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2019
Annual Report
Interactive Security • Video • Energy Management • Intelligent Automation • Wellness
S E R V I C E P R OV I D E R S O L U T I O N S
Alarm.com Academy • Business Intelligence Tools • Customer Connections • Home Builder Program
Marketing Portal • MobileTech Application • Remote Toolkit • Partner Portal • Web Services
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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)
8281 Greensboro Drive
Suite 100
Tysons Virginia
(Address of principal executive offices)
26-4247032
(IRS Employer
Identification No.)
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
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.01 par value per share
ALRM
The Nasdaq Stock Market LLC
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
Securities registered pursuant to section 12(g) of the Act: None
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐
Yes No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 28, 2019 was $1.7 billion, based on a closing price of $53.50 per
share of the registrant's common stock as reported on The Nasdaq Global Select Market. 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 18, 2020, there were 48,747,310 outstanding shares of the registrant's common stock, $0.01 par value per share.
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 2020 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, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
ALARM.COM HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
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
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Equity
Notes to the Consolidated Financial Statements
Schedule II. Valuation and Qualifying Accounts
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. 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
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 to 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 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 depend on our technology to intelligently secure,
automate and manage their residential and commercial properties. In the last year alone, our platforms processed more than 200
billion data points generated by over 100 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 9,000 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. We also generate hardware and other
revenue, primarily from our service provider partners and distributors. Our hardware sales include connected devices that enable
our services, such as video cameras, video recorders, gateway modules 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 service provider 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 our network of service
providers and the length of our service relationships with residential and commercial property owners, combined with our robust
SaaS platforms and approximately 20 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 $502.4
million, $420.5 million and $338.9 million in 2019, 2018 and 2017, respectively. Our SaaS and license revenue was $337.4
million, $291.1 million and $236.3 million in 2019, 2018 and 2017, respectively, representing a compound annual growth rate of
19.5%. We also generated net income attributable to common stockholders of $53.5 million, $21.5 million and $29.2 million in
2019, 2018 and 2017, respectively, as well as Adjusted EBITDA, a non-GAAP metric, of $108.3 million, $93.1 million and $71.6
million in 2019, 2018 and 2017, 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.
Our Solutions and Integrated Platforms
Our solutions are designed to make both residential and commercial properties safer, smarter and more efficient. Our
technology platforms support all participants in what we refer to as the connected property market. This market includes the
residential and commercial property owners who subscribe to our services, 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, energy
management and wellness solutions as stand-alone offerings or as combined solutions to address the needs of a broad range of
customers. Our subscribers can seamlessly connect to their property through our family of mobile apps, websites and
engagement platforms like voice control through Amazon Echo and Google Home, wearable devices like the Apple Watch and
TV applications 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 with central stations used by our service providers to monitor 24 hours a day,
seven days a week, and coordinate emergency response as needed. 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 hours a day, seven days a week with live operators ready to initiate
emergency response.
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Always-On Monitoring. Whether the security system is armed or disarmed, we continuously monitor sensors in the
property and can keep subscribers 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. Facial
recognition technology enhances unexpected activity alerts by enabling certain security panels with built-in cameras to
proactively monitor for unauthorized sharing or theft of an authorized user's security system codes.
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.
Wellness. Our technology intelligently monitors quality of life through a suite of connected sensors and devices, and
delivers proactive insights into activities of daily living. With alerts about changes in behavior that can indicate emerging
quality of life issues, family members and homecare and senior living providers can address issues before they escalate
and deliver more efficient care.
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 offer indoor and outdoor camera 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, as
well as video management software and cameras for enterprise commercial applications through our OpenEye business.
The capabilities associated with our video monitoring solution include:
Video Analytics: Our video analytics engine provides object classification and object tracking technology that can
distinguish between people, vehicles and animals, determine an object's direction of movement and measure the
duration of activity. Subscribers can selectively control and manage notifications and assign virtual zones and multi-
directional "tripwires" so they can monitor their properties for highly specific activity.
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 object or motion detection or system
events, such as 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. Onsite recording up to 24 hours a day, seven days a week 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. Our commercial video surveillance offering provides 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. Our OpenEye solution supports enterprise-level requirements such as
advanced forensic video search, point of sale system integration and customer site mapping, as well as large-scale
camera deployments.
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.
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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 area 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 and solar energy production data for the entire
property and individual devices can give subscribers greater insight into the property’s energy profile and encourage
more efficient use of energy-consuming devices.
HVAC Monitoring Service. Our Heating, Ventilation and Air Conditioning, or HVAC, monitoring service works with select
high-efficiency heating and cooling systems and allows HVAC contractors to remotely monitor and manage
sophisticated residential and light commercial heating and cooling systems.
Whole Home Water Safety Solution. Our comprehensive whole home water safety solution protects properties from a
full range of water-related damage. Integrated with Alarm.com’s Smart Water Valve + Meter, our solution can monitor
usage, detect both low- and high-volume leaks and automatically shut off the property’s water supply. Working with
other connected devices in the Alarm.com ecosystem, our solution can also alert the homeowner about conditions that
can lead to frozen and burst pipes, intelligently manage humidity levels and notify homeowners if a sump pump fails.
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 enable 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 devices and 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, connected water heaters, batteries and electric vehicles, enabling
utilities to leverage these devices as an enterprise-grade, grid resource through EnergyHub's SaaS platform.
Commercial Solutions
In addition to our residential solutions, we offer Alarm.com for Business, a security solution for small and medium
businesses, ranging from single-site to multi-location businesses. Alarm.com for Business combines intelligent intrusion
detection, video surveillance, access control and energy management into a single solution through Alarm.com's app and online
interfaces. Our Smarter Access Control solution, part of the unified Alarm.com for Business platform, helps 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 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 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.
Multi-site Management and Access Control. Commercial subscribers with multiple business locations and access points
can easily manage Alarm.com’s commercial video and access control solutions from a single dashboard and customize
video feeds to seamlessly monitor multiple properties and use sophisticated rules, user permissions and schedules to
manage access across multiple locations and security partitions. Business owners and managers can easily add and
delete access for new employees and departing employees in a few clicks and provide limited access for third parties
such as delivery personnel, 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. Unexpected activity alerts provide business owners and managers with the early
identification of activity such as unexpected entry after hours, or doors propped open that could cause energy waste or
safety concerns, helps business owners quickly respond to problematic situations. 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.
Our OpenEye enterprise commercial video management solution complements the Alarm.com for Business platform and
extends our market to address the unique requirements of large commercial and national account customers such as
universities, banks, national retail chains and property management companies. OpenEye offers Video Surveillance as a
Service, or VSaaS, as well as cameras, recorders and other peripherals designed for video applications. Key benefits of the
OpenEye solution include:
Intelligent Cloud Architecture. OpenEye’s hybrid architecture intelligently combines local recording with managed cloud
services. It provides long-term storage of high-resolution video, low bandwidth consumption and a full suite of
centralized management capabilities that include remote viewing, administration and health reporting for deployments
that can include thousands of video cameras.
Enterprise-Level Capabilities. Capabilities such as advanced forensic video search, point of sale system integration and
customer site mapping address the specific needs of enterprise-level subscribers and allow loss prevention officers,
business analysts and other IT resources to employ video as a key operational and management tool.
Large-Scale Video Deployments. Centrally managed recorder firmware, system diagnostics and configuration
capabilities allow enterprise commercial customers to actively manage large-scale camera deployments. OpenEye’s
user interface is optimized for guard or command stations and other settings where video from multiple cameras is
viewed and searched simultaneously on secure workstations or video walls.
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. Capabilities associated with these solutions include:
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.
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• 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, including service
appointment reminders, device notes, quick links and MobileTech Podcasts. These features help to increase
accuracy of installations, decrease time spent on-site and reduce support calls and return visits, which saves
subscribers and service providers money while increasing subscriber satisfaction.
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Smart Gateway. The Smart Gateway allows service provider partners to create a private and secure Wi-Fi
network infrastructure specifically for a subscriber's property that is dedicated to Alarm.com video cameras. It
is designed to streamline camera installation and reduce common support issues caused by a subscriber's
unmanaged Wi-Fi network, and to enable Alarm.com's service provider partners to more efficiently deploy
video cameras and services with better connectivity and maximized wireless spectrum for performance.
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.
• 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.
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 our 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.
Home Builder Program. Our home builder program includes hardware and service plans designed to facilitate
partnerships between home builders and our service provider partners. Home builders can rapidly deploy a full-range of
our smart home solutions in new communities and model homes, while minimizing risks and costs by depending on our
nationwide network of service provider partners for hardware installation and ongoing support.
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.
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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 9,000 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
and upgrade their customer's hardware or software, eliminating the cost of an in-person service call for many routine
support issues. 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, in 2019, we launched: Smart
Gateway, a private and secure Wi-Fi network infrastructure; an HVAC monitoring service and the integration of a range
of new security control panels. Our platforms also support various broadly adopted communications protocols
commonly used in many automation devices, including Z-Wave, Wi-Fi and cellular. 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.
Dedicated Service Provider Support. We operate support centers focused on providing timely support to our service
providers and their technicians. We are focused on ensuring our service providers receive fast and reliable service to
address the broad needs of subscribers across a wide range of devices and solutions.
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.
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Scale of Subscriber Base and Service Provider Coverage. Our platforms currently support millions of residential and
commercial subscribers and we have over 9,000 service provider partners who market, sell and support Alarm.com
solutions. In 2019, our platforms processed more than 200 billion data points generated by over 100 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 200 billion data points in 2019. As consumer
preferences shift towards more proactive, intelligence-based features, we believe that our investments in proprietary
analytics give us a competitive advantage.
Trusted Brand. We believe that 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 impressive 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 276 issued patents as
of December 31, 2019 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 to drive consumer interest in our offerings and 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 20 years. We intend to continue to invest heavily to add
additional innovative offerings and broaden our suite of solutions. As the market for 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 products are currently localized and available in
approximately 40 countries outside of North America, including Australia, Belgium, Brazil, Chile, Columbia, Iceland,
Ireland, Netherlands, New Zealand, Norway, South Africa, Sweden and Turkey. We intend 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
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, including our Alarm.com for Business solution, to provide such
businesses with visibility into their key operational activities, keep businesses secure, provide facility access to
employees and vendors remotely 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, utility companies, insurance providers and other services
companies to expand avenues into residential and commercial properties.
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Pursue selective strategic acquisitions. We may selectively pursue future acquisitions of businesses, technologies,
or products that complement our platforms or 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 attractive 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, schools and
universities, 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 adopt intelligently connected property solutions and as the major technology trends of mobile access, the IoT,
big data and cloud technology continue to create opportunities to connect people with their properties in new ways. According to
research data published by IHS Markit in 2019, the global installed base for smart home devices reached 684 million in 2018 and
will exceed 4 billion in 2023. During this period, IHS Markit also forecasts strong growth for professional service provider
channels as consumers look toward more services and a do-it-for-me approach, compared with purely do-it-yourself. We believe
that the trends highlight a significant opportunity for market participants, including Alarm.com and our service provider partners.
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 workflow efficiency services.
Since our inception, we have utilized a multi-tenant SaaS platform architecture to enable rapid innovation in a 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 high reliability standards. We operate our Alarm.com cloud services platform
through two redundant network operations centers located in Phoenix, Arizona and Ashburn, Virginia. Each center is designed to
run the entire Alarm.com platform independent of the other.
Cybersecurity
The solutions we provide rely on technology and data, and cybersecurity is a crucial part of our business. We conduct our
business in the United States and are expanding internationally in various other countries. Conducting expanded international
operations subjects us to additional risks, including our exposure to cyber-attacks. We dedicate substantial resources to the
protection of our data, systems and infrastructure. We have implemented and continue to maintain a comprehensive information
security program consisting of policies, procedures, and technology designed to maintain the privacy, security and integrity of our
data, confidential information, systems and networks. Among other things, the program includes controls designed to limit and
monitor access to our systems, networks and data, prevent inappropriate or unauthorized access or modification, and monitor for
threats or vulnerability.
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
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.
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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.
Alarm.com Smart Thermostat. Our Smart Thermostat combines elegant design, sophisticated cloud services and
advanced energy management features. It was designed by our Building 36 and device engineering teams 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, 2019,
we had 621 employees engaged in research and development functions.
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 independent licensed, professional service provider partners. Our
channel network currently consists of over 9,000 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, property management and insurance markets.
We believe this highly trusted, established network is a core 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 2020 Barnes Buchanan Conference Report, the top 5 dealers represented approximately
34% of all industry recurring monthly revenue in 2019. The distribution of revenue among our service provider partners is
reflective of the industry overall. Monitronics International, Inc., rebranded and now doing business as Brinks Home Security,
represented greater than 10% but not more than 15% of our revenue in 2017. ADT LLC represented greater than 15% but not
more than 20% of our revenue in 2017, 2018 and 2019.
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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. Our subscriber acquisition cost payback period has historically been
one year or less.
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. While we offer tools and services to assist our
service providers when they are marketing to potential subscribers, we do not control or influence the marketing activities
performed by our service providers, as they are free to select the marketing tools they believe will be the most effective. Our
contracts with our service providers require that they comply with all applicable rules and laws when engaging in marketing
activities. 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. As of December 31, 2019, we had 391 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.
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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 Alula (formed following the merger of
ipDatatel, LLC and Resolution Products, LLC), Avigilon Corporation, Brivo Inc., Digital Monitoring Products Inc., Eagle Eye
Networks Inc., Honeywell International Inc., Resideo Technologies Inc., Telular Corporation (acquired by AMETEK, Inc.),
SecureNet Technologies, LLC, United Technologies Corporation, and Verkada Inc., 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 security solutions sold directly to subscribers, as well as managed service providers, such as
cable television, telephone and broadband companies like AT&T Inc., Charter Communications, Inc. and Comcast, and providers
of point products, including Google Inc.'s Nest Labs, Inc. which offers the Nest Secure security system as well as a smart
thermostat, the Nest Protect smart smoke detector and video cameras. Amazon.com offers Amazon Home Services security
packages with bundled equipment and professional installation, and Amazon Key, a security camera and smart lock integration
feature. Ring Inc., owned by Amazon.com, offers a connected video doorbell, video cameras and an integrated security system,
Ring Alarm. Samsung's SmartThings offers a security system and a home automation and awareness hub. Arlo Technologies,
Inc. offers connected video cameras, a connected video doorbell, and smart security devices. 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, 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
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, or they
may acquire third-party technology or solution providers that we partner with and choose not to offer those solutions on our
platforms. 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.
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As of December 31, 2019, we owned 265 issued United States utility patents, one issued United States design patent,
seven issued Canadian patents and three issued Australian patents and these patents are scheduled to expire between 2021
and 2038. We continue to broaden our intellectual property portfolio and file patent applications and as of December 31, 2019,
we had 213 pending utility patent applications and 71 provisional patent applications filed in the United States. We also had 56
pending international patent applications and 21 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 15 registered trademarks in
the United States, including Alarm.com and the Alarm.com logo and design, and six 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.
Employees
As of December 31, 2019, we had 1,160 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.
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."
On January 1, 2017, 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 was 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. On March 8, 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 conducted its Piper business. Connect provides a custom, on-premise
interactive security and home automation platform for ADT Pulse® and several other service providers. Piper provides an all-in-
one video and home automation hub. On October 21, 2019, we acquired 85% of the issued and outstanding capital stock of PC
Open Incorporated, a Washington corporation, doing business as OpenEye. OpenEye provides cloud-managed video
surveillance solutions for the enterprise commercial market.
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 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.
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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 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 have acquired, and to integrate and manage 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;
changes in U.S. trade policies, including new or potential tariffs or penalties on imported products;
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;
perceived or actual problems with the security, privacy, 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;
collectibility of receivables due from service provider partners and other third parties;
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the strength of regional, national and global economies; and
the impact of natural disasters such as earthquakes, hurricanes, fires, power outages, floods, epidemics, pandemics
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 - Non-GAAP Measures," 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, 2019, 2018 and 2017.
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 $208.9 million in 2015 to $502.4 million in 2019. 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;
• manage our relationships with our hardware vendors and other key suppliers;
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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 507 as of December 31, 2015 to 1,160 as of December 31, 2019. 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 and maintaining a global organization and managing a
geographically dispersed workforce requires 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.
Events outside of our control, including public health crises, may negatively affect the operation of our business, the
facilities of third parties on which we depend and consumer spending.
Our global and international operations involve certain risks, including risks related to the facilities of certain of our suppliers,
contract manufacturing facilities, third-party warehouse facilities, third-party service providers or customers. Such risks can
include public health crises, such as pandemics and epidemics, political instability or other events outside of our control. These
types of events could have a negative effect on consumer spending in the affected regions or depending upon the severity,
globally, and also could adversely affect our supply chain operations and our operating results.
For example, in December 2019, a novel strain of coronavirus surfaced in Wuhan, China, which has resulted in the temporary
closure of many corporate offices, retail stores, and manufacturing facilities and factories across China. We anticipate there
could be some disruption to our hardware supply chain due to the impact of the coronavirus on manufacturing and production in
China because approximately one-third to one-half of the finished goods hardware products that we sell to our customers are
imported from China, and other Alarm.com finished goods hardware products that are not manufactured in China may contain
subcomponents made in China. However, as the potential impact on global supply chains from the coronavirus is difficult to
predict, the extent to which the coronavirus may negatively affect our industry, our supply of finished goods hardware products,
our business operations, our operating results or the duration of any potential business disruption is uncertain. Any potential
impact to our results will depend to a large extent on future developments and new information that may emerge regarding the
duration and severity of the coronavirus and the actions taken by authorities and other entities to contain the coronavirus or treat
its impact, particularly in China and Taiwan, all of which are beyond our control. These potential impacts, while uncertain, could
harm our business and adversely affect our operating results.
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From time to time, we are involved in legal proceedings where a negative outcome, including an adverse litigation
judgment or settlement, could expose us to monetary damages or limit our ability to operate our business, resulting in
a material adverse effect on our business, financial condition, cash flows and results of operations.
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 putative class action lawsuit was filed against us, alleging violations of the Telephone Consumer
Protection Act, or TCPA. On October 25, 2018, we entered into a definitive settlement agreement, or the Settlement Agreement,
with the plaintiffs to settle the class action lawsuit for $28.0 million, which was paid to the settlement administrator in 2019. On
August 13, 2019, the U.S. District Court for the Northern District of California, or the Court, approved the Settlement Agreement.
On October 22, 2019, EcoFactor, Inc., or EcoFactor, filed a complaint with the U.S. International Trade Commission, or ITC,
alleging that Alarm.com’s smart thermostats infringe three U.S. patents owned by EcoFactor. On November 11, 2019, EcoFactor
filed a lawsuit against us in U.S. District Court, District of Massachusetts, alleging infringement of the same three patents
asserted against us in the ITC. On January 31, 2020, EcoFactor filed a lawsuit against us in the U.S. District Court, Western
District of Texas, alleging Alarm.com’s products and services infringe four additional U.S. patents owned by EcoFactor.
