
February 29,
2016
108
10.13†
2015 Employee Stock Purchase Plan
10-Q
001-37461
10.2
10.14†
2017 Executive Bonus Plan
8-K
001-37461
10.1
August 14,
2015
February 28,
2017
10.15†
10.16†
10.17
10.18
10.19
10.20#(cid:3)
10.21#
10.22#
10.23#
10.24
10.25
21.1*
23.1*
31.1*
31.2*
Form of Indemnity Agreement by and between Registrant
and each of its directors and executive officers
Offer Letter by and between the Registrant and Steve
Valenzuela dated October 12, 2016
Senior Secured Credit Facilities 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
parties thereto, dated May 8, 2014
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 parties
thereto, dated December 7, 2015
Third Amendment to Credit Agreement by and among Alarm.com
Holdings, Inc., Alarm.com Incorporated, Silicon Valley Bank and
the several lenders from time to time parties thereto, dated
August 10, 2016
Alarm.com Dealer Program Agreement by and between the
Registrant and Monitronics Funding LP, dated October 22,
2007, as amended by Amendment No. 1 dated January 15,
2008 and the Second Amendment dated February 23, 2013
Third Amendment to Alarm.com Dealer Program Agreement by
and between the Registrant and Monitronics International, (cid:44)(cid:81)(cid:70)(cid:17)
Fourth Amendment to Alarm.com Dealer Program Agreement
by and between the Registrant and Monitronics International,
Inc., dated September 13, 2017
Reformed Master Services Agreement by and between (cid:36)(cid:79)(cid:68)(cid:85)(cid:80)(cid:17)(cid:70)(cid:82)(cid:80)
Incorporated and ADT LLC, effective as of August 19, (cid:21)(cid:19)(cid:20)(cid:25)
Senior Secured Credit Facilities 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 parties
thereto, dated October 6, 2017
S-1/A
333-204428
10.9
June 11, 2015
8-K
S-1
001-37461
10.1
November 14,
2016
333-204428
10.10 May 22, 2015
10-K
001-37461
10.12
10-Q
001-37461
10.4
February 29,
2016
August 15,
2016
S-1/A
333-204428
10.11
June 19, 2015
10-K
001-37461
10.14
10-Q
001-37461
10.1
10-Q
001-37461
10.2
10-Q
001-37461
10.2
February 29,
2016
November 9,
2017
November 14,
2016
November 9,
2017
Indemnity Agreement by and between the Registrant and Michelle(cid:3)
(cid:46)(cid:17)(cid:3)Lee, dated January 17, 2018
8-K
001-37461
10.1
January 23,
2018
Subsidiaries of the Registrant
Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm
Certification of Principal Executive Officer Pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of Principal Financial Officer Pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 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
* Filed herewith.
** Furnished herewith.
† Indicates management contract or compensatory plan.
# Confidential treatment has been granted from the Securities and Exchange Commission as to certain portions of this document.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
109
Pursuant 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 the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 27, 2018
Alarm.com Holdings, Inc.
By:
/s/ Stephen Trundle
Stephen Trundle
President and Chief Executive Officer
(Principal Executive 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 capacities and on the dates indicated.
Signature
Title
Date
/s/ Stephen Trundle
Stephen Trundle
President, Chief Executive Officer and Director
(Principal Executive Officer)
February 27, 2018
/s/ Steve Valenzuela
Steve Valenzuela
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
February 27, 2018
/s/ Timothy McAdam
Timothy McAdam
Chairman of the Board of Directors
February 21, 2018
/s/ Donald Clarke
Donald Clarke
Director
Director
Michelle Lee
/s/ Darius Nevin
Director
Darius Nevin
/s/ Hugh Panero
Hugh Panero
Director
/s/ Mayo Shattuck
Mayo Shattuck
Director
February 20, 2018
February 20, 2018
February 20, 2018
February 20, 2018
110
BOARD OF DIRECTORS
CORPORATE INFORMATION
Stephen Trundle
(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:1063)(cid:76)(cid:70)(cid:72)(cid:85)
Alarm.com
Timothy McAdam
General Partner
Technology Crossover Ventures
Donald Clarke
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:73)(cid:1063)(cid:76)(cid:70)(cid:72)(cid:85)
Plex Systems, Inc.
Michelle Lee
Visiting Professor of Law
Stanford Law School
Darius Nevin
Member
G3 Capital Partners, LLC
Hugh Panero
Owner
Yellow Brick Road Ventures, LLC
Mayo Shattuck
Chairman
Exelon Corporation
EXECUTIVE OFFICERS
Stephen Trundle
(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:1063)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)
Steve Valenzuela
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:73)(cid:1063)(cid:76)(cid:70)(cid:72)(cid:85)
(cid:45)(cid:72)(cid:611)(cid:85)(cid:72)(cid:92)(cid:3)(cid:37)(cid:72)(cid:71)(cid:72)(cid:79)(cid:79)
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:54)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:74)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:44)(cid:81)(cid:81)(cid:82)(cid:89)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:50)(cid:73)(cid:1063)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)
David Hutz
Chief Systems Architect
Daniel Kerzner
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:51)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:3)(cid:50)(cid:73)(cid:1063)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)
Jean-Paul Martin
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:55)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:50)(cid:73)(cid:1063)(cid:76)(cid:70)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:82)(cid:16)(cid:41)(cid:82)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)
Daniel Ramos
Senior Vice President and Corporate Secretary
Corporate Headquarters
Alarm.com Holdings, Inc.
8281 Greensboro Drive, Suite 100
Tysons, VA 22102
Phone: 877.389.4033
Stock Listing
Alarm.com Holdings Inc. stock is publicly traded
on The Nasdaq Global Select Market under the
ticker symbol: ALRM
Investor Relations
Our investor relations website is located at
investors.alarm.com
Contact ir@alarm.com
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
1800 Tysons Boulevard
McLean, VA 22102
Transfer Agent
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Phone: 1.800.937.5449
(cid:90)(cid:90)(cid:90)(cid:17)(cid:68)(cid:86)(cid:87)(cid:1063)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:17)(cid:70)(cid:82)(cid:80)
Annual Meeting of Stockholders
June 7, 2018 at 9:00 a.m. ET
8281 Greensboro Drive, Suite 100
Tysons, VA 22102
COMMITTEE COMPOSITION
Nominating
& Corporate
Governance
Audit
Compensation
Timothy McAdam
Donald Clarke
Michelle Lee
Darius Nevin
Hugh Panero
Mayo Shattuck
Chairman
of the Board
Chair
Member