EcoFactor is seeking permanent injunctions, enhanced damages and attorney's fees. See the section of this Annual Report titled
"Legal Proceedings" for additional information regarding each of these matters. We may not be able to accurately assess the
risks related to any of these suits, and we may be unable to accurately assess our level of exposure as the results of any
litigation, investigations and other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether
meritorious or not, could be time consuming, result in costly litigation, damage our reputation, require significant amounts of
management time and divert significant resource. Companies in our industry have been subject to claims related to patent
infringement, regulatory matters, and product liability, as well as contract and employment-related claims. As a result of patent
infringement and other intellectual property 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. The outcome of
legal claims and proceedings against us cannot be predicted with certainty, and a negative outcome could result in a material
adverse effect on our business, financial condition, cash flows and results of operations.
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 similar laws and regulations in the other countries in
which we operate. Our advertising and sales practices and that of our U.S. 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 or using automatic telephone dialing systems and
prerecorded or artificial voice messages, we could be subject to fines, penalties, private actions or enforcement actions by
government regulators. For example, on December 30, 2015, a putative class action lawsuit was filed against us, alleging
violations of the TCPA. In connection with the Settlement Agreement we entered into with the plaintiffs, which was approved by
the Court in August 2019, we paid total cash consideration of $28.0 million into a settlement fund, and, among other things,
agreed to implement certain business practice changes to increase awareness of TCPA compliance. See the section of this
Annual Report titled "Legal Proceedings" for additional information on this matter. Although we have taken steps to insulate
ourselves from any such wrongful conduct by our service provider partners, and to contractually 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. State-level privacy and data security laws in California
and various other U.S. states regulate our, and our service provider partners’, use, collection, and disclosure of subscribers’
personal information. A number of proposed privacy bills in other U.S. states could place restrictions on how we and our service
provider partners use personal information and market to consumers in those states. 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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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 Alula (formed following the merger of ipDatatel, LLC and Resolution Products, LLC), Avigilon Corporation, Brivo Inc.,
Digital Monitoring Products Inc., Eagle Eye Networks Inc., Honeywell International Inc., Resideo Technologies Inc., Telular
Corporation (acquired by AMETEK, Inc.), SecureNet Technologies, LLC, United Technologies Corporation, and Verkada Inc.,
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 security solutions sold directly to subscribers, as well as
managed service providers, such as cable television, telephone and broadband companies like AT&T Inc., Charter
Communications, Inc. and Comcast, and providers of point products, including Google Inc.'s Nest Labs, Inc. which offers the
Nest Secure security system as well as a smart thermostat, the Nest Protect smart smoke detector and video cameras.
Amazon.com offers Amazon Home Services security packages with bundled equipment and professional installation, and
Amazon Key, a security camera and smart lock integration feature. Ring Inc., owned by Amazon.com, offers a connected video
doorbell, video cameras and an integrated security system, Ring Alarm. Samsung's SmartThings offers a security system and a
home automation and awareness hub. Arlo Technologies, Inc. offers connected video cameras, a connected video doorbell, and
smart security devices. 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, 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
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.
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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 or may be unable to adequately protect
confidential information and data from unauthorized access or loss. 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 or could result in unauthorized access to or loss of data. If such an event results in unauthorized access to or loss of
service provider partner, subscriber, employee or other personally identifiable data subject to data privacy and security laws and
regulations, then it could result in substantial fines by U.S. federal and state authorities, foreign data privacy authorities in the
European Union, or the EU, Canada, and other countries, and/or private claims by companies or individuals. 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 operations centers, 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.
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 data and 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 to such data could result in loss of confidential information, damage to our reputation, early termination of
our service provider partner contracts, litigation, regulatory investigations or actions and other liabilities or actions against us,
including significant fines by U.S. federal and state authorities, foreign data privacy authorities in the EU, Canada, and other
countries and private claims by companies and individuals for violation of data privacy and security regulations. 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, attacks on our cloud networks, phishing attempts, social engineering attempts, distributed
denial of service attacks and other advanced persistent threats or malicious software programs that attack our products and
services, our networks and network endpoints 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 or unauthorized access to or loss of our data. If such an event results
in unauthorized access to or loss of any data subject to data privacy and security laws and regulations, then we could be subject
to substantial fines by U.S. federal and state authorities, foreign data privacy authorities in the EU, Canada, and other countries,
and private claims by companies or individuals. A system disruption, shutdown, or loss of data may result in adverse publicity
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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 technology 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.
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, manage and grow 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 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
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
service provider contracts typically have an initial term of one year, with subsequent renewal terms of one year, and are
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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 9,000 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, 2019, 2018 and 2017, our 10 largest revenue service provider partners accounted for 52%, 57% and
60% of our revenue. ADT LLC represented greater than 15% but not more than 20% of our revenue in 2017, 2018 and 2019.
ADT LLC also represented more than 10% of accounts receivable as of December 31, 2019 and 2018. Monitronics International,
Inc., rebranded and now doing business as Brinks Home Security, represented greater than 10% but not more than 15% of our
revenue in 2017.
Brinks Home Security, along with certain of its domestic subsidiaries, filed voluntary petitions for relief, as well as a joint
partial prepackaged plan of reorganization, or the Plan, with the United States Bankruptcy Court for the Southern District of
Texas as of June 30, 2019. We were listed as an unsecured creditor with an unimpaired trade claim in the Plan. On September
3, 2019, Brinks Home Security disclosed it had emerged from the bankruptcy proceedings after completing a reorganization and
obtaining new debt financing. We expect to continue to receive payments in the ordinary course of business; however, if Brinks
Home Security is unable to meet its payment obligations to us, our revenue and profitability may be adversely affected.
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.
Substantially all of the revenues associated with the non-hosted software platform 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 conducted its Piper business, which we refer to
in this report as the Acquisition. Historically, ADT LLC, or ADT, has accounted for substantially all of the revenue of the Connect
business unit. In connection with the Acquisition we amended our master service agreement with ADT to cover services provided
with respect to the non-hosted software platform, or Software platform, and recently further amended the master service
agreement; however, 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 Software platform for its new customers or keep existing customers on the Software platform. In addition,
even if ADT continues to use the Software platform, we cannot assure you that the revenue 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 revenue
from ADT with revenues from new customers or other existing customers. Because the Software platform relies on ADT for
substantially all of its revenue, any negative developments in ADT’s business, or any decrease in revenue from or loss of ADT as
a customer could harm our business, financial condition, cash flows and results of operations.
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 video doorbell or 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
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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, which 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.
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.
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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, availability and reliability 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 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 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
renegotiate agreements relating to various aspects of these solutions or other third-party solutions. The inability to easily
integrate with, or any defects in or disruption in the supply or availability of, 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, or may discontinue or sunset older wireless networks as new technology evolves. For example, certain cellular carriers
have announced their intention to shut down their 3G and CDMA wireless networks by the end of 2022 which may require our
subscribers to upgrade to alternative and potentially more expensive, technologies. See “The technology we employ may
become obsolete, and we may need to incur significant capital expenditures to update our technology” below. 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.
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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, cellular networks 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, certain cellular
carriers have announced their intention to shut down their 3G and CDMA wireless networks by the end of 2022. We intend to
work with our service providers to develop a transition plan over the next three years to convert or upgrade the equipment of end
user accounts reliant upon 3G or CDMA networks, and we expect to incur incremental costs over the next three years related to
the planned 3G and CDMA network shutdown. If our service providers are not able to convert or upgrade the equipment of their
customers who are currently using 3G or CDMA network technology, then those accounts may be terminated with us when such
networks are no longer available.
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, which generated 20% of our hardware and other revenue for the year ended December 31, 2019. 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 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.
From time to time we provide advance payments or loans to our vendors to, for example, secure procurement of long lead
time parts or to provide bridge financing to ensure continuity of operations. We provided such advance payments and loan
financing to one of our key hardware suppliers that was repaid in 2019, whose products generated between 15% and 25% of our
hardware and other revenue over the last twelve months. See Note 9 to our consolidated financial statements for more
information regarding this matter.
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.
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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 how rapidly or how consistently this market will develop and the degree to which 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, concerns about data privacy 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 data privacy and security, 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. Moreover, in the event of any regulatory investigations or actions against us related to these matters, we could be subject
to additional risks and liabilities, including significant fines by U.S. federal and state authorities, foreign data privacy authorities in
the EU, Canada, and other countries, in addition to the costs of such investigations, all of which 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.
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.
We believe part of our growth will continue to be driven by acquisitions of other companies or their technologies, assets and
businesses. On March 8, 2017, we acquired Icontrol's Connect and Piper business units, and on October 21, 2019, we acquired
85% of the issued and outstanding shares of capital stock of PC Open Incorporated, doing business as OpenEye. We have
acquired other businesses in the past. For example, we acquired the assets of HiValley Technology Inc. in March 2015, and we
acquired certain assets of ObjectVideo, Inc. in January 2017. 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 and integrate the operations and personnel or failing to retain the key personnel of the acquired
company or business;
failing to retain customers and service providers and other third-party business partners seeking to terminate or
renegotiate their relationships with us;
failing to integrate the acquired technologies, or incurring significant expense to integrate acquired technologies into our
platforms and solutions;
disrupting our ongoing business;
encountering complexities associated with managing a larger, more complex and growing business;
diverting our management’s attention and other company resources;
failing to maintain uniform standards, controls and policies;
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incurring significant accounting charges;
impairing relationships with employees, service provider partners or subscribers;
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, or fail to manage the acquired business or
execute our integration and growth strategy in an efficient and effective manner, 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 but not limited to 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 June 28, 2018, the State of California enacted the California Consumer Privacy Act of 2018, or CCPA, which took effect
on January 1, 2020. The CCPA governs the collection, sale and use of California residents’ personal information, and
significantly impacts businesses’ handling of personal information and privacy policies and procedures. The CCPA, as well as
data privacy laws that have been proposed in other states, may limit our ability to use, process and store certain data, which may
decrease adoption of our platforms and solutions, affect our relationships with service provider partners and our suppliers,
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increase our costs for compliance, and harm our business, financial condition, cash flows and results of operations. In addition,
the CCPA may subject us to regulatory fines by the State of California, individual claims, and increased commercial liabilities.
The United States and the European Union, or EU, have a cooperative program for transferring personal data, referred to as
the Privacy Shield, that went into effect on August 1, 2016. We have self-certified our compliance with the Privacy Shield
framework since September 2016 and we rely on our Privacy Shield certification when transferring personal data from the EU
and Switzerland to the United States. Furthermore, in certain circumstances, we use Model Contracts to transfer personal data
from the EU to the United States in compliance with the European Commission’s Directive on Data Protection. However, the
validity of these data transfer mechanisms is continually being challenged in EU courts. Further uncertainty may result due to the
withdrawal of the United Kingdom, or UK, from the EU, which occurred on January 31, 2020. While EU law continues to apply to
the UK during the transition period that ends on December 31, 2020, the UK and EU must finalize an agreement before the end
of the transition period and may be unable to do so. As a result of these ongoing challenges, there will continue to be significant
regulatory uncertainty surrounding the validity of data transfers from the EU and the UK to the United States. Various non-EU
jurisdictions may also choose to impose data localization laws limiting the transfer of personal data out of the jurisdiction, or our
European-based service provider partners may require similar contractual restrictions regarding data localization. Such laws or
contractual restrictions may increase our costs for compliance, and harm our business, financial condition, cash flows and results
of operations.
The EU's General Data Protection Regulation, or GDPR, went into effect on May 25, 2018. Prior to May 25, 2018, we
updated existing privacy and data security measures to comply with GDPR. As guidance on compliance with GDPR from the EU
data protection authorities evolves over time, our privacy or data security measures may be deemed or perceived to be in
noncompliance with current or future laws and regulations, which may subject us to litigation, regulatory investigations or other
liabilities and could limit the products and services we can offer in certain jurisdictions. 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 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.
Furthermore, Brazil’s comprehensive privacy law, the General Data Protection Law, or LGPD, is scheduled to go into effect in
August 2020. The LGPD creates a new legal framework for the use, processing and storage of Brazilians’ personal data, and it
adds significant privacy and security obligations for companies processing personal data in Brazil. The LGPD may limit our and
our service providers’ ability to use, process and store certain data, which may decrease adoption of our platforms and solutions,
affect our relationships with our service provider partners and suppliers, increase our costs for compliance, and harm our
business, financial condition, cash flows and results of operations. In addition, the LGPD may subject us to regulatory fines by
the Brazilian Data Protection Authority and increased commercial liabilities.
Since April 2018 we have offered a solution for certain service provider partners who may be 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. As a result, we are subject to HIPAA when PHI is accessed, created, maintained or
transmitted through our solution by these service provider partners. We have implemented additional privacy and security
policies and procedures, as well as administrative, physical and technical safeguards to enable our solution to be HIPAA
compliant. Additionally, HIPAA compliance has required us to put in place certain agreements with contracting partners and to
appoint a Privacy Officer and Security Officer. If our privacy and security policies or other safeguards for PHI are deemed to be in
noncompliance by the United States Department of Health and Human Services, or HHS, we may be subject to litigation,
regulatory investigations or other liabilities. In the event of a breach of PHI that we hold, we may be subject to governmental
fines, individual claims under state privacy laws governing personal health information, remediation expenses and/or harm to our
reputation. Furthermore, if future changes to HIPAA or state privacy laws governing PHI expand the definition of PHI or put more
restrictions on our ability to use, process and store PHI, then HIPAA compliance for our solutions as currently constituted may be
costly both financially and in terms of administrative resources. Ongoing compliance efforts may take substantial time and
require the assistance of external resources, such as attorneys, information technology, and/or other consultants and advisors.
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.
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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 have incurred such penalties in the past, which have
reduced 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 be subject to significant additional liabilities as a result of the Acquisition 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.
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.
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, 2019, we had $208.4 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.
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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. Negative
conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross
domestic product growth, financial and credit market fluctuations, energy costs, international trade relations and other
geopolitical issues, the availability and cost of credit and the global housing and mortgage markets could cause a decrease in
consumer discretionary spending and business investment and diminish growth expectations in the U.S. economy and abroad.
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.
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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.
Failure to comply with laws and regulations could harm our business.
We conduct our business in the United States and in various other countries. We are subject to regulation by various
federal, state, local and foreign governmental agencies, including, but not limited to, agencies and regulatory bodies or
authorities responsible for monitoring and enforcing product safety and consumer protection laws, data privacy and security laws
and regulations, employment and labor laws, workplace safety laws and regulations, environmental laws and regulations,
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.
Our global operations require us to import from and export to several countries, which geographically stretches our
compliance obligations. We are also subject to anti-money laundering laws such as the USA PATRIOT Act and may be subject to
similar laws in other jurisdictions. 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. We may also be subject to import/export laws and
regulations in other jurisdictions in which we conduct business. 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.
We face many risks associated with our international business operations and our plans to expand internationally,
which could harm our business, financial condition, cash flows and results of operations.
We anticipate that our efforts to operate and continue to expand our business internationally will entail additional costs and
risks as we establish our international offerings and develop relationships with service provider partners to market, sell, install,
and support our platforms, solutions and brand in other countries. Revenue in countries outside of North America accounted
for 3%, 2% and 1% of our total revenue for each of the years ended December 31, 2019, 2018 and 2017, respectively. We have
limited 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 and parts of Asia could have many adverse consequences on our international expansion.
These could include sovereign default, liquidity and capital pressures on financial institutions in other parts of the world including
the eurozone, 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 additional risks that we do not generally face in our
North American markets. These risks include:
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localization of our solutions, including the addition of foreign languages and adaptation to new local practices, as well as
certification, registration and other 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 the development of policies and procedures for different countries when requirements under
privacy regulations in such countries may conflict or be inconsistent with one another;
difficulties in managing and staffing international operations;
increased costs due to new or potential tariffs, penalties, trade restrictions and other trade barriers;
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,
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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.
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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
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.
Enhanced United States tax, tariff, import/export restrictions, or other trade barriers may have an adverse impact on
global economic conditions, financial markets and our business.
There is currently significant uncertainty about the future relationship between the United States and various other countries,
including China, the European Union, Canada, and Mexico, with respect to trade policies, treaties, tariffs and customs duties,
and taxes. Recently, the U.S. administration has called for significant changes to U.S. trade policy with respect to China.
Additionally, we were notified by U.S. Customs and Border Protection on April 19, 2019 that certain camera products we import
from China were reclassified into a product category, known as List 3, that was subject to an additional 10% import duty. We are
appealing this action, but have begun paying the additional import duty while the appeal process is underway. If we are
unsuccessful in our appeal, and if we are not able to pass on the increased cost to our customers, our margin on such products
would decrease. On May 10, 2019, the President increased the additional import duty on List 3 products to 25%. Certain of our
video camera products are included in the List 3 category. The President has also imposed an additional 15% import duty on
other Chinese imports, identified in Lists 4A and 4B. The additional duties on items identified on List 4A took effect on September
1, 2019, while the implementation of additional duties on items identified on List 4B has been suspended indefinitely. We are
addressing the risks related to these imposed and announced tariffs, which have affected, or have the potential to affect, at least
some of our imports from China.
Between one-third to one-half of the finished goods hardware products that we sell to our customers are imported from
China and could be subject to increased tariffs. Other Alarm.com finished goods hardware products that are not manufactured in
China may contain subcomponents made in China that could also be subject to increased tariffs. While the additional import
duties resulted in an increase to our cost of hardware revenue, these import duties had a modest impact on hardware revenue
margins. If tariffs, trade restrictions, or trade barriers are expanded or interpreted by a court or governmental agency to apply to
more of our products, then our exposure to future taxes and duties on such imported products and components could be
significant and could have a material effect on our financial results. If our products are deemed to be subject to additional duties
and taxes as determined by a court or governmental agency, we may suffer additional hardware revenue margin erosion or be
required to raise our prices on certain imported products. There can be no assurance that we will not experience a disruption in
our business or harm to our financial condition related to these or other changes in trade practices, and any changes to our
operations or our sourcing strategy in order to mitigate any such tariff costs could be complicated, time-consuming, and costly.
Furthermore, our business may be adversely affected by retaliatory trade measures taken by China and other countries, which
could materially harm our business, financial condition and results of operations. Trade barriers, or the perception that any of
them could be imposed, may have a negative effect on global economic conditions and the stability of global financial markets,
and may significantly reduce global trade and, in particular, trade between these nations and the United States. Any of these
factors could have a material adverse effect on our business, financial condition and results of operations.
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The incurrence of debt may impact our financial position and subject us to additional financial and operating
restrictions.
On October 6, 2017, we entered into a $125.0 million senior secured revolving credit facility, or the 2017 Facility, with Silicon
Valley Bank, or 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 our previous credit facility. The outstanding balance of the 2017 Facility was $63.0 million as of December 31,
2019. On November 30, 2018, we amended the 2017 Facility to incorporate the parameters that must be met for us to
repurchase our outstanding common stock under the stock repurchase program authorized by our board of directors on
November 29, 2018.
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.
The LIBOR calculation method may change and LIBOR is expected to be phased out after 2021.
Our 2017 Facility permits interest on the outstanding principal balance to be calculated based on LIBOR, plus an applicable
margin based on our consolidated leverage ratio. On July 27, 2017, the U.K. Financial Conduct Authority, or the FCA, announced
that it will no longer require banks to submit rates for the calculation of LIBOR after 2021. In the meantime, actions by the FCA,
other regulators or law enforcement agencies may result in changes to the method by which LIBOR is calculated. At this time, it
is not possible to predict the effect of any such changes or any other reforms to LIBOR that may be enacted in the United
Kingdom or elsewhere.
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 adopted Accounting Standards Update No. 2016-02, "Leases (Topic 842)" or Topic 842, effective
January 1, 2019, which requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use
assets on the balance sheet. See Note 2 to our consolidated financial statements for additional information about the impact of
this accounting standard and other new accounting pronouncements. Implementation of new accounting standards 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.
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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 Software platform
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 related intellectual property litigation matters. 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.
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 attorneys' fees. 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.
In addition, on October 22, 2019, EcoFactor, filed a complaint with the ITC, and on November 22, 2019, the ITC instituted an
investigation into EcoFactor’s allegations, naming us, among several others, as respondents, alleging with respect to Alarm.com
that Alarm.com’s smart thermostats infringe three U.S. patents owned by EcoFactor. EcoFactor is seeking a permanent limited
exclusion order and permanent cease and desist order. On November 11, 2019, EcoFactor filed a lawsuit against us in the U.S.
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District Court, District of Massachusetts, alleging infringement of the same three patents asserted against us in the ITC, seeking
permanent injunctions, enhanced damages and attorneys' fees. On January 31, 2020, EcoFactor filed a lawsuit against us in the
U.S. District Court for the Western District of Texas, alleging Alarm.com’s products and services infringe four additional U.S.
patents owned by EcoFactor. EcoFactor is seeking permanent injunctions, enhanced damages and attorneys' fees. See the
section of this Annual Report titled "Legal Proceedings" for additional information on each of these matters. Should EcoFactor
prevail in the ITC investigation, Alarm.com thermostats made abroad could be excluded from importation into the United States.
Should EcoFactor prevail in either of its district court lawsuits we could be required to pay damages in the amount of EcoFactor’s
lost profits and/or a reasonable royalty for sales of our solution, we could be 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 we could be 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 EcoFactor’s claims, any of these outcomes could result in a material
adverse effect on our business.
Even if we were to prevail in any of these matters, ongoing 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 each of these litigation matters, we
anticipate announcements of the results of hearings and motions, and other interim developments related to the litigation matters
at hand. 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. See the section of this Annual Report titled "Legal Proceedings" for additional
information.
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
$71.50 through December 31, 2019. 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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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;
repurchases of our common stock under the stock repurchase program authorized by our board of directors or 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
39
•
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
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.
Our actual operating results may differ significantly from any guidance provided.
Our guidance, 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 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 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.
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. 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
40
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.
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, 2019, 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:
•
•
•
•
•
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
41
•
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. Notwithstanding the foregoing, this choice of forum
provision will not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended,
or any other claim for which the federal courts have exclusive jurisdiction. 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our Facilities
Our principal office is located in Tysons, Virginia, where we currently occupy 166,952 square feet of commercial space
under a lease we entered into in August 2014 which expires in 2026. We have previously amended our lease to expand our
square footage as we continued to grow. Our Alarm.com segment uses this facility for sales and marketing, research and
development, customer service and administrative purposes.
Our Alarm.com segment leases offices in Bloomington, Minnesota and Redwood City, California as well as in other
locations. We also own a commercial building located in Liberty Lake, Washington. These facilities are used for sales and
training, research and development, technical support, warehousing 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 attorneys' 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 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 three patents that found certain claims unpatentable,
while certain other claims were not found to be unpatentable. Vivint appealed the decisions to the U.S. Court of Appeals for the
Federal Circuit, or the Federal Circuit, and we cross-appealed. In July 2018, the Federal Circuit issued orders affirming the
PTAB’s March 2017 decisions that invalidated all challenged claims of two patents. The U.S. District Court, District of Utah lifted
the stay on the litigation on June 26, 2017, with Vivint proceeding with its case on four of the six patents in its complaint. No trial
date has been set. In September 2017, the U.S. Patent and Trademark Office, or PTO, ordered ex parte reexaminations of
certain claims of two of the remaining patents in suit, at our request. On October 30, 2018 and November 5, 2018, the PTO
issued final office actions in the pending reexaminations rejecting all claims being examined as unpatentable over the prior art.
Vivint appealed these rejections to the PTAB on March 29, 2019 and April 4, 2019. The U.S. District Court, District of Utah has
42
ordered the litigation regarding the nine claims (from two patents) rejected by the PTO during the reexaminations be stayed until
May 15, 2020. On April 3, 2019, the U.S. District Court, District of Utah heard argument on the parties’ cross motions for claim
construction and Alarm.com’s motion for partial summary judgment as to invalidity. Decisions on these motions are pending. On
December 20, 2018, the Federal Circuit issued an order regarding the inter partes review of three of the remaining patents in suit
that vacated, reversed and remanded the PTAB’s ruling with regard to the construction of a term (“communication device
identification code”) as requested by Alarm.com and affirmed the PTAB’s May 2017 rulings invalidating certain of the Vivint
patents in all other respects. On July 24, 2019, the PTAB issued further decisions with respect to two of the remaining patents in
suit, finding additional claims unpatentable in view of the Federal Circuit’s December 20, 2018 decision. One of the claims
asserted in the litigation was found unpatentable in the July 14, 2019 decisions, and the U.S. District Court, District of Utah has
stayed the proceedings with respect to that claim until May 15, 2020. Vivint appealed the July 24, 2019 decisions to the Federal
Circuit on September 25, 2019.
Should Vivint prevail in proving Alarm.com infringes one or more of its patent claims, we could be required to pay damages
of Vivint’s lost profits and/or a reasonable royalty for sales of our solution. Since all remaining patent claims in the litigation have
expired, Vivint shall not be entitled to injunctive relief as a remedy in this matter. 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 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 sought 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 asserted 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. In June 2017, Alarm.com filed an amended complaint against Protect America only in the Western
District of Texas and voluntarily dismissed SecureNet from the suit. In December 2019, Alarm.com entered into a confidential
settlement agreement with Protect America which resulted in the dismissal of the lawsuit without prejudice.
On October 22, 2019, EcoFactor, Inc., or EcoFactor, filed a complaint with the U.S. International Trade Commission, or ITC,
naming Alarm.com Incorporated and Alarm.com Holdings, Inc., among others, as proposed respondents. The complaint alleges
that Alarm.com’s smart thermostats infringe three U.S. patents owned by EcoFactor. EcoFactor is seeking a permanent limited
exclusion order and permanent cease and desist order. On November 22, 2019, the ITC instituted an investigation into
EcoFactor’s allegations naming Alarm.com Incorporated, Alarm.com Holdings, Inc. and others as respondents. We answered the
complaint on December 19, 2019. Among other things, we asserted defenses based on non-infringement and invalidity of the
patents in question. The administrative law judge presiding over the investigation has set March 15, 2021 as the target date for
completion of the investigation. The evidentiary hearing is scheduled to begin on July 21, 2020.
On November 11, 2019, EcoFactor filed a lawsuit against us in U.S. District Court, District of Massachusetts, alleging
infringement of the same three patents asserted against us in the ITC. EcoFactor is seeking permanent injunctions, enhanced
damages and attorneys' fees. On December 26, 2019, the court issued an order staying the lawsuit pending the conclusion of
the related ITC investigation.
On January 31, 2020, EcoFactor filed a second lawsuit against us in U.S. District Court, Western District of Texas, alleging
Alarm.com’s products and services infringe four additional U.S. patents owned by EcoFactor. EcoFactor is seeking permanent
injunctions, enhanced damages and attorneys' fees. Our response to the complaint is due on March 5, 2020.
Should EcoFactor prevail in the ITC investigation, Alarm.com thermostats manufactured abroad could be excluded from
importation into the United States. Should EcoFactor prevail in its district court lawsuits we could be required to pay damages
and/or a reasonable royalty for sales of our solution, we could be 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, and we could be 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
EcoFactor’s claims, the outcome of these legal claims cannot be predicted with certainty and any of these outcomes could result
in an adverse effect on our business.
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, or the Court, which alleged violations of the Telephone Consumer Protection Act, or TCPA, and sought to hold us
responsible for the marketing activities of one of our service providers as well as telemarketing calls made by one of this service
provider’s sub-dealer agents under principles of agency and vicarious liability. On August 30, 2018, we reached an agreement in
principle to settle the case for total cash consideration of $28.0 million. On October 25, 2018, we entered into a definitive
43
settlement agreement, or Settlement Agreement, and submitted it to the Court for approval. The Court granted preliminary
approval of the Settlement Agreement on December 19, 2018 and final approval on August 13, 2019.
In entering into the definitive settlement agreement, we made no admission of liability. Pursuant to the Settlement
Agreement, among other things, (1) we agreed to pay total cash consideration of $28.0 million into a settlement fund, (2) we
agreed to implement certain business practice changes to increase awareness of TCPA compliance, (3) each party to the
Settlement Agreement agreed to a mutual release of claims relating to any claim or potential claim relating to the marketing
activities described in the complaint, and (4) each party covenanted not to sue the other with regard to the released claims. In
addition, we agreed to no longer allow the service provider identified in the litigation as purportedly violating the TCPA to continue
activating new accounts for Alarm.com products and services following preliminary Court approval of the Settlement Agreement.
We made an initial payment of $5.0 million to the settlement administrator on January 2, 2019, and the remaining payment
of $23.0 million was made on September 30, 2019. The release of claims includes all alleged damages incurred related to the
lawsuit. Any attorneys’ fees awarded by the Court and all costs of notice and claims administration will be paid from the
settlement fund. We currently expect all distributions to be completed by August 2020.
In addition to the matters described above, we may be required to provide indemnification to certain of our service provider
partners for certain claims regarding our solutions. For example, we are incurring costs associated with the indemnification of our
service provider ADT, LLC in two ongoing patent infringement suits: Applied Capital, Inc. v. The ADT Corporation et al. and
Varatec, LLC v. ADT, LLC.
On July 13, 2016, Applied Capital, Inc., or Applied Capital, filed a lawsuit against ADT, LLC, the ADT Corporation, and
Icontrol Networks, Inc. in U.S. District Court, the District of New Mexico. Applied Capital, Inc v. The ADT Corporation et al., D.
New Mexico Case No. 1-16-cv-00815. Icontrol was dismissed without prejudice on May 22, 2017. Applied Capital alleges that
ADT’s sales of ADT Pulse directly and indirectly infringes U.S. Patent Nos. 8,378,817 and 9,728,082, which were allegedly
purchased by Applied Capital. Applied Capital is seeking damages and attorneys’ fees. ADT answered Applied Capital’s
amended complaint on July 16, 2018. Among other things, ADT has asserted defenses based on non-infringement and invalidity
of the patents-in-suit. On April 5, 2019, Applied Capital filed a lawsuit for breach of contract against Rodney Fox, the inventor of
the patents-in-suit, in the Second Judicial District Court, County of Bernalillo in New Mexico State Court (No. D-202-
CV-2019-02841). Mr. Fox counterclaimed, alleging that he is the rightful owner of the patents-in-suit. Based on the dispute of
ownership, on October 15, 2019, ADT filed a motion to stay in this matter pending its resolution. Applied Capital and Mr. Fox
reached settlement and stipulated to dismissal of the New Mexico State Court action on October 31, 2019. The court issued its
claim construction order on August 12, 2019, fact discovery closed on November 12, 2019, and the parties served opening
expert reports on December 16, 2019. Rebuttal expert reports are due on February 10, 2020 and expert discovery closes on
February 28, 2020. Applied Capital filed its Second Amended Complaint on January 27, 2020 and ADT answered, adding a claim
of inequitable conduct, on February 10, 2020. The pretrial conference is scheduled for August 5, 2020; however, the trial date
has not yet been set.
On March 4, 2019, Varatec, LLC, or Varatec, sued ADT, LLC d/b/a ADT Security Services in U.S. District Court for the
Northern District of Illinois. Varatec, LLC v. ADT, LLC d/b/a ADT Security Services, N.D. Illinois Case No. 1-19-cv-01543. Varatec
alleges that ADT’s sales of ADT Pulse directly and indirectly infringe U.S. Patent No. 7,792,256, which was assigned to
Varatec. Varatec seeks a permanent injunction, enhanced damages, and attorneys’ fees. On May 23, 2019, ADT filed a motion
seeking to dismiss the complaint for failure to state a claim, on the basis that the asserted patent fails to claim patent eligible
subject matter. On July 3, 2019, third-party Unified Patents Inc. filed a petition seeking inter parties review of the asserted patent
by the PTAB. After the completion of briefing of ADT’s motion to dismiss, the parties agreed to stay the case pending resolution
of the inter partes review, and the court granted the parties’ motion on August 14, 2019. Unified Patent’s petition for inter parties
review was instituted on December 31, 2019 and Varatec’s response is due on March 23, 2020. The stay remains in place.
Should either Applied Capital or Varatec prevail on the claims that one or more elements of ADT’s products infringe, we
could be required to indemnify ADT for damages in the form of a reasonable royalty or ADT could be enjoined from making,
using and selling our solution if a license or other right to continue selling our technology 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 these legal claims cannot be predicted with certainty.
We may also 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
44
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. On February 18, 2020, the closing
price of our common stock on The Nasdaq Global Select Market was $47.28 per share.
Holders
As of February 18, 2020, there were 46 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
amended, 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.
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 of our filings 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, 2019 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.
45
June 26,
2015
December
31, 2015
December
31, 2016
December
31, 2017
December
31, 2018
December
31, 2019
Alarm.com Holdings, Inc.
Nasdaq Composite
S&P 500
$
$
100
100
100
$
99
99
97
$
165
106
107
$
224
136
127
$
307
131
119
255
177
154
Recent Sales of Unregistered Securities
None.
Use of Proceeds
None.
46
Issuer Purchases of Equity Securities
The following table contains information relating to the repurchases of our common stock made by us in the quarter ended
December 31, 2019:
Period
October 1 to October 31, 2019
November 1 to November 30, 2019
December 1 to December 31, 2019
Total
Total Number
of Shares
Purchased
Average
Price Paid
per Share
Total Number of Shares
Purchased as a Part of a
Publicly Announced
Program(1)
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Program
— $
—
—
— $
—
—
—
—
— $
—
—
—
75,000,000
75,000,000
75,000,000
(1) On November 29, 2018, our board of directors authorized a stock repurchase program, under which we are authorized to purchase up
to an aggregate of $75.0 million of our outstanding common stock from time to time on the open market or in privately negotiated
transactions, block trades, tender offers and by any combination of the foregoing, in accordance with federal securities laws, during the
two-year period ending November 29, 2020.
47
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated statements of operations data for the years ended December 31, 2019, 2018 and 2017 and the
selected consolidated balance sheet data as of December 31, 2019 and 2018 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, 2016 and 2015 and the selected consolidated balance sheet data as of December 31, 2017, 2016 and
2015 are derived from our audited consolidated financial statements not included in this Annual Report. Our historical results are
not necessarily indicative of the results to be expected in 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, 2019,
2018, 2017, 2016 and 2015 (in thousands, except share and per share data).
Information about prior period acquisitions that may affect the comparability of the selected financial information presented
below is included in Item 1. Business. Information about the $28.0 million expense recorded in general and administrative
expense in 2018, which relates to the agreement reached to settle the legal matter alleging violations of the Telephone
Consumer Protection Act, or TCPA, and may affect the comparability of the selected financial information presented below, is
disclosed in Item 3. “Legal Proceedings.” Information about the $1.7 million of interest recorded within interest income and the
$6.9 million of gain recorded within other income, net, in 2019, which relates to promissory note proceeds received from one of
our hardware suppliers and proceeds from an acquired promissory note, and may affect the comparability of the selected
financial information presented below, is disclosed in Item 7. "Management’s Discussion and Analysis of Financial Condition and
Results of Operations."
Certain previously reported amounts in the consolidated statements of operations for the years ended December 31, 2018,
2017, 2016 and 2015 have been reclassified to conform to our current presentation to reflect interest income as a separate line
item, which was previously included in other income, net.
48
Consolidated Statements of Operations Data:
2019
2018
2017
2016
2015
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
Interest income
Other income / (expense), net
Income before income taxes
Provision for / (benefit from) income taxes
Net income
Dividends paid to participating securities
Net loss attributable to redeemable noncontrolling interest
Net income allocated to participating securities
$ 337,375
$ 291,072
$ 236,283
$ 173,540
$ 140,936
164,988
502,363
129,422
420,494
102,654
338,937
87,566
261,106
67,952
208,888
50,066
133,533
183,599
61,815
69,959
114,443
22,134
268,351
50,413
(2,974)
4,922
6,535
58,896
5,566
53,330
—
201
—
44,933
100,782
145,715
55,902
95,750
89,204
21,721
35,610
80,578
116,188
43,490
55,396
72,755
17,734
262,577
189,375
12,202
(2,918)
2,272
143
11,699
(9,825)
21,524
—
—
(3)
33,374
(2,199)
1,031
35
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)
451
62
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)
283
(631)
17,465
5,697
11,768
(18,987)
—
—
Net income / (loss) attributable to common stockholders
$
53,531
$
21,521
$
29,238
$
10,142
$
(7,219)
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
Year Ended December 31,
2019
2018
2017
2016
2015
$
$
1.11
1.06
$
$
0.45
0.43
$
$
0.63
0.59
$
$
0.22
0.21
$
$
(0.30)
(0.30)
48,427,446
50,273,889
$
47,633,739
49,692,184
46,682,141
49,153,948
45,716,757
47,875,522
— $
— $
— $
— $
24,108,362
24,108,362
0.36
2019
Year Ended December 31,
2017
2016
2018
2015
Other Financial and Operating Data:
SaaS and license revenue renewal rate(3)
Adjusted EBITDA(4)
94%
93%
93%
94%
93%
$ 108,307
$ 93,081
$ 71,628
$ 49,034
$ 34,370
49
2019
2018
As of December 31,
2017
2016
2015
Balance sheet and other data:
Cash and cash equivalents
Working capital
Total assets
Total long-term obligations
Total stockholders' equity
_____________________
(1) Excludes amortization and depreciation shown in operating expenses below.
$ 119,629
167,879
557,799
115,143
355,651
$ 146,061
152,793
440,985
88,126
277,589
$
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
(2) Includes stock-based compensation expense as follows:
2019
Year Ended December 31,
2017
2016
2018
2015
Stock-based compensation expense data:
Sales and marketing
General and administrative
Research and development
Total stock-based compensation expense
$
$
2,075
6,474
12,054
20,603
$
$
1,196
4,901
7,332
13,429
$
$
561
2,638
4,214
7,413
$
$
536
1,430
2,035
4,001
$
$
372
2,486
1,266
4,124
(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 Alarm.com platform 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 on the Alarm.com platform, 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 expense, interest income, other income, net, provision for / (benefit
from) income taxes, amortization and depreciation expense, stock-based compensation expense, acquisition-related expense and
legal costs and settlement fees incurred in connection with non-ordinary course litigation and other disputes, 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.
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 accounting principles generally accepted in
the United States, or 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
50
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, our 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).
2019
Year Ended December 31,
2017
2016
2018
2015
Adjusted EBITDA:
Net income
Adjustments:
Interest expense, interest income and other income, net
Provision for / (benefit from) income taxes
Amortization and depreciation expense
Stock-based compensation expense
Acquisition-related expense
Litigation expense
Total adjustments
Adjusted EBITDA
$
53,330
$
21,524
$
29,251
$
10,154
$
11,768
(8,483)
5,566
22,134
20,603
2,403
12,754
54,977
$ 108,307
$
503
(9,825)
21,721
13,429
—
45,729
71,557
93,081
$
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
51
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 depend on our technology to intelligently secure,
automate and manage their residential and commercial properties. In the last year alone, our platforms processed more than 200
billion data points generated by over 100 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 9,000 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 connected devices that enable our services, such as video cameras, video recorders, gateway modules
and smart thermostats. We believe that the length of our service relationships with residential and commercial property owners,
combined with our robust platforms and approximately 20 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 stand-alone 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 and Google Home, wearable devices like the Apple Watch,
and TV platforms such as Apple TV and Amazon Fire TV.
Executive Overview and Highlights of 2019 and 2018 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. SaaS and license revenue represented 67%, 69% and 70% of our
revenue in 2019, 2018 and 2017, respectively.
We also generate SaaS and license revenue from monthly fees charged to service providers on a per subscriber basis for
access to our non-hosted software platform, or Software platform. The non-hosted software for interactive security, automation
and related solutions is typically deployed and operated by the service provider in its own network operations center. Software
license revenue represented 9%, 10% and 9% of our revenue in 2019, 2018 and 2017, respectively.
We also generate revenue from the sale of hardware, including video cameras, video recorders, cellular radio modules,
thermostats, image sensors and other peripherals, that enables our solutions. We have a rich history of innovation in cellular
technology that enables our robust SaaS offering. Our hardware and other revenue also includes our revenue from the sale of
perpetual licenses that provide our customers in the commercial market the right to use our video surveillance software for an
indefinite period of time in exchange for a one-time license fee. Hardware and other revenue represented 33%, 31% and 30% of
52
our revenue in 2019, 2018 and 2017, respectively. We typically expect hardware and other revenue to fluctuate as a percentage
of total revenue.
Highlights of our financial performance for the periods covered in this Annual Report include:
•
•
SaaS and license revenue increased 16% to $337.4 million in 2019 from $291.1 million in 2018. SaaS and license
revenue increased 23% to $291.1 million in 2018 from $236.3 million in 2017.
Total revenue increased 19% to $502.4 million in 2019 from $420.5 million in 2018. Total revenue increased 24% to
$420.5 million in 2018 from $338.9 million in 2017.
• Net income attributable to common stockholders was $53.5 million in 2019, $21.5 million in 2018 and $29.2 million in
2017.
•
Adjusted EBITDA, a non-GAAP measurement of operating performance, increased to $108.3 million in 2019 from $93.1
million in 2018. Adjusted EBITDA increased to $93.1 million in 2018 from $71.6 million in 2017.
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 GAAP measure,
for the years ended December 31, 2019, 2018 and 2017.
Geographic Areas
We believe there is significant opportunity to expand our international business, as 3% of our total revenue during the year
ended December 31, 2019 originated from customers located outside of North America. Our products are currently localized and
available in approximately 40 countries outside of North America.
Recent Developments
On October 21, 2019, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired 85% of the issued and
outstanding capital stock of PC Open Incorporated, a Washington corporation, doing business as OpenEye. OpenEye provides
cloud-managed video surveillance solutions for the enterprise commercial market. We believe the acquisition of OpenEye will
provide a key element to our comprehensive suite of interactive cloud-based services spanning video, access control, intrusion
and automation for domestic and international commercial enterprises.
In consideration for the purchase of 85% of the issued and outstanding capital stock of OpenEye, we paid $61.2 million in
cash on October 21, 2019, after deducting $2.8 million related to an agreed holdback. Pursuant to the terms of the stock
purchase agreement, following the preliminary determination of the working capital of OpenEye as of the closing date, the
purchase price increased by $0.2 million. An earn-out of up to an additional $11.0 million is payable if certain calendar 2020
revenue targets are met. The purchase price allocation, which is pending until the final determination of the working capital and
tax adjustments, was not finalized as of the filing date of this Annual Report on Form 10-K.
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 from the way similar business
metrics used by other companies are calculated and include the following (dollars in thousands):
SaaS and license revenue
Adjusted EBITDA
SaaS and license revenue renewal rate
Year Ended December 31,
2019
2018
2017
$
337,375
$
291,072
$
236,283
108,307
93,081
71,628
Twelve Months Ended December 31,
2019
2018
2017
94%
93%
93%
53
SaaS and License Revenue
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, interest income, other income, net, provision for /
(benefit from) income taxes, amortization and depreciation expense, stock-based compensation expense, acquisition-related
expense and legal costs and settlement fees incurred in connection with non-ordinary course litigation and other disputes,
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
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,
2019, 2018 and 2017.
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 our Alarm.com platform 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 on the Alarm.com platform, 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.
Leases (Topic 842)
On February 25, 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU,
2016-02, “Leases (Topic 842)” or Topic 842, which requires lessees to recognize operating and financing lease liabilities and
corresponding right-of-use, or ROU, 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. In July 2018, the
FASB amended the update to allow entities to apply the transition requirements of Topic 842 at the adoption date rather than at
the beginning of the earliest comparative period presented. Accordingly, the amendments in Topic 842 were effective for us
beginning January 1, 2019.
On January 1, 2019, we adopted Topic 842 by applying the modified retrospective approach to all of our leases in effect as
of that date. We used the optional transition method, which required us to record the initial effect of Topic 842 as a cumulative-
effect adjustment to retained earnings on January 1, 2019. Additionally, we elected to use the package of practical expedients for
the adoption of Topic 842, which allowed us not to reassess: (i) whether any expired or existing contracts are or contain leases,
(ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any existing leases qualify for
capitalization under Topic 842. We also used the hindsight practical expedient when determining the lease term and assessing
impairment of ROU assets.
54
The adoption of Topic 842 resulted in the recording of the following amounts on our consolidated balance sheets (in
thousands):
Balance Sheet Caption
Property and equipment, net
Operating lease right-of-use assets
Operating lease liabilities (current)
Operating lease liabilities (noncurrent)
Accounts payable, accrued expenses and other current liabilities
Other liabilities
Accumulated deficit
As of January 1, 2019
$
1,057
28,432
5,699
36,957
(1,548)
(11,656)
37
The adoption of Topic 842 did not materially impact our consolidated statements of operations, consolidated statement of
equity and consolidated statements of cash flows.
Components of Operating Results
Our fiscal year ends on December 31. The key elements of our operating results include:
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 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.
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.
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 for use of our patents. In addition, in certain markets our EnergyHub subsidiary sells its demand response service for 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.
Software License Revenue. Our SaaS and license revenue also includes our software license revenue from monthly fees
charged to service providers sold on a per subscriber basis for access to our Software platform. The non-hosted 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 Software platform solution typically include software and services, such as
post-contract customer support, or PCS.
Hardware and Other Revenue. We generate hardware and other revenue primarily from the sale of video cameras, video
recorders 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 primarily transfer hardware to our customers upon delivery to the
customer, which corresponds with the time at which the customer obtains control of the hardware. We record a reserve against
revenue for hardware returns based on historical returns.
Our hardware and other revenue also includes our revenue from the sale of perpetual licenses that provide our customers in
the commercial market the right to use our OpenEye video surveillance software for an indefinite period of time in exchange for a
one-time license fee, which is generally paid at contract inception. Hardware and other revenue may also include activation fees
charged to some of our 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. The decision whether to charge an activation fee is based in part on
the expected number of subscribers to be added by our service provider partners and as a result, many of our largest service
provider partners do not pay an activation fee.
55
In December 2019, a novel strain of coronavirus surfaced in Wuhan, China, which has resulted in the temporary closure of
many corporate offices, retail stores, and manufacturing facilities and factories across China. We anticipate there could be some
disruption to our hardware supply chain due to the impact of the coronavirus on manufacturing and production in China.
However, as the potential impact on global supply chains from the coronavirus is difficult to predict, the extent to which the
coronavirus may negatively affect our hardware revenue is uncertain.
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 operations centers which are expensed as incurred, as well as patent and royalty costs
in connection with technology licensed from third-party providers. Our cost of SaaS and license revenue also includes our cost of
software license revenue, which primarily includes the payroll and payroll-related costs of the department dedicated to providing
service exclusively to those service providers that host the Software platform. Our cost of hardware and other revenue primarily
includes cost of raw materials, tooling 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 and video recorders, which we
purchase from an original equipment manufacturer, and other devices. Our cost of hardware and other revenue also includes
royalty costs in connection with technology licensed from third-party providers.
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 primarily when the hardware and other services
are delivered to the service provider partner, which occurs when control of the hardware and other services transfers to the
service provider partner. Our cost of revenue excludes amortization and depreciation shown in operating expenses.
In 2019, the U.S. administration has called for significant changes to U.S. trade policy with respect to China. Beginning in
May 2019, certain of our video camera products became subject to a 25% import duty. Additionally, beginning in September
2019, certain of our video cameras and sensors became subject to a 15% import duty. Approximately one-third to one-half of the
finished goods hardware products that we sell to our service provider partners are imported from China and could be subject to
increased tariffs. While the additional import duties resulted in an increase to our cost of hardware revenue, these import duties
had a modest impact on hardware revenue margins. We continue to monitor the changes in tariffs. If tariffs are increased or are
expanded to apply to more of our products, such actions may increase our cost of hardware revenue and reduce our hardware
revenue margins in the future.
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 884 employees as of January 1, 2019 to 1,160
employees as of December 31, 2019, 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 increased from 288 as of January 1, 2019 to 391 as of
December 31, 2019. 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. 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.
General and Administrative Expense. General and administrative expense consists primarily of personnel and related
expenses for our administrative, legal, 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. 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.
56
The number of employees in general and administrative functions increased from 96 as of January 1, 2019 to 148 as of
December 31, 2019. 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 regulations governing public companies.
While somewhat unpredictable, we also expect to continue to incur costs related to litigation involving intellectual property. See
the section of this Annual Report titled "Legal Proceedings" for additional information regarding litigation matters.
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 500 as of January 1, 2019 to 621 as of
December 31, 2019. 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 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. On October 6, 2017, we entered into a
$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. 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 Facility. Interest expense is
expected to remain relatively consistent in 2019 as compared to 2018.
Interest Income
Interest income consists of interest income earned on our cash and cash equivalents and our notes receivable.
Other Income, Net
Other income, net primarily consists of gains earned on our notes receivable and conversion of our outstanding notes
receivable balance into an equity investment, partially offset by an impairment of one of our investments.
Provision for / (benefit from) income taxes
The Tax Cuts and Jobs Act was signed into law on December 22, 2017. This legislation made significant changes 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 income tax rate from 35% to 21%.
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 rates were different from the
statutory rate primarily due to the tax windfall benefits from employee stock-based payment transactions, foreign derived
intangible income deductions and research and development tax credits claimed, and state taxes, partially offset by the impact of
non-deductible meal and entertainment expenses and state taxes. 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.
57
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). Certain previously reported amounts in the consolidated statements of operations for the
years ended December 31, 2018 and 2017 have been reclassified to conform to our current presentation to reflect interest
income as a separate line item, which was previously included in other income, net.
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
Interest income
Other income, net
Income before income taxes
Provision for / (benefit from) income taxes
Net income
_______________
Year Ended December 31,
2019
2018
2017
$
%
$
%
$
%
$ 337,375
164,988
67% $ 291,072
33
129,422
502,363
100
420,494
69% $ 236,283
70%
31
100
102,654
338,937
30
100
50,066
133,533
183,599
61,815
69,959
114,443
22,134
268,351
50,413
(2,974)
4,922
6,535
58,896
5,566
$ 53,330
10
27
37
12
14
23
4
53
10
(1)
1
2
12
44,933
100,782
145,715
55,902
95,750
89,204
21,721
262,577
12,202
(2,918)
2,272
143
11,699
1
(9,825)
11% $ 21,524
11
24
35
13
23
21
5
62
3
(1)
1
—
3
(2)
35,610
80,578
116,188
43,490
55,396
72,755
17,734
189,375
33,374
(2,199)
1,031
35
32,241
2,990
10
24
34
13
16
22
5
56
10
—
—
—
10
1
5% $ 29,251
9%
(1) Excludes amortization and depreciation shown in operating expenses below.
(2) Operating expenses include stock-based compensation expense as follows (in thousands):
Year Ended December 31,
2019
2018
2017
Stock-based compensation expense data:
Sales and marketing
General and administrative
Research and development
Total stock-based compensation expense
$
$
2,075
$
1,196
$
6,474
12,054
20,603
$
4,901
7,332
13,429
$
561
2,638
4,214
7,413
58
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%
81%
37%
15%
78%
35%
15%
78%
34%
Year Ended December 31,
2019
2018
2017
Comparison of Years Ended December 31, 2019 to December 31, 2018
The following tables in this section set forth our selected consolidated statements of operations (in thousands), data for the
percentage change and data as a percentage of revenue for the years ended December 31, 2019 and 2018. Certain previously
reported amounts in the consolidated statements of operations for the year ended December 31, 2018 have been reclassified to
conform to our current presentation to reflect interest income as a separate line item, which was previously included in other
income, net.
Revenue
Revenue:
SaaS and license revenue
Hardware and other revenue
Total revenue
Year Ended December 31,
% Change
2019
2018
2019 vs. 2018
$
$
337,375
164,988
502,363
$
$
291,072
129,422
420,494
16%
27%
19%
The $81.9 million increase in total revenue in 2019 as compared to 2018 was the result of a $46.3 million, or 16%, increase
in our SaaS and license revenue and a $35.6 million, or 27%, increase in our hardware and other revenue. Our software license
revenue included within SaaS and license revenue increased $2.1 million to $43.4 million in 2019 as compared to $41.3
million during 2018. The increase in our Alarm.com segment SaaS and license revenue in 2019 was primarily due to growth in
our subscriber base, including the revenue impact from subscribers we added in 2018. 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 2019
compared to 2018 was due to an increase in the volume of video cameras sold. Our Other segment contributed 15% of the
increase in SaaS and license revenue in 2019 as compared to 2018. The increase in SaaS and license revenue for our Other
segment in 2019 as compared to 2018 was due to an increase in sales of our energy management and demand response
solutions and our property management and HVAC solutions. Hardware and other revenue in our Other
segment decreased 13% in 2019 as compared to 2018, primarily due to the timing of sales related to our remote access
management solution.
Cost of Revenue
Cost of revenue(1):
Cost of SaaS and license revenue
Cost of hardware and other revenue
Total cost of revenue
% of total revenue
________________
Year Ended December 31,
% Change
2019
2018
2019 vs. 2018
$
$
50,066
133,533
183,599
$
$
44,933
100,782
145,715
37%
35%
11%
32%
26%
(1) Excludes amortization and depreciation shown in operating expenses.
The $37.9 million increase in cost of revenue in 2019 as compared to 2018 was the result of a $32.8 million, or 32%,
increase in cost of hardware and other revenue and a $5.1 million, or 11%, increase in cost of SaaS and license revenue. Our
cost of software license revenue included within cost of SaaS and license revenue decreased $0.4 million to $1.3 million during
2019 as compared to $1.7 million during 2018. The increase in cost of Alarm.com segment hardware and other revenue related
primarily to an increase in the number of hardware units shipped in 2019 as compared to 2018. The increase in cost of
59
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.
Cost of hardware and other revenue as a percentage of hardware and other revenue was 81% and 78% for the years ended
December 31, 2019 and 2018, respectively. Cost of SaaS and license revenue as a percentage of SaaS and license
revenue was 15% for each of the years ended December 31, 2019 and 2018. Cost of software license revenue as a percentage
of software license revenue was 3% and 4% for the years ended December 31, 2019 and 2018, respectively. The increase in
cost of hardware and other revenue as a percentage of hardware and other revenue in 2019 as compared to 2018 is a reflection
of the mix of product sales during the periods.
Sales and Marketing Expense
Sales and marketing
% of total revenue
Year Ended December 31,
% Change
2019
2018
2019 vs. 2018
$
61,815
$
55,902
11%
12%
13%
The $5.9 million increase in sales and marketing expense in 2019 as compared to 2018 was primarily due to increases in
headcount for our sales team and service provider partner support team to support our growth. As a result, our personnel and
related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased
by $8.1 million in 2019 as compared to 2018. Additionally, recruiting costs and costs for external consultants increased by $0.3
million in 2019 for our Alarm.com segment as compared to 2018. These increases were partially offset by a $4.2 million decrease
in our marketing expense for our Alarm.com segment in 2019 as compared to 2018. Sales and marketing expense from our
Other segment increased $1.4 million in 2019 as compared to 2018, primarily due to increases in headcount for our sales team.
The overall number of employees in our sales and marketing teams increased from 288 as of December 31, 2018 to 391 as of
December 31, 2019. Sales and marketing expense as a percentage of total revenue was 12% and 13% for the years ended
December 31, 2019 and 2018, respectively.
General and Administrative Expense
General and administrative
% of total revenue
Year Ended December 31,
% Change
2019
2018
2019 vs. 2018
$
69,959
$
95,750
(27)%
14%
23%
The $25.8 million decrease in general and administrative expense in 2019 as compared to 2018 was primarily due to a
$31.6 million decrease in legal expenses within our Alarm.com segment resulting from a $28.0 million expense recorded during
2018 for the agreement reached to settle the legal matter alleging violations of the TCPA within our Alarm.com segment.
Additionally, the decrease in general and administrative expense was due to the 2019 reversal of the $3.3 million reserve
previously recorded in 2018, relating to a promissory note provided to one of our hardware suppliers within our Alarm.com
segment. These decreases were partially offset by a $7.2 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 a $2.7 million increase in rent
expense within the Alarm.com segment due in part to additional office space obtained for our corporate headquarters. General
and administrative expenses from our Other segment decreased by $0.5 million in 2019 as compared to 2018, primarily due to a
decrease in expense for external consultants. The overall number of employees in general and administrative functions
increased from 96 as of December 31, 2018 to 148 as of December 31, 2019.
Research and Development Expense
Research and development
% of total revenue
Year Ended December 31,
% Change
2019
2018
2019 vs. 2018
$
114,443
$
89,204
28%
23%
21%
60
The $25.2 million increase in research and development expense in 2019 as compared to 2018 was primarily due to an
increase in headcount of employees in research and development functions. Our personnel and related costs for our Alarm.com
segment increased by $20.4 million in 2019 as compared to 2018 and our expenses for external consultants increased by $1.2
million. Additionally, the increase in research and development expense is due to $1.0 million of in-process research and
development we acquired on September 18, 2019. Research and development expense from our Other segment decreased by
$0.2 million due to a decrease in our expenses for external consultants in 2019 as compared to 2018. The overall number of
employees in research and development functions increased from 500 as of December 31, 2018 to 621 as of December 31,
2019.
Amortization and Depreciation
Amortization and depreciation
% of total revenue
Year Ended December 31,
% Change
2019
2018
2019 vs. 2018
$
22,134
$
21,721
2%
4%
5%
Amortization and depreciation increased $0.4 million in 2019 as compared to 2018, due to customer relationships,
developed technology and trade name intangibles acquired in connection with our March 2017 acquisition of certain assets and
assumption of certain liabilities of the Connect line of business and all of the outstanding equity interests of the two subsidiaries
through which Icontrol Networks, Inc. conducted its Piper line of business, as well as the customer relationships, developed
technology and trade name intangibles acquired in connection with our October 2019 acquisition of 85% of the issued and
outstanding capital stock of OpenEye. These increases are partially offset by certain intangible assets being fully amortized prior
to December 31, 2019.
Interest Expense
Interest expense
% of total revenue
Year Ended December 31,
% Change
2019
2018
2019 vs. 2018
$
(2,974)
$
(2,918)
2%
(1)%
(1)%
Interest expense increased $0.1 million in 2019 as compared to 2018, primarily due to an increase in the effective interest
rate on the 2017 Facility resulting from the increase in the Eurodollar Base Rate, or LIBOR.
Interest Income
Interest income
% of total revenue
Year Ended December 31,
% Change
2019
2018
2019 vs. 2018
$
4,922
$
2,272
117%
1%
1%
Interest income increased $2.7 million in 2019 as compared to 2018, primarily due to recording interest income of $1.7
million related to promissory note proceeds received from one of our hardware suppliers and proceeds from an acquired
promissory note within our Alarm.com segment.
Other Income, Net
Other income, net
% of total revenue
Year Ended December 31,
% Change
2019
2018
2019 vs. 2018
$
6,535
$
2%
143
—%
4,470%
Other income, net increased $6.4 million during 2019 as compared to 2018, primarily due to recording a gain of $6.9
million related to promissory note proceeds received from one of our hardware suppliers and proceeds from an acquired
promissory note within our Alarm.com segment, partially offset by a $0.6 million impairment of one of our investments.
61
Provision for / (benefit from) income taxes
Provision for / (benefit from) income taxes
% of total revenue
Year Ended December 31,
% Change
2019
2018
2019 vs. 2018
$
5,566
$
(9,825)
(157)%
1%
(2)%
The provision for income taxes increased $15.4 million in 2019 as compared to 2018. Our effective tax rate was 9.5% in
2019 as compared to (84.0)% in 2018. The increase in the provision for income taxes was primarily related to decreases in tax
windfall benefits and research and development tax credits claimed, partially offset by increased foreign derived intangible
income deductions claimed in 2019 as compared to 2018.
Comparison of Years Ended December 31, 2018 to December 31, 2017
A comparison of the years ended December 31, 2018 and 2017 has been omitted from this Form 10-K, but may be found in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal
year ended December 31, 2018, filed with the SEC on March 1, 2019.
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.
62
The selected consolidated statements of operation data in amounts and as a percentage of total revenue are presented
below (amounts in thousands):
Revenue:
SaaS and license revenue
Hardware and other revenue
Total revenue
Cost of revenue:
Mar. 31,
2018
June 30,
2018
Sept. 30,
2018
Dec. 31,
2018
Mar. 31,
2019
June 30,
2019
Sept. 30,
2019
Dec. 31,
2019
$ 67,988
$ 70,968
$ 74,292
$ 77,824
$ 80,055
$ 82,334
$ 84,924
$ 90,062
24,768
92,756
33,520
37,556
104,488
111,848
33,578
111,402
32,280
112,335
39,326
121,660
42,956
127,880
50,426
140,488
Cost of SaaS and license revenue
Cost of hardware and other revenue
Total cost of revenue
10,806
17,571
28,377
11,027
25,461
36,488
11,501
30,491
41,992
11,599
27,259
38,858
12,325
26,625
38,950
12,665
31,891
44,556
12,438
35,085
47,523
12,638
39,932
52,570
Total operating expenses
$ 52,386
$ 59,490
$ 86,550
$ 64,151
$ 64,164
$ 63,059
$ 68,162
$ 72,966
Net income / (loss)
$ 10,515
$ 10,733
$ (7,652)
Net income / (loss) attributable to
common stockholders
Net income / (loss) per share
attributable to common
stockholders
$ 10,512
$ 10,732
$ (7,652)
Basic
Diluted
$
$
0.22
0.21
$
$
0.23
0.22
$
$
(0.16)
(0.16)
$
$
$
$
7,928
7,928
0.16
0.16
$
$
$
$
9,010
$ 13,796
$ 17,690
$ 12,834
9,010
$ 13,796
$ 17,690
$ 13,035
0.19
0.18
$
$
0.29
0.27
$
$
0.36
0.35
$
$
0.27
0.26
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 / (loss)
Net income / (loss) attributable to
common stockholders
Quarterly Trends
73%
27%
100%
12%
19%
31%
56%
11%
11%
68%
32%
100%
11%
24%
35%
57%
10%
10%
66 %
34 %
100 %
11 %
27 %
38 %
77 %
(7)%
(7)%
70%
30%
100%
10%
25%
35%
57%
7%
7%
71%
29%
100%
11%
24%
35%
57%
8%
8%
68%
32%
100%
10%
26%
37%
52%
11%
11%
66%
34%
100%
10%
27%
37%
53%
14%
14%
64%
36%
100%
9%
28%
37%
52%
9%
9%
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 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. Our cost of SaaS and license revenue as a percentage of SaaS and license revenue has been between 14% and 16%
for all periods presented.
63
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 46% 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. During the three months ended
September 30, 2018, we recorded a $28.0 million expense related to an agreement reached in 2018 to settle the legal matter
alleging violations of the TCPA. During the three months ended September 30, 2019, we recorded interest of $1.7 million within
interest income and recorded a $6.9 million gain within other income, net, which relates to promissory note proceeds received
from one of our hardware suppliers and proceeds from an acquired promissory note.
Segment Information
We have two reportable segments: Alarm.com and Other. Our Alarm.com segment represents our cloud-based and
Software platforms for the intelligently connected property and related solutions that contributed 93%, 93% and 94% of our
revenue for the years ended December 31, 2019, 2018 and 2017, respectively. 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.
Our Alarm.com segment increased from 803 employees as of January 1, 2019 to 1,076 employees as of December 31,
2019. Our Other segment increased from 81 employees as of January 1, 2019 to 84 employees as of December 31, 2019. 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):
SaaS and
License
Revenue
2019
Hardware
and Other
Revenue
Year Ended December 31,
2018
Operating
Expenses
SaaS and
License
Revenue
Hardware
and Other
Revenue
Operating
Expenses
SaaS and
License
Revenue
2017
Hardware
and Other
Revenue
Operating
Expenses
Alarm.com
Other
Intersegment Alarm.com
Intersegment Other
$ 317,580
$ 156,265
$ 249,097
$ 278,013
$ 119,221
$ 243,835
$ 227,583
$
92,445
$ 171,436
19,795
—
—
20,919
(4,301)
(7,895)
19,254
13,059
—
—
—
—
20,316
(4,749)
(5,366)
18,742
8,700
—
—
—
—
15,154
(2,945)
(2,000)
17,939
—
—
Total
$ 337,375
$ 164,988
$ 268,351
$ 291,072
$ 129,422
$ 262,577
$ 236,283
$ 102,654
$ 189,375
Our SaaS and license revenue for the Alarm.com segment included software license revenue of $43.4 million, $41.3 million
and $29.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. There was no software license revenue
recorded for the Other segment during the years ended December 31, 2019, 2018 and 2017.
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
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 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.
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To determine the transaction price, we analyze all of the performance obligations included in the contract. We consider the
terms of the contract and our customary business practices, which typically do not include financing components or non-cash
consideration. We have variable consideration in the form of retrospective volume discounts, rebate incentives, restocking fees
and assurance-type warranties. The significant inputs related to variable consideration include the volume and amount of
products and services sold historically and expected to be sold in the future, the availability and performance of our services and
the historical and expected number of returns. Depending on the type of variable consideration and its predictability, we may
apply an “expected value” approach or a “most likely amount” approach. We estimate the variable consideration at the onset of a
contract and include the variable consideration within the transaction price if it is probable that a significant reversal of the
variable consideration would not occur in the future. When determining whether the amount of variable consideration included in
the transaction price should be constrained, we look at the history of hardware purchased and subscribers added by our service
provider partners to estimate the likelihood of those service provider partners obtaining the retrospective volume discounts and
rebates. At times, our contracts include consideration payable to a customer in the form of fixed discounts or rebates. We record
the consideration payable to a customer as a reduction to the transaction price resulting in a reduction to revenue over the
service period.
If we enter into contracts that contain multiple promised services, we evaluate which of the promised services represent
separate performance obligations based on whether or not the promised services are distinct and whether or not the services are
separable from other promises in the contract. If these criteria are met, then we allocate the transaction price to the performance
obligations using the relative stand-alone selling price method at contract inception.
In determining the relative estimated selling prices, we consider market conditions, entity-specific factors and information
about the customer or class of customer. Any discount within the contract is allocated proportionately to all of the separate
performance obligations in the contract unless the terms of discount relate specifically to the entity’s efforts to satisfy some but
not all of the performance obligations.
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. We also generate SaaS and license revenue from the fees paid to us when we license
our intellectual property to third parties for use of our patents. We recognize revenue from SaaS services on a monthly basis as
we satisfy our performance obligations.
Software License Revenue. Our SaaS and license revenue also includes our software license revenue from monthly fees
charged to service providers sold on a per subscriber basis for access to our Software platform. Under the usage-based royalty
exception, we recognize revenue on a monthly basis over the period during which the services are expected to be performed.
Hardware and Other Revenue. We generate hardware and other revenue primarily from the sale of video cameras, video
recorders 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 as we satisfy our performance
obligations, which primarily occurs when the hardware is received by our service provider partner or distributor, net of a reserve
for estimated returns.
When determining the amount of consideration we expect to be entitled to for the sale of our hardware, we estimate the
variable consideration associated with customer returns. We record a reserve against revenue for hardware returns based on
historical returns. For the years ended December 31, 2019, 2018 and 2017, our reserve against revenue for hardware returns
was 1%, 2% and 2% of hardware and other revenue, respectively. 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. Additionally, we provide assurance-type warranties related to the intended functionality of
the products and services provided and those warranties typically allow for the return of hardware up to one year past the date of
sale. These warranties were not identified as separate performance obligations.
Our hardware and other revenue also includes our revenue from the sale of perpetual licenses that provide our customers in
the commercial market the right to use our OpenEye video surveillance software for an indefinite period of time in exchange for a
one-time license fee, which is generally paid at contract inception. Our perpetual licenses provide a right to use intellectual
property that is functional in nature and has significant stand-alone functionality. Accordingly, for perpetual licenses of functional
intellectual property, revenue is recognized at the point-in-time when control has been transferred to the customer, which occurs
once the software has been made available to the customer.
Hardware and other revenue may also include activation fees charged to some of our 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. The
decision whether to charge an activation fee is based in part on the expected number of subscribers to be added by our service
provider partners and as a result, many of our largest service provider partners do not pay an activation fee. 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.
65
We do not expect any material changes in the near term to the underlying assumptions used to recognize revenue during
the year ended December 31, 2019. However, if changes in these assumptions occur, and, should those changes be significant,
they could have a material impact on our SaaS and license revenue as well as our hardware and other revenue.
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 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 and was valued with Level 3 unobservable inputs. 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 and future collection of financed customer receivables, the
unobservable inputs, 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 for the subsidiary unit awards was $0.2 million as of December 31, 2019.
The liability for the contingent consideration consists of the potential earn-out payment related to our acquisition of 85% of
the issued and outstanding capital stock of OpenEye on October 21, 2019. The earn-out payment is contingent on the
satisfaction of certain calendar 2020 revenue targets and has a maximum potential payment of up to $11.0 million. We account
for the contingent consideration using fair value and establish a liability for the future earn-out payment based on an estimation
of revenue attributable to perpetual licenses and subscription licenses over the 2020 calendar year. We estimated the fair value
of the liability by using a Monte Carlo simulation model for determining each of the projected measures by using an expected
distribution of potential outcomes. The contingent consideration liability was valued with Level 3 unobservable inputs, including
the revenue volatility and the discount rate. The liability for the contingent consideration was $2.6 million as of December 31,
2019.
Based on these assessments of fair value, we remeasured the liabilities valued with Level 3 unobservable inputs and
recorded a reduction of $0.2 million in operating expenses within the consolidated statement of operations for the year ended
December 31, 2019. We have not made any material changes in the accounting methodology used to determine the fair value of
the subsidiary unit awards or the contingent consideration. 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
or the contingent consideration as of December 31, 2019. However, if changes in these assumptions occur, and, should those
changes be significant, we may be exposed to additional operating expenses.
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
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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. Beginning in November 2019, the expected volatility for options granted is based on historical volatilities of our
stock over the estimated expected term of the stock options. The expected volatility for options granted prior to November 2019
was 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, 2019. 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 valuation requires management to apply significant judgment in estimating the fair value of long-lived and
intangible assets acquired, which involves the use of significant estimates and assumptions.
Significant estimates and assumptions in valuing intangible assets include estimates about future expected cash flows,
discount rates, attrition rates related to acquired customer relationships, royalty rates and obsolescence factors related to
acquired developed technology and royalty rates relate to acquired trade names.
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.
Some acquisitions may include contingent consideration, which is an obligation to make future payments to the seller
contingent upon the achievement of future operational or financial targets. We estimated the fair value of the contingent
consideration liability by using a Monte Carlo simulation model for determining each of the projected measures by using an
expected distribution of potential outcomes. Significant estimates and assumptions in valuing contingent consideration include
estimates about future financial results, revenue volatility and the discount rate. The fair value of the contingent consideration is
estimated on a quarterly basis and changes in the fair value of the contingent consideration resulting from information that
existed subsequent to the acquisition date are recorded in the consolidated statements of operations.
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. The amount of goodwill impairment is calculated
as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
For our 2019 annual impairment review, we performed a qualitative assessment for our Alarm.com reporting unit, our only
reporting unit with a goodwill balance. Based on the results of our qualitative assessment, we determined that it was not more
likely than not that the fair value of our reporting unit was less than its carrying amount, including goodwill. Therefore, we
concluded that there was no goodwill impairment as of October 1, 2019. Our assessment was performed as of October 1, 2019,
and we have determined there have been no triggering events from our assessment date through December 31, 2019.
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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, 2019, 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. Due to the uncertainty of
realization of certain deferred tax assets related to our Canadian net operating losses and research and development tax credits,
we established a valuation allowance of $0.3 million during the second quarter of 2019, which remained at $0.3 million as
of December 31, 2019. As of December 31, 2018, based on our historical and expected future taxable earnings, we believed it
was more likely than not that we would realize all of the benefit of the existing deferred tax assets. Accordingly, we did not record
a valuation allowance as of December 31, 2018.
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.
Impairment of 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. Notes receivable are evaluated for impairment at least quarterly. Impairment occurs when it is
deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. We
periodically assess our notes receivable for collectibility and impairment by considering internal factors such as payment status,
collateral value, the probability of collecting payments when due and credit quality as well as external factors such as economic
conditions. 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.
Based on our assessment of the collectibility of a promissory note provided to one of our hardware suppliers, we recorded
an impairment of $3.3 million during the year ended December 31, 2018, which was subsequently reversed during the year
ended December 31, 2019 upon receiving a payment from our hardware supplier. If changes in the assumptions used to assess
the collectibility and impairment of our notes receivable occur, and, should those changes be significant, they could have a
material impact on our consolidated statements of operations.
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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,
2018
2019
$
119,629
76,373
167,879
$
146,061
49,510
152,793
2017
96,329
40,634
119,433
We define working capital as current assets minus current liabilities. Our cash and cash equivalents as of December 31,
2019 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, 2019, we had $119.6 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. To date, we have
principally financed our operations through cash generated by operating activities and, to a lesser extent, through private and
public equity financings.
We believe our existing cash and cash equivalents, together with our 2017 Facility, 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 12 months,
we expect our capital expenditure requirements to be approximately $18.0 million, primarily related to the continued build out of
our leased and owned office space, as well as purchases of computer software and equipment. In February 2020, we made a
prepayment of $4.7 million for long lead-time parts related to our inventory. On August 30, 2018, we reached an agreement in
principle to settle a putative class action lawsuit filed against us and Alarm.com Incorporated in the U.S. District Court for the
Northern District of California. The tentative settlement was subject to the negotiation and execution of a definitive settlement
agreement and Court approval. On October 25, 2018, we entered into a definitive settlement agreement, or the Settlement
Agreement, with the plaintiffs. An initial payment of $5.0 million was made by us to the settlement administrator on January 2,
2019 and the remaining payment of $23.0 million was made on September 30, 2019.
In October 2018, we entered into a subordinate convertible promissory note with one of our hardware suppliers, or the
October 2018 Promissory Note, which was amended in November 2018, January 2019 and February 2019 as a result of the
hardware supplier's financial restructuring. In March 2019, we entered into a separate secured promissory note with the same
hardware supplier, which, together with the October 2018 Promissory Note, we refer to as the Promissory Notes. Under the
Promissory Notes, we agreed to provide the hardware supplier loans of up to $7.4 million, collateralized by all assets owned by
the supplier. In March 2019, we paid $16.4 million to acquire a secured promissory note, or the Acquired Promissory Note, that
was originally executed between our hardware supplier and another third-party secured creditor. The Acquired Promissory Note
had an outstanding balance of $26.6 million as of December 31, 2018, including interest. In addition to the $16.4 million paid in
March 2019 for the Acquired Promissory Note, we agreed to pay the third-party secured creditor an additional $6.0 million,
subject to certain contingencies measured as of May 4, 2019. Based on the outcome of those contingencies, we recorded a $6.0
million liability in March 2019 related to the Acquired Promissory Note and paid the $6.0 million contingent liability during the
three months ended September 30, 2019.
On May 6, 2019, we entered into a forbearance agreement with the hardware supplier, or the Forbearance Agreement.
Under the Forbearance Agreement, the hardware supplier agreed to pay us the outstanding balance of principal and interest
under the Promissory Notes and the Acquired Promissory Note before June 30, 2019. In consideration for the full and timely
payments under the Forbearance Agreement, we agreed to temporarily forbear from exercising the remedies available to us with
respect to the collateral securing the Promissory Notes and the Acquired Promissory Note. On June 24, 2019, we entered into a
Forbearance Extension Agreement with the hardware supplier, under which the hardware supplier agreed to pay us $7.4 million
on or before June 24, 2019. In consideration for the $7.4 million payment under the Forbearance Extension Agreement, we
69
agreed to temporarily forbear from exercising the remedies available to us with respect to the collateral securing the Promissory
Notes and the Acquired Promissory Note until July 10, 2019.
On June 24, 2019, we received a payment of $7.4 million from the hardware supplier for the partial satisfaction of amounts
due under the Promissory Notes and the Acquired Promissory Note. On July 15, 2019, we received an additional payment of
$25.0 million from the supplier and converted the remaining outstanding notes receivable balance into an equity investment in
the hardware supplier.
As of December 31, 2019, there was no remaining outstanding balance on the Promissory Notes and the Acquired
Promissory Note. As of December 31, 2018, the outstanding balance of the Promissory Notes excluding interest was $3.3 million
and was included in other assets in our consolidated balance sheets prior to any adjustments for impairment.
On September 18, 2019, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of an
unrelated third party. Substantially all of the acquired assets consisted of in-process research and development, or IPR&D. In
consideration for the purchase of the IPR&D, we paid $0.9 million in cash on September 18, 2019, with the remaining $0.1
million expected to be paid 18 months following the acquisition date, subject to offset for any indemnification obligations.
On October 21, 2019, Alarm.com Incorporated acquired 85% of the issued and outstanding capital stock of OpenEye for
$61.2 million in cash after deducting $2.8 million related to an agreed holdback. Pursuant to the terms of the stock purchase
agreement, following the preliminary determination of the working capital of OpenEye as of the closing date, the purchase price
increased by $0.2 million. The working capital adjustment is expected to be finalized and paid to the stockholders of OpenEye in
the first half of 2020 along with a portion of the holdback. The remaining amount of the holdback is expected to be paid to the
stockholders of OpenEye by the fourth quarter of 2022, subject to offset for any indemnification obligations. An earn-out of up to
an additional $11.0 million is payable if certain calendar 2020 revenue targets are met. We recorded a redeemable noncontrolling
interest of $11.4 million on October 21, 2019 related to the remaining 15% equity interest owned by the minority OpenEye
stockholders. The purchase price allocation, which is pending until the final determination of the working capital and tax
adjustments, was not finalized as of the filing date of this Annual Report on Form 10-K.
In December 2019, we purchased land and a commercial building located in Liberty Lake, Washington for $5.1 million. Once
renovations are complete, this building will be used by OpenEye for sales and training, research and development, warehousing
and administrative purposes.
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, together with our 2017 Facility, 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
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, 2019, $63.0 million was outstanding under the 2017 Facility, no letters of credit were outstanding and
$62.0 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, 2019, 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. The 2017 Facility is discussed in more detail below under "Debt Obligations."
Dividends
We did not declare or pay dividends during the years ended December 31, 2019, 2018 or 2017. 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
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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.
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 (used in) / from financing activities
$
$
47,112
(73,414)
(130)
$
60,710
(13,377)
2,399
57,187
(168,795)
67,303
Year Ended December 31,
2018
2017
2019
Operating Activities
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 2019, cash flows from operating activities were $47.1 million, compared to $60.7 million for 2018. This $13.6
million decrease in cash flows from operating activities was due to a $61.4 million decrease in cash from operating assets and
liabilities, partially offset by a $31.8 million increase in net income and a $16.0 million increase in non-cash items.
The $61.4 million decrease in cash from operating assets and liabilities was primarily due to the $28.0 million expense
recorded during 2018 for the agreement reached to settle the legal matter alleging violations of the TCPA, and such settlement
amount was subsequently paid during 2019. The decrease in cash from operating assets and liabilities was also due to
differences in timing of collection of receipts and payments of disbursements. The $16.0 million increase in non-cash items was
primarily due to a $14.1 million change in deferred income taxes, primarily due to the increase in deferred income taxes resulting
from the $28.0 million expense recorded during 2018 for the agreement reached to settle the legal matter alleging violations of
the TCPA. Additionally, the increase in non-cash items was due to a $7.2 million increase in stock-based compensation resulting
from additional grants of stock options and restricted stock units during 2019, partially offset by a gain of $6.9 million recorded
during 2019 related to the proceeds from the Promissory Notes and the Acquired Promissory Note received from one of our
hardware suppliers.
For 2018, cash flows from operating activities were $60.7 million, an increase of $3.5 million from 2017, as the result of
a $13.5 million increase in cash from operating assets and liabilities partially offset by a $7.7 million decrease in net income and
a $2.3 million decrease in non-cash items.
The $13.5 million increase in cash from operating assets and liabilities was primarily due to the $28.0 million expense
recorded during 2018 for the agreement reached to settle the legal matter alleging violations of the TCPA, which was not paid as
of December 31, 2018. This increase in cash from operating assets and liabilities was partially offset by a $5.5 million increase in
the change in inventory related to the purchase of long lead-time parts, a $2.8 million settlement of the liability related to the
subsidiary unit awards during 2018 and differences in timing of collection of receipts and payments of disbursements.
The $2.3 million decrease in non-cash items was primarily due to a $14.0 million increase in the change in deferred income
taxes, primarily due to the increase in deferred income taxes resulting from the $28.0 million expense recorded during 2018 for
the agreement reached to settle the legal matter alleging violations of the TCPA. This decrease in non-cash items was partially
offset by a $6.0 million increase in stock-based compensation resulting from additional grants of stock options and restricted
stock units during 2018. Additionally, there was a $4.0 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 in the first quarter of 2017.
Investing Activities
Our investing activities typically 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.
71
For 2019, our cash flows used in investing activities was $73.4 million as compared to $13.4 million in 2018. The $60.0
million increase in cash used in investing activities was primarily due to our payment of $58.8 million, net of cash acquired, for
85% of the issued and outstanding capital stock of OpenEye. The increase in cash used in investing activities was also due to
$22.4 million paid in 2019 for the Acquired Promissory Note, $3.7 million of additional funding provided to the hardware supplier
under the Promissory Notes in 2019 and $5.1 million paid for the purchase of land and a commercial building in 2019. The
increases in cash used in investing activities were partially offset by $30.7 million received from one of our hardware suppliers for
the amounts due under the Promissory Notes and the Acquired Promissory Note.
For 2018, our cash flows used in investing activities was $13.4 million as compared to $168.8 million in 2017. The $155.4
million decrease 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.
Financing Activities
Cash generated by financing activities includes 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 typically includes repurchases of common stock and repayments of debt.
For 2019, cash flows used in financing activities was $0.1 million compared to cash flows from financing activities of $2.4
million in 2018. The $2.5 million change in cash flows used in financing activities was primarily due to a decrease of $2.5 million
in the issuance of common stock under equity-based plans.
For 2018, cash flows from financing activities was $2.4 million compared to $67.3 million in 2017. The $64.9
million decrease in cash flows from financing activities was primarily due to the $64.3 million of net proceeds borrowed under the
credit facilities during 2017 related to the Acquisition in March 2017.
Contractual Obligations
Presented below is information about our material contractual obligations and the periods in which those future payments
are due as of December 31, 2019. Future events could cause actual payments to differ from these estimates. As of
December 31, 2019, 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
Total contractual obligations
$
— $
63,000
$
— $
— $
2,206
126
9,818
141
—
624
12,915
$
$
3,876
222
18,823
—
4,375
290
90,586
$
—
—
15,840
—
2,513
—
18,353
—
—
10,893
—
601
63,000
6,082
348
55,374
141
7,489
—
11,494
$
914
133,348
$
_______________
(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, 2019.
(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, 2019, we had no outstanding letters of credit under our 2017 Facility.
72
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.
Debt Obligations
On October 6, 2017, we entered into a $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 our previous
credit facility. 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 being
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. During each of the years ended December 31, 2019 and 2018, we repaid $4.0 million of the
outstanding balance of the 2017 Facility.
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, 2019, 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. The 2017 Facility also carries an unused line commitment fee of 0.20%. For
the years ended December 31, 2019, 2018 and 2017, the effective interest rate on the credit facilities was 4.45%, 4.13% and
4.16%, respectively.
The carrying value of the 2017 Facility was $63.0 million and $67.0 million as of December 31, 2019 and 2018, respectively.
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 approximated its fair value as of
December 31, 2019 and 2018. The 2017 Facility contains various financial and other covenants that require us to maintain a
maximum consolidated leverage ratio not to exceed 3.25:1.00 and a consolidated fixed charge coverage ratio of at least
1.25:1.00. As of December 31, 2019, 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.
On November 30, 2018, we amended the 2017 Facility to incorporate the parameters that must be met for us to repurchase
our outstanding common stock under the stock repurchase program authorized by our board of directors on November 29, 2018.
Non-GAAP Measures
We define Adjusted EBITDA as our net income before interest expense, interest income, other income, net, provision for /
(benefit from) income taxes, amortization and depreciation, stock-based compensation expense, acquisition-related expense and
legal costs and settlement fees incurred in connection with non-ordinary course litigation and other disputes, 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,
73
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
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:
Year Ended December 31,
2019
2018
2017
$
53,330
$
21,524
$
29,251
Interest expense, interest income and other income, net
(8,483)
Provision for / (benefit from) income taxes
Amortization and depreciation expense
Stock-based compensation expense
Acquisition-related expense
Litigation expense
Total adjustments
Adjusted EBITDA
5,566
22,134
20,603
2,403
12,754
54,977
503
(9,825)
21,721
13,429
—
45,729
71,557
$
108,307
$
93,081
$
1,133
2,990
17,734
7,413
5,895
7,212
42,377
71,628
ITEM 7A. QUANTITATIVE AND QUALITATIVE 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 2017
Facility 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, 2019 and 2018, an increase or decrease in the interest
rate on our 2017 Facility with SVB by 100 basis points would increase or decrease our annual interest expense by approximately
$0.6 million and $0.7 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.
74
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALARM.COM HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Equity
Notes to the Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 2019, 2018 and 2017
Page
76
78
79
80
82
83
122
75
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 (the
“Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, equity, and cash flows
for each of the three years in the period ended December 31, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2019 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by
the COSO.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for
leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018.
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.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded PC Open
Incorporated, a Washington corporation, doing business as OpenEye ("OpenEye"), from its assessment of internal control over
financial reporting as of December 31, 2019 because it was acquired by the Company in a purchase business combination
during 2019. We have also excluded OpenEye from our audit of internal control over financial reporting. OpenEye is an 85%
owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal
control over financial reporting represent 1% and 1%, respectively, of the related consolidated financial statement amounts as
of and for the year ended December 31, 2019.
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
76
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Acquisition of OpenEye - Valuation of Acquired Customer Relationships and Developed Technology Intangible Assets
As described in Notes 2 and 7 to the consolidated financial statements, the Company acquired 85% of the issued and
outstanding capital stock of OpenEye for total consideration of $67.0 million on October 21, 2019, which resulted in $38.6
million of intangible assets being recorded. Intangible assets recorded by the Company primarily included customer
relationships of $19.8 million and developed technology of $16.6 million. Management valued the single group of customer
relationships using the multi-period excess earnings method and valued the developed technology by applying the relief from
royalty method. As disclosed by management, this valuation requires management to apply significant judgment in estimating
the fair value of intangible assets acquired, which involves the use of significant estimates and assumptions. Significant
estimates and assumptions in valuing intangible assets include future expected cash flows, discount rates, attrition rates related
to acquired customer relationships and royalty rates and obsolescence factors related to acquired developed technology.
The principal considerations for our determination that performing procedures relating to the valuation of acquired customer
relationships and developed technology intangible assets recorded with the acquisition of OpenEye is a critical audit matter are
there was significant judgment by management in estimating the fair value of the acquired customer relationships and
developed technology intangible assets. This in turn led to significant auditor judgment, subjectivity, and effort in performing
procedures and evaluating the significant assumptions relating to management’s estimates, including future expected cash
flows, discount rates, attrition rate, royalty rate, and obsolescence factors. In addition, the audit effort involved the use of
professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence
obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
acquisition accounting, including controls over management’s valuation of the acquired customer relationships and developed
technology intangible assets and controls over development of the significant assumptions related to the valuation of the
acquired customer relationships and developed technology intangible assets, including future expected cash flows, discount
rates, attrition rate, royalty rate, and obsolescence factors. These procedures also included, among others, (i) reading the
purchase agreement; (ii) testing management’s process for estimating the fair value of the acquired customer relationships and
developed technology intangible assets; and (iii) testing management’s significant assumptions relating to future expected cash
flows, discount rates, attrition rate, royalty rate, and obsolescence factors used to estimate the fair value of the acquired
customer relationships and developed technology intangible assets. Testing management’s process included evaluating the
appropriateness of the valuation methods, testing the completeness and accuracy of underlying data used in the valuation, and
the reasonableness of significant assumptions, including the future expected cash flows, discount rates, attrition rate, royalty
rate, and obsolescence factors. Evaluating the reasonableness of the future expected cash flows and customer attrition rate
involved considering the past performance of the acquired businesses and, for future expected cash flows, economic and
industry forecasts. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of
management’s valuation methods and significant assumptions, including discount rates, royalty rate, and obsolescence factors.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
February 25, 2020
We have served as the Company’s auditor since 2009.
77
ALARM.COM HOLDINGS, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Year Ended December 31,
2019
2018
2017
$
337,375
$
291,072
$
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
Interest income
Other income, net
Income before income taxes
Provision for / (benefit from) income taxes
Net income
Net loss attributable to redeemable noncontrolling interest
Net income allocated to participating securities
Net income attributable to common stockholders
Per share information attributable to common stockholders:
Net income per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
_______________
164,988
502,363
50,066
133,533
183,599
61,815
69,959
114,443
22,134
268,351
50,413
(2,974)
4,922
6,535
58,896
5,566
53,330
201
—
129,422
420,494
44,933
100,782
145,715
55,902
95,750
89,204
21,721
236,283
102,654
338,937
35,610
80,578
116,188
43,490
55,396
72,755
17,734
262,577
189,375
12,202
(2,918)
2,272
143
11,699
(9,825)
21,524
—
(3)
33,374
(2,199)
1,031
35
32,241
2,990
29,251
—
(13)
$
$
$
53,531
$
21,521
$
29,238
1.11
1.06
$
$
0.45
0.43
$
$
0.63
0.59
48,427,446
50,273,889
47,633,739
49,692,184
46,682,141
49,153,948
(1) Exclusive of amortization and depreciation shown in operating expenses below.
See accompanying notes to the consolidated financial statements.
78
ALARM.COM HOLDINGS, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
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
Operating lease right-of-use assets
Other assets
Total assets
December 31,
2019
2018
$
119,629
$
146,061
76,373
34,168
13,504
243,674
38,548
103,438
104,963
19,137
30,523
17,516
49,510
22,990
9,502
228,063
27,757
79,067
63,591
28,952
—
13,555
$
557,799
$
440,985
Liabilities, redeemable noncontrolling interest and stockholders’ equity
Current liabilities:
Accounts payable, accrued expenses and other current liabilities
$
48,727
$
Accrued compensation
Deferred revenue
Operating lease liabilities
Total current liabilities
Deferred revenue
Long-term debt
Operating lease liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 13)
Redeemable noncontrolling interest
Stockholders’ equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding
as of December 31, 2019 and December 31, 2018.
Common stock, $0.01 par value, 300,000,000 shares authorized; 48,700,963 and 48,103,038 shares
issued; and 48,700,713 and 48,102,081 shares outstanding as of December 31, 2019 and
December 31, 2018, respectively.
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
16,342
3,043
7,683
75,795
7,455
63,000
37,199
7,489
190,938
11,210
—
487
365,627
(10,463)
355,651
Total liabilities, redeemable noncontrolling interest and stockholders’ equity
$
557,799
$
See accompanying notes to the consolidated financial statements.
79
58,430
13,484
3,356
—
75,270
7,820
67,000
—
13,306
163,396
—
—
481
341,139
(64,031)
277,589
440,985
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
Provision for notes receivable
Amortization on patents and tooling
Amortization and depreciation
Amortization of debt issuance costs
Amortization of operating leases
Deferred income taxes
Change in fair value of contingent liability
Undistributed losses from equity investees
Stock-based compensation
Gain on notes receivable
Acquired in-process research and development
Impairment of investment
Disposal of property and equipment
Changes in operating assets and liabilities (net of business acquisitions):
Accounts receivable
Inventory
Other current and non-current assets
Accounts payable, accrued expenses and other current liabilities
Deferred revenue
Operating lease liabilities
Other liabilities
Cash flows from operating activities
Cash flows used in investing activities:
Business acquisitions, net of cash acquired
Additions to property and equipment
Purchases of in-process research and development
Investment in cost and equity method investees
Issuances or purchases of notes receivable
Receipt of payment on notes receivable
Purchases of patents and patent licenses
Cash flows used in investing activities
Cash flows (used in) / from financing activities:
Proceeds from credit facility
Repayments of credit facility
Payments of debt issuance costs
Repurchases of common stock
Issuances of common stock from equity-based plans
Cash flows (used in) / 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,
2018
2017
2019
$
53,330
$
21,524
$
29,251
1,170
(123)
(3,272)
700
22,134
108
7,600
2,599
(198)
—
20,603
(6,931)
850
605
—
(22,273)
(6,491)
(2,887)
(10,980)
(1,567)
(8,268)
403
47,112
(58,833)
(19,324)
(850)
—
(26,103)
31,696
—
(73,414)
—
(4,000)
—
—
3,870
(130)
(26,432)
146,061
119,629
$
149
273
3,319
900
21,721
108
—
(11,482)
—
—
13,429
—
—
—
1,410
(9,298)
(8,813)
115
30,615
(1,502)
—
(1,758)
60,710
—
(11,015)
—
—
(1,287)
—
(1,075)
(13,377)
—
(4,000)
—
(1)
6,400
2,399
49,732
96,329
146,061
$
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
$
See accompanying notes to the consolidated financial statements.
80
ALARM.COM HOLDINGS, INC.
Consolidated Statements of Cash Flows - Continued
(in thousands)
Supplemental disclosures:
Cash paid for interest
Cash paid for / (received from) income taxes, net of refunds
Noncash investing and financing activities:
Assumed options from business acquisition
Cash not yet paid for capital expenditures
Cash not yet paid for business and asset acquisitions - holdback
Contingent liability from business acquisition
Year Ended December 31,
2018
2017
2019
$
2,730
2,254
—
837
2,970
2,595
$
$
2,695
(2,052)
—
1,857
—
—
2,010
1,805
1,375
322
—
—
See accompanying notes to the consolidated financial statements.
81
ALARM.COM HOLDINGS, INC.
Consolidated Statements of Equity
(in thousands)
Redeemable
Noncontrolling
Interest
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
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
Adoption of accounting standard on
revenue recognition
Common stock issued in connection
with equity-based plans
Vesting of common stock subject to
repurchase
Stock-based compensation expense
Net income
Balance as of December 31, 2018
Adoption of accounting standard on
leases
Common stock issued in connection
with equity-based plans
Vesting of common stock subject to
repurchase
Stock-based compensation expense
Noncontrolling interest assumed
through acquisition
Net income attributable to common
stockholders
Balance as of December 31, 2019
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,411
(201)
11,210
— $
— 46,142
$
461
$ 308,697
$
(117,909) $
191,249
—
—
—
—
—
—
—
—
—
—
—
—
—
1,045
15
—
—
—
—
11
—
—
—
—
31
3,439
77
7,413
1,375
—
(19)
—
—
—
—
29,251
12
3,450
77
7,413
1,375
29,251
— $
— 47,202
$
472
$ 321,032
$
(88,677) $
232,827
—
—
—
—
—
—
—
—
—
—
—
888
12
—
—
—
9
—
—
—
—
3,122
6,391
55
13,661
—
—
—
—
21,524
3,122
6,400
55
13,661
21,524
— $
— 48,102
$
481
$ 341,139
$
(64,031) $
277,589
—
—
—
—
—
—
—
—
—
—
—
—
—
598
1
—
—
—
—
6
—
—
—
—
—
3,864
8
20,616
—
—
37
—
—
—
—
37
3,870
8
20,616
—
53,531
53,531
— $
— 48,701
$
487
$ 365,627
$
(10,463) $
355,651
See accompanying notes to the consolidated financial statements.
82
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements
December 31, 2019, 2018 and 2017
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
depend on our technology to intelligently secure, automate and manage their residential and commercial properties. Our
solutions are delivered through an established network of over 9,000 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.
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 have unconsolidated equity investments in third-party businesses. Equity investments with readily determinable fair
values are recorded at fair value. Equity investments without readily determinable fair values are recorded using the
measurement alternative. Under the alternative, we measure investments without readily determinable fair values at cost, less
impairment, adjusted for observable price changes from orderly transactions for identical or similar investments. We make a
separate election to use the measurement alternative for each eligible investment, and reassess whether an investment qualifies
for the alternative at each reporting period. Adjustments resulting from impairment, fair value, or observable price changes are
recorded in other income, net in our consolidated statements of operations.
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.
Reclassifications
Certain previously reported amounts in the consolidated statements of operations for the years ended December 31, 2018
and 2017 have been reclassified to conform to our current presentation to reflect interest income as a separate line item, which
was previously included in other income, net.
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, 2019 and 2018, we have invested $93.3 million and $117.4 million in cash
equivalents in the form of money market funds with one financial institution, respectively. 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 3%, 2%
and 1% of our total revenue for the years ended December 31, 2019, 2018 and 2017, respectively. Accounts receivable balances
83
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
related to service providers partners outside of North America were 7% and 4% as of December 31, 2019 and 2018,
respectively. 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 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. Notes receivable are evaluated for impairment at least quarterly. Impairment occurs when it is
deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. Factors
considered in determining impairment include payment status, collateral value and the probability of collecting payments when
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. See Note 9 for further details on loans provided to one of our distribution partners and one of our
suppliers.
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, video recorders, home automation system parts and peripherals, is
stated at the lower of cost or net realizable value, 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.
Leases
We determine if an arrangement contains a lease at the inception of the arrangement. As part of the lease determination
process, we assess several factors, including, but not limited to, whether we have the right to control and direct the use of the
asset and whether the other party has a substantive substitution right. If we enter into leases that contain multiple components,
we identify separate lease components based on whether or not the right to use the underlying assets is distinct and either highly
dependent or highly interrelated with other rights in the contract. We also evaluate whether there are any non-lease components
in the arrangement. For certain classes of underlying assets, such as data centers, we have elected not to separate non-lease
components from lease components. For all other classes of underlying assets, if separate lease and non-lease components are
identified, we allocate the consideration in the contract to the lease and non-lease components using the relative stand-alone
selling price method at the lease inception.
Many of our leases include options to renew at our sole discretion. We also have several leases that provide us an option to
terminate the lease prior to the end of the lease term. These renewal and termination options are included in the lease term at
the commencement date when we are reasonably certain the options will be exercised. When assessing the likelihood of
electing these options, we consider the length of the renewal period, market conditions, our expansion plans, the existence of a
termination penalty, as well as other factors. Our lease agreements do not contain any material residual value guarantees,
restrictive covenants or variable lease payments.
Right-of-use, or ROU, assets represent our right to use an underlying asset for the term of the lease and lease liabilities
represent our obligation to make lease payments throughout the term of the lease. ROU assets and lease liabilities are
recognized as of the commencement date of the lease based on the present value of contractual lease payments due over the
term of the lease. We use our incremental borrowing rate to determine the present value of the lease payments, as our leases do
not state the rate implicit in the lease. Our incremental borrowing rate is determined on a collateralized basis at the
commencement date of the lease.
ROU assets and lease liabilities resulting from operating leases are recorded on our consolidated balance sheets. We did
not have any finance leases or subleases as of December 31, 2019 and 2018.
84
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
Lease expense is recognized on a straight-line basis over the term of the lease and is recorded in general and
administrative expense. Some of our leases include tenant improvement allowances, which are recorded when we are
reasonably certain to utilize the allowance and are amortized on a straight-line basis over the shorter of the lease terms or the
asset lives. Leases with an initial lease term of twelve months or less are considered short-term leases. Short-term leases are
not recorded on our consolidated balance sheets. Expenses associated with short-term leases are recognized on a straight-line
basis over the term of the lease and are recorded in general and administrative expense. Short-term lease costs were immaterial
for the year ended December 31, 2019.
Redeemable Noncontrolling Interests
Noncontrolling interests with redemption features that are not solely within our control are considered redeemable
noncontrolling interests. Our redeemable noncontrolling interest relates to our 85% equity ownership interest in PC Open
Incorporated, a Washington corporation, doing business as OpenEye (see Note 7). The OpenEye stockholder agreement
contains a put option that gives the minority OpenEye stockholders the right to sell their OpenEye shares to us based on the fair
value of the shares. The OpenEye stockholder agreement also contains a call option that gives us the right to purchase the
remaining OpenEye shares from the minority OpenEye stockholders based on the fair value of the shares. The put and call
options can each be exercised beginning in the first quarter of 2023. This redeemable noncontrolling interest is considered
temporary equity and we report it between liabilities and stockholders’ equity in the consolidated balance sheets. The amount of
the net income or loss attributable to redeemable noncontrolling interests is recorded in the consolidated statements of
operations and the accretion of the redemption value is recorded as an adjustment to additional paid-in capital. The redemption
value of the of the noncontrolling interest was $11.2 million as of December 31, 2019.
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. Our non-
hosted 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, 2019, we do not have any capitalized external software due to the shorter development cycle associated
with agile development.
Revenue Recognition
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 our non-hosted software platform, or 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
service provider 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,
video recorders, 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
85
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
purchase of our platform services. The performance obligation is primarily satisfied when the hardware is received by our service
provider partner or distributor. 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. Our performance obligation related to
providing our platform solutions is satisfied on a daily basis as the subscriber uses the platform services. The purchase of
platform solutions and the purchase of hardware are separate transactions as revenue is recognized when control of the
promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to
receive in exchange for those goods or services. We generate all of our revenue from contracts with customers.
SaaS and license revenue associated with our contracts is invoiced and revenue is recognized at an amount that
corresponds directly with the value of the performance completed to date. Additionally, the consideration received from hardware
sales corresponds directly with the stand-alone selling price of the hardware. As a result, we have elected to use the practical
expedient related to the amount of transaction price allocated to the unsatisfied performance obligations and therefore, we have
not disclosed the total remaining revenue expected to be recognized on all contracts or the expected period over which the
remaining revenue would be recognized for the current period or any prior period.
To determine the transaction price, we analyze all of the performance obligations included in the contract. We consider the
terms of the contract and our customary business practices, which typically do not include financing components or non-cash
consideration. We have variable consideration in the form of retrospective volume discounts, rebate incentives, restocking fees
and assurance-type warranties. The significant inputs related to variable consideration include the volume and amount of
products and services sold historically and expected to be sold in the future, the availability and performance of our services and
the historical and expected number of returns. Depending on the type of variable consideration and its predictability, we may
apply an "expected value" approach or a "most likely amount" approach. We estimate the variable consideration at the onset of a
contract and include the variable consideration within the transaction price if it is probable that a significant reversal of the
variable consideration would not occur in the future. When determining whether the amount of variable consideration included in
the transaction price should be constrained, we look at the history of hardware purchased and subscribers added by our service
provider partners to estimate the likelihood of those service provider partners obtaining the retrospective volume discounts and
rebates. At times, our contracts include consideration payable to a customer in the form of fixed discounts or rebates. We record
the consideration payable to a customer as a reduction to the transaction price resulting in a reduction to revenue over the
service period.
If we enter into contracts that contain multiple promised services, we evaluate which of the promised services represent
separate performance obligations based on whether or not the promised services are distinct and whether or not the services are
separable from other promises in the contract. If these criteria are met, then we allocate the transaction price to the performance
obligations using the relative stand-alone selling price method at contract inception.
In determining the relative estimated selling prices, we consider market conditions, entity-specific factors and information
about the customer or class of customer. Any discount within the contract is allocated proportionately to all of the separate
performance obligations in the contract unless the terms of discount relate specifically to the entity’s efforts to satisfy some but
not all of the performance obligations.
For our standard service provider agreements, we have used a portfolio approach for purposes of revenue recognition, as
each agreement has similar characteristics and we do not expect the effects of applying this approach would have a material
impact on our financial statements as compared to assessing each agreement individually.
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 the terms of our contractual arrangements with our service provider partners, we bill a monthly fee to our service
provider partners in advance of the month of service, with the exception of the initial partial month of service, which is paid in
arrears. Due to the limited period of time between receipt of payment and delivery of service, we have not accounted for these
advance payments as significant financing components. We typically transfer the promised SaaS services to our customers over
time, which is evidenced by the fact that the customers receive and consume the benefits provided by our performance of the
services as such services are rendered. As a result, we recognize revenue from SaaS services on a monthly basis as we satisfy
our performance obligations. 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.
86
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
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 for use of our patents. We bill a monthly fee to third parties based on the number of customers that were active during the
prior month. We apply the usage-based royalty exception to recognize license revenue because the sole or predominant item to
which the royalty relates is the license of intellectual property. Under the usage-based royalty exception, we recognize revenue
on a monthly basis over the period of service. In addition, in certain markets our EnergyHub subsidiary sells its demand
response service for 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.
Software License Revenue
Our SaaS and license revenue also includes our software license revenue from monthly fees charged to service providers
sold on a per subscriber basis for access to our Software platform. The non-hosted 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 Software 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 using the relative stand-alone
selling price method. We apply the usage-based royalty exception to recognize license revenue associated with software hosted
by our customers because the predominant item to which the royalty relates is the license of intellectual property. Under the
usage-based royalty exception, we recognize revenue on a monthly basis over the period during which the services are
expected to be performed. Under the terms of 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. Our software license revenue during the years
ended December 31, 2019, 2018 and 2017 was $43.4 million, $41.3 million and $29.7 million, respectively.
Hardware and Other Revenue
We generate hardware and other revenue primarily from the sale of video cameras, video recorders 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 primarily transfer hardware to our customers upon delivery to the customer, which corresponds with
the time at which the customer obtains control of the hardware. As a result, we recognize hardware and other revenue as we
satisfy our performance obligations, which primarily occurs when the hardware is received by our service provider partner or
distributor, net of a reserve for estimated returns. There are a few contracts in which we provide shipping and handling services
to the customer after control of the hardware transfers to the customer. In these instances, we have elected to account for
shipping and handling costs as activities performed to fulfill the promise to transfer hardware to the customer and not as a
separate promised service.
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. Payment for our hardware is typically due within 30 days from shipment, with the exception of
certain hardware finance arrangements, which are paid over a 36-month period. Our distributors sell directly to our service
provider partners under terms between the two parties.
When determining the amount of consideration we expect to be entitled to for the sale of our hardware, we estimate the
variable consideration associated with customer returns. We record a reserve against revenue for hardware returns based on
historical returns. For the years ended December 31, 2019, 2018 and 2017, our reserve against revenue for hardware returns
was 1%, 2% and 2% of hardware and other revenue, respectively. 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. Additionally, we provide assurance-type warranties related to the intended functionality of
the products and services provided and those warranties typically allow for the return of hardware up to one year past the date of
sale. These warranties were not identified as separate performance obligations.
Our hardware and other revenue also includes our revenue from the sale of perpetual licenses that provide our customers in
the commercial market the right to use our OpenEye video surveillance software for an indefinite period of time in exchange for a
one-time license fee, which is generally paid at contract inception. Our perpetual licenses provide a right to use intellectual
property that is functional in nature and has significant stand-alone functionality. Accordingly, for perpetual licenses of functional
intellectual property, revenue is recognized at the point-in-time when control has been transferred to the customer, which occurs
once the software has been made available to the customer.
Hardware and other revenue may also include activation fees charged to some of our 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
87
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
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. The decision whether to charge an activation fee is based in part on the expected
number of subscribers to be added by our service provider partners and as a result, many of our largest service provider
partners do not pay an activation fee. 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 balance of deferred revenue for activation fees was $8.1 million
and $9.2 million as of December 31, 2019 and 2018, respectively, which combines current and long-term balances.
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 operations centers which are expensed as incurred, as well as patent and royalty costs
in connection with technology licensed from third-party providers. Our cost of SaaS and license revenue also includes our cost of
software license revenue, which primarily includes the payroll and payroll-related costs of the department dedicated to providing
service exclusively to those service providers that host the Software platform. Our cost of software license revenue during the
years ended December 31, 2019, 2018 and 2017 was $1.3 million, $1.7 million and $1.2 million, respectively. Our cost of
hardware and other revenue primarily includes cost of raw materials, tooling 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 and
video recorders, which we purchase from an original equipment manufacturer, and other devices. Our cost of hardware and
other revenue also includes royalty costs in connection with technology licensed from third-party providers.
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 primarily when the hardware and other services
are delivered to the service provider partner, which occurs when control of the hardware and other services transfers to the
service provider partner. Our cost of revenue excludes amortization and depreciation shown in operating expenses.
Contract Asset and Contract Liability Balances
At contract inception, we assess the goods and services promised in our contracts with customers and identify a
performance obligation for each distinct promise to transfer a good or service, or bundle of goods or services. To identify the
performance obligations, we consider all of the goods or services promised in the contract, whether explicitly stated or implied
based on customary business practices. We record a contract asset when we satisfy a performance obligation by transferring a
promised good or service. Contract assets can be conditional or unconditional depending on whether another performance
obligation must be satisfied before payment can be received. We receive payments from our service provider partners based on
the billing schedule established in our contracts. All of the accounts receivable presented in the balance sheet represent
unconditional rights to consideration. We do not have any assets from contracts containing conditional rights and we do not have
any assets from satisfied performance obligations that have not been invoiced.
We recognize an asset related to the costs incurred to obtain a contract only if we expect to recover those costs and we
would not have incurred those costs if the contract had not been obtained. We recognize an asset from the costs incurred to
fulfill a contract if the costs (i) are specifically identifiable to a contract, (ii) enhance resources that will be used in satisfying
performance obligations in future and (iii) are expected to be recovered. Our contract assets consist of capitalized commission
costs and upfront payments made to a customer. Based on the policy above, we capitalize a portion of our commission costs as
an incremental cost of obtaining a contract. When calculating the incremental cost of obtaining a contract, we exclude any
commission costs related to metrics that could be satisfied without obtaining a contract, including training-related metrics. We
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. We applied the portfolio approach to account for the
amortization of contract costs as each contract has similar characteristics. Upfront payments made to a customer are capitalized
and amortized over the expected period of benefit and are recorded as a reduction to revenue.
Contract liabilities include payments received in advance of performance under the contract, and are realized with the
associated revenue recognized under the contract. All of the deferred revenue presented in the balance sheets represents
contract liabilities resulting from advance cash receipts from customers or amounts billed in advance to customers from the sale
of services. Changes in deferred revenue are due to our performance under the contract as well as to cash received from new
contracts for which services have not been provided.
88
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
Research and Development
Our research and development costs consist 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. 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. Also included are non-personnel costs, such as consulting and
professional fees paid to third-party development resources. 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.
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 2019, 2018 and 2017, 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 and intangible and long-lived assets at fair value on a nonrecurring basis. These assets are recognized at fair value
when they are deemed to be other-than-temporarily impaired. Additionally, equity investments without readily determinable fair
values are recognized at fair value on a nonrecurring basis when observable price changes from orderly transactions for identical
or similar investments become available.
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 2019, 2018 and 2017, we
recognized compensation expense of $20.6 million, $13.4 million and $7.4 million, respectively, and associated income tax
benefit of $5.2 million, $7.6 million and $12.7 million, respectively, in connection with our stock-based compensation plans. We
account for stock-based compensation arrangements with non-employees based upon the award’s grant date fair value. 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.
89
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
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, or the Plan, on April 30, 2009. All of our employees are eligible to
participate in the Plan. For the years ended December 31, 2019 and 2018, our discretionary match was 100% of employee
contributions up to 10% of salary and up to a $4,000 maximum match. For the year ended December 31, 2017, our discretionary
match was 100% of employee contributions up to 6% of salary and up to a $3,000 maximum match. We recognized
compensation expense of $3.2 million, $2.7 million and $1.8 million for the years ended December 31, 2019, 2018 and 2017,
respectively, 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 valuation requires management to apply significant judgment in estimating the fair value of long-lived and
intangible assets acquired, which involves the use of significant estimates and assumptions.
Significant estimates and assumptions in valuing intangible assets include estimates about future expected cash flows,
discount rates, attrition rates related to acquired customer relationships, royalty rates and obsolescence factors related to
acquired developed technology and royalty rates relate to acquired trade names.
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.
Some acquisitions may include contingent consideration, which is an obligation to make future payments to the seller
contingent upon the achievement of future operational or financial targets. We estimated the fair value of the contingent
consideration liability by using a Monte Carlo simulation model for determining each of the projected measures by using an
expected distribution of potential outcomes. Significant estimates and assumptions in valuing contingent consideration include
estimates about future financial results, revenue volatility and the discount rate. The fair value of the contingent consideration is
estimated on a quarterly basis and changes in the fair value of the contingent consideration resulting from information that
existed subsequent to the acquisition date are recorded in the consolidated statements of operations.
On October 21, 2019, we acquired 85% of the issued and outstanding capital stock of OpenEye. Certain stockholders of
OpenEye have the right to receive an earn-out payment of up to an additional $11.0 million based upon satisfaction of certain
calendar 2020 revenue targets. As of December 31, 2019, the estimated fair value of the contingent consideration related to the
potential earn-out payment using a Monte Carlo simulation model was $2.6 million, and this amount is recorded in accrued
compensation in the consolidated balance sheets.
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. The amount of goodwill impairment is calculated
as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
90
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
For our 2019 annual impairment review, we performed a qualitative assessment for our Alarm.com reporting unit, our only
reporting unit with a goodwill balance. Based on the results of our qualitative assessment, we determined that it was not more
likely than not that the fair value of our reporting unit was less than its carrying amount, including goodwill. Therefore, we
concluded that there was no goodwill impairment as of October 1, 2019. Our assessment was performed as of October 1, 2019,
and we have determined there have been no triggering events from our assessment date through December 31, 2019.
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, 2019, 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 $7.5 million, $11.4 million and $4.1 million for the years
ended December 31, 2019, 2018 and 2017, respectively. 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. Due to the uncertainty of
realization of certain deferred tax assets related to our Canadian net operating losses and research and development tax credits,
we established a valuation allowance of $0.3 million during the second quarter of 2019, which remained at $0.3 million as
of December 31, 2019. As of December 31, 2018, based on our historical and expected future taxable earnings, we believed it
was more likely than not that we would realize all of the benefit of the existing deferred tax assets. Accordingly, we did not record
a valuation allowance as of December 31, 2018.
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.
Comprehensive Income
Our comprehensive income for each of the years ended December 31, 2019, 2018 and 2017 was equal to our net income
disclosed in the consolidated statements of operations.
Earnings per Share
Our basic net income 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.
91
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
Our diluted net income per share attributable to common stockholders is calculated by giving effect to all potentially dilutive
common stock when determining the weighted-average number of common shares outstanding. For purposes of the diluted net
income per share calculation, options to purchase common 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 per share. These participating securities include unvested shares issued
upon the early exercise of options that are subject to repurchase 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 attributable to common stockholders. We also have redeemable noncontrolling interest
related to our 85% equity ownership interest in OpenEye. When calculating net income attributable to the common stockholders,
net income attributable to redeemable noncontrolling interest should be excluded from net income. As a result, net income
attributable to the common stockholders is equal to the net income less (i) dividends paid on unvested shares with any remaining
earnings allocated in accordance with the bylaws between the outstanding common and preferred stock and (ii) net income
attributable to redeemable noncontrolling interest as of the end of each period.
Recent Accounting Pronouncements
Adopted
On February 25, 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU,
2016-02, “Leases (Topic 842)” or Topic 842, which requires lessees to recognize operating and financing lease liabilities and
corresponding ROU 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. In July 2018, the FASB
amended the update to allow entities to apply the transition requirements of Topic 842 at the adoption date rather than at the
beginning of the earliest comparative period presented. Accordingly, the amendments in Topic 842 were effective for us
beginning January 1, 2019.
On January 1, 2019, we adopted Topic 842 by applying the modified retrospective approach to all of our leases in effect as
of that date. We used the optional transition method, which required us to record the initial effect of Topic 842 as a cumulative-
effect adjustment to retained earnings on January 1, 2019. Additionally, we elected to use the package of practical expedients for
the adoption of Topic 842, which allowed us not to reassess: (i) whether any expired or existing contracts are or contain leases,
(ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any existing leases qualify for
capitalization under Topic 842. We also used the hindsight practical expedient when determining the lease term and assessing
impairment of ROU assets.
The adoption of Topic 842 resulted in the recording of the following amounts on our consolidated balance sheets (in
thousands):
Balance Sheet Caption
Property and equipment, net
Operating lease right-of-use assets
Operating lease liabilities (current)
Operating lease liabilities (noncurrent)
Accounts payable, accrued expenses and other current liabilities
Other liabilities
Accumulated deficit
As of January 1, 2019
$
1,057
28,432
5,699
36,957
(1,548)
(11,656)
37
The adoption of Topic 842 did not materially impact our consolidated statements of operations, consolidated statement of
equity or consolidated statements of cash flows.
Not Yet Adopted
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. From November 2018 to
February 2020, amendments to Topic 326 were issued to clarify numerous accounting topics. 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
92
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
fiscal years. Early adoption is permitted for fiscal years and interim periods beginning after December 15, 2018. To date, we have
assessed the manner in which we currently estimate the allowance for doubtful accounts on our trade receivables, the
composition of our notes receivable and our historical credit loss activity. We are currently assessing forecasted market
conditions and the impact this pronouncement may have on our consolidated financial statements. This pronouncement will
require additional disclosures within our notes to the consolidated financial statements.
On August 28, 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework -
Changes to the Disclosure Requirements for Fair Value Measurement," which provides guidance designed to improve the
effectiveness of fair value measurement disclosures in notes to the financial statements. The update removes several existing
disclosure requirements, including, but not limited to: (i) the amount of and reasons for transfers between Level 1 and Level 2 of
the fair value hierarchy, (ii) the policy for timing of transfers between levels and (iii) the valuation processes for Level 3 fair value
measurements. The update also adds additional disclosure requirements for public companies, including but not limited to: (i) the
changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value
measurements held at the end of the reporting period and (ii) the range and weighted average of significant unobservable inputs
used to develop Level 3 fair value measurements. The update also modifies and clarifies several existing disclosure
requirements. The amendment in this update is effective for fiscal years beginning after December 15, 2019, and interim periods
within those fiscal years. The additional disclosure requirements and one of the modifications to an existing disclosure
requirement should be applied prospectively while all other disclosure changes should be applied retrospectively to all periods
presented upon the effective date. Early adoption is permitted. We are currently assessing the impact this pronouncement may
have on our fair value measurement disclosures; however, this pronouncement is not expected to have a material impact on our
consolidated financial statements.
On December 18, 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income
Taxes," which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.
The update also simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance to improve consistent
application. The amendment in this update is effective for fiscal years beginning after December 15, 2020, and interim periods
within those fiscal years. Early adoption is permitted. We are currently assessing the impact this pronouncement may have on
our consolidated financial statements.
On January 16, 2020, the FASB issued ASU 2020-1, "Investments-Equity Securities (Topic 321), Investments-Equity Method
and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic
323, and Topic 815," which provides guidance on the interaction between accounting standards related to equity securities,
equity method investments and certain derivatives. This amendment clarifies that an entity should consider observable
transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the
measurement alternative immediately before applying, or upon discontinuing, the equity method. The amendment also clarifies
that an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option,
individually or with existing investments, the underlying securities would be accounted for under the equity method or the fair
value option in accordance with the financial instruments guidance. The amendment in this update is effective for fiscal years
beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. This
pronouncement is not expected to have a material impact on our consolidated financial statements.
Note 3. Revenue from Contracts with Customers
Contract Assets
Our contract assets consist of capitalized commission costs and upfront payments made to customers. The current portion
of capitalized commission costs and upfront payments made to customers are included in other current assets within our
consolidated balance sheets. The non-current portion of capitalized commission costs and upfront payments made to customers
are reflected in other assets within our consolidated balance sheets. Our amortization of contract assets during the years ended
December 31, 2019 and 2018 were $2.4 million and $2.0 million, respectively. There were no amortized commission costs during
the year ended December 31, 2017.
We review the capitalized costs for impairment at least annually. Impairment exists if the carrying amount of the asset
recognized from contract costs exceeds the remaining amount of consideration we expect to receive in exchange for providing
the goods and services to which such asset relates, less the costs that relate directly to providing those good and services and
that have not been recognized as an expense. We did not record an impairment loss on our contract assets during the years
ended December 31, 2019, 2018 and 2017.
93
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
The changes in our contract assets are as follows (in thousands):
Beginning of period balance
Commission costs and upfront payments to a customer capitalized in period
Amortization of contract assets
End of period balance
Contract Liabilities
Year Ended December 31,
2019
2018
$
$
2,881
$
4,141
(2,444)
4,578
$
—
4,864
(1,983)
2,881
Contract liabilities include payments received in advance of performance under the contract, and are realized with the
associated revenue recognized under the contract. The changes in our contract liabilities are as follows (in thousands):
Beginning of period balance
Revenue deferred and acquired in current period
Revenue recognized from amounts included in contract liabilities
End of period balance
Year Ended December 31,
2019
2018
$
$
11,176
$
6,127
(6,805)
10,498
$
12,678
3,954
(5,456)
11,176
The revenue recognized from amounts included in contract liabilities primarily relates to prepayment contracts with
customers as well as payments of activation fees.
Note 4. 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,
2019
2018
$
$
80,032
(2,584)
(1,075)
76,373
$
$
52,850
(1,425)
(1,915)
49,510
For the years ended December 31, 2019, 2018 and 2017, we recorded a provision for doubtful accounts of $1.2 million, $0.1
million and $0.5 million, respectively.
For the year ended December 31, 2019, we recorded a reduction to the reserve for product returns of $0.1 million. For the
years ended December 31, 2018 and 2017, we recorded a $0.3 million and $2.1 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 5. Inventory, Net
The components of inventory, net are as follows (in thousands):
Raw materials
Finished goods
Total inventory, net
December 31,
2019
2018
$
$
8,921
25,247
34,168
$
$
6,396
16,594
22,990
94
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
Note 6. Property and Equipment, Net
Furniture and fixtures, computer software and equipment, leasehold improvements and real property are recorded at cost
and presented net of depreciation. We record land at historical cost. During the application development phase, we record
capitalized development costs in our construction in progress account and then reclass the asset to internal-use software when
the project is ready for its intended use, which is usually when the code goes into production. Furniture, fixtures and office
equipment and computer software and hardware 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. Leasehold improvements are
amortized on a straight-line basis over the shorter of the lease terms or the asset lives. Real property is amortized on a straight-
line basis over lives ranging from 15 to 39 years.
The components of property and equipment, net are as follows (in thousands):
Furniture, fixtures and office equipment
Computer software and hardware
Internal-use software
Construction in progress
Leasehold improvements
Real property
Land
Total property and equipment
Accumulated depreciation
Property and equipment, net
December 31,
2019
2018
5,604
17,767
8,949
4,232
23,223
4,917
1,398
66,090
(27,542)
38,548
$
$
4,102
16,228
5,072
3,790
18,338
707
508
48,745
(20,988)
27,757
$
$
Depreciation expense related to property and equipment for the years ended December 31, 2019, 2018 and 2017 was $5.9
million, $5.7 million and $5.4 million, respectively. Amortization expense related to internal-use software of $1.9 million, $0.8
million and $0.4 million was included in those expenses for the years ended December 31, 2019, 2018 and 2017, respectively.
We had no disposals and write-offs of property and equipment that impacted the consolidated statements of operations during
the year ended December 31, 2019. Within the Alarm.com segment, we disposed of and wrote off $1.4 million and $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 years ended December 31, 2018
and 2017, respectively. In December 2019, we purchased land and a commercial building located in Liberty Lake, Washington
for $5.1 million. Once renovations are complete, this building will be used by OpenEye for sales and training, research and
development, warehousing and administrative purposes.
Note 7. Acquisitions
Asset Acquisition
On September 18, 2019, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of an
unrelated third party. Substantially all of the acquired assets consisted of in-process research and development, or IPR&D. We
believe the acquisition of the IPR&D will strengthen our comprehensive suite of cloud-based solutions.
In consideration for the purchase of the IPR&D, we paid $0.9 million in cash on September 18, 2019, with the remaining
$0.1 million expected to be paid 18 months following the acquisition date, subject to offset for any indemnification obligations.
The $1.0 million consideration related to IPR&D was expensed at the time of the asset acquisition and was included in research
and development expense in our consolidated statements of operations during 2019, as the IPR&D had no alternative future
use.
OpenEye
On October 21, 2019, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired 85% of the issued and
outstanding capital stock of OpenEye. OpenEye provides cloud-managed video surveillance solutions for the enterprise
commercial market. We believe the acquisition of OpenEye will provide a key element to our comprehensive suite of interactive
cloud-based services spanning video, access control, intrusion and automation for domestic and international commercial
enterprises.
95
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
In consideration for the purchase of 85% of the issued and outstanding capital stock of OpenEye, we paid $61.2 million in
cash on October 21, 2019, after deducting $2.8 million related to an agreed holdback. Pursuant to the terms of the stock
purchase agreement, following the preliminary determination of the working capital of OpenEye as of the closing date, the
purchase price increased by $0.2 million. The working capital adjustment is expected to be finalized and paid to the stockholders
of OpenEye in the first half of 2020 along with a portion of the holdback. The remaining amount of the holdback is expected to be
paid to the stockholders of OpenEye by the fourth quarter of 2022, subject to offset for any indemnification obligations. An earn-
out of up to an additional $11.0 million is payable if certain calendar 2020 revenue targets are met, of which $2.8 million was
recorded at October 21, 2019. The purchase price allocation, which is pending the final determination of the working capital and
tax adjustments, was not finalized as of the filing date of this Annual Report on Form 10-K.
The table below sets forth the purchase consideration and the preliminary allocation to estimate the fair value of the tangible
and intangible net assets acquired (in thousands):
October 21, 2019
$
$
$
Calculation of Purchase Consideration:
Cash paid, net of working capital adjustment
Holdback consideration
Contingent consideration
Total consideration
Estimated Tangible and Intangible Net Assets:
Cash
Accounts receivable
Inventory
Other current assets
Property and equipment
Customer relationships
Developed technology
Trade name
Accounts payable
Accrued expenses
Other current liabilities
Deferred tax liability
Deferred revenue
Redeemable noncontrolling interest
Goodwill
Total estimated tangible and intangible net assets
$
61,403
2,820
2,793
67,016
2,352
5,742
4,687
216
296
19,805
16,583
2,219
(2,746)
(1,017)
(1,683)
(8,510)
(889)
(11,411)
41,372
67,016
Goodwill of $41.4 million reflects the value of acquired workforce and synergies we expect to achieve from integrating
OpenEye's cloud-managed video surveillance solutions into our existing comprehensive suite of interactive cloud-based services
for domestic and international commercial enterprises. None of the goodwill recognized is expected to be deductible for income
tax purposes in future periods. We allocate goodwill to reporting units based on expected benefit from synergies and have
preliminarily allocated the goodwill to the Alarm.com segment.
Fair Value of Net Assets Acquired and Intangibles
In accordance with ASC 805, OpenEye constituted a business and the assets and liabilities were recorded at their
respective fair values as of October 21, 2019. 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 OpenEye shared with its customers. We valued the single group of customer
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
relationships using the multi-period excess earnings method, an income approach. The significant assumptions used in the
income approach include estimates about future expected cash flows from customer contracts, the attrition rate and the discount
rate. We are amortizing the customer relationships, valued at $19.8 million, on an attribution basis derived from the discounted
cash flows of the model over an estimated useful life of 13 years.
Developed Technology
Developed technology primarily consists of intellectual property of proprietary software that is marketed for sale. We valued
the developed technology by applying the relief from royalty method, an income approach. The significant assumptions used in
the relief from royalty method include estimates about future expected cash flows from the developed technology, the royalty
rate, the obsolescence factor and the discount rate. We are amortizing the OpenEye developed technology, valued at $16.6
million, on an attribution method based on the discounted cash flows of the model over an estimated useful life of nine years.
Trade Name
We valued the trade names acquired using a relief from royalty method. The significant assumptions used in the income
approach include future expected cash flows from the trade name, the royalty rate and the discount rate. We are amortizing the
trade names, valued at $2.2 million, on an attribution basis derived from the discounted cash flows of the model over an
estimated useful life of five years.
Redeemable Noncontrolling Interests
Our redeemable noncontrolling interest relates to our 85% equity ownership interest in OpenEye. The OpenEye stockholder
agreement contains a put option that gives the minority OpenEye stockholders the right to sell their remaining 15% equity
ownership interest to us based on the fair value of the shares. The OpenEye stockholder agreement also contains a call option
that gives us the right to purchase the remaining OpenEye shares from the minority OpenEye stockholders based on the fair
value of the shares. The put and call options can each be exercised beginning in the first quarter of 2023. The redeemable
noncontrolling interest was recorded at fair value on October 21, 2019, by applying the income approach using unobservable
inputs for projected cash flows, including projected financial results and a discount rate, which are considered Level 3 inputs.
This redeemable noncontrolling interest is considered temporary equity and we report it between liabilities and stockholders’
equity in the consolidated balance sheets. The redemption value of the of the noncontrolling interest was $11.4 million as of
October 21, 2019, and decreased to $11.2 million as of December 31, 2019.
Contingent Consideration
We account for the contingent consideration related to the potential earn-out payment using fair value and establish a
liability for the future earn-out payment based on an estimation of revenue attributable to perpetual licenses and subscription
licenses over the 2020 calendar year. We estimated the fair value of the liability by using a Monte Carlo simulation model for
determining each of the projected measures by using an expected distribution of potential outcomes. At October 21, 2019, the
fair value of the liability was $2.8 million. See Note 10 for details on the unobservable inputs used in the fair value estimate.
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 was released in accordance with the asset purchase agreement upon the finalization of 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
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
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 are being recognized
over the remaining service periods of the stock options.
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
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 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 Software 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.
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
Developed Technology
Developed technology primarily consists of intellectual property of proprietary software that is marketed for sale. The
Software 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
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 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 was 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
Tangible and Intangible Net Assets:
Developed technology
Current liabilities
Goodwill
Total 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.
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
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.
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 amortized 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 - OpenEye
The following unaudited pro forma data is presented as if OpenEye were included in our historical consolidated statements
of operations beginning January 1, 2018. These pro forma results do not necessarily represent what would have occurred if all
the business combination had taken place on January 1, 2018, 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 OpenEye business
combination with the following adjustments: (i) we adjusted the pro forma amounts for income taxes, (ii) we adjusted for
amortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2018, and
(iii) we adjusted for transaction fees incurred and reclassified them to January 1, 2018.
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, except per share data):
Revenue
Net income attributable to common stockholders
Net income attributable to common stockholders per share - basic
Net income attributable to common stockholders per share - diluted
Business Combinations in Operations - OpenEye
Pro Forma
Year Ended December 31,
2019
2018
$
$
$
527,550
51,075
1.05
1.02
$
$
$
451,013
13,264
0.27
0.26
The operations of the OpenEye business combination discussed above were included in the consolidated financial
statements as of the acquisition date. The following table presents the revenue and earnings of the business combination in the
year of acquisition as reported within the consolidated financial statements (in thousands):
Revenue
Net loss
Year Ended
December 31, 2019
5,863
$
(1,646)
Unaudited Pro Forma Information - Connect and Piper Business Units from Icontrol and ObjectVideo Labs
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
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
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, except per share data):
Revenue
Net income
Net income per diluted share
Pro Forma
Year Ended
December 31, 2017
350,007
$
33,191
0.68
$
Business Combinations in Operations - Connect and Piper Business Units from Icontrol and ObjectVideo Labs
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 8. Goodwill and Intangible Assets, Net
The changes in goodwill by reportable segment are outlined below (in thousands):
Balance as of January 1, 2018
Goodwill acquired
Balance as of December 31, 2018
Goodwill acquired
Balance as of December 31, 2019
Alarm.com
Other
Total
$
$
63,591
—
63,591
41,372
104,963
$
$
— $
—
—
—
— $
63,591
—
63,591
41,372
104,963
On October 21, 2019, we acquired 85% of the issued and outstanding capital stock of OpenEye and recorded $41.4 million
of goodwill in the Alarm.com segment. There were no impairments of goodwill recorded during the years ended December 31,
2019, 2018 or 2017. As of December 31, 2019, 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, 2018
Amortization
Balance as of December 31, 2018
Intangible assets acquired
Amortization
Balance as of December 31, 2019
Developed
Technology
Trade Name
Total
5,532
(3,854)
1,678
16,583
(1,441)
16,820
$
$
228
(103)
125
2,219
(122)
2,222
$
$
94,286
(15,219)
79,067
38,607
(14,236)
103,438
Customer
Relationships
88,526
$
(11,262)
77,264
19,805
(12,673)
84,396
$
$
$
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
We recorded $14.2 million, $15.2 million and $12.3 million of amortization related to our intangible assets for the years
ended December 31, 2019, 2018 and 2017, respectively. There were no impairments of long-lived assets during the years ended
December 31, 2019, 2018 and 2017.
The following tables reflect the weighted-average remaining life and carrying value of finite-lived intangible assets (in
thousands, except weighted-average remaining life):
December 31, 2019
Customer relationships
Developed technology
Trade name
Other
Total intangible assets
Customer relationships
Developed technology
Trade name
Other
Total intangible assets
Gross
Carrying
Amount
123,731
30,542
3,304
234
157,811
Gross
Carrying
Amount
103,926
13,959
1,084
234
119,203
$
$
$
$
Accumulated
Amortization
$
(39,335) $
(13,722)
(1,082)
(234)
(54,373) $
Net
Carrying
Value
84,396
16,820
2,222
—
103,438
Weighted-
Average
Remaining Life
9.8
8.7
4.8
—
$
$
December 31, 2018
Net
Carrying
Value
Accumulated
Amortization
$
(26,662) $
(12,281)
(959)
(234)
(40,136) $
77,264
1,678
125
—
79,067
Weighted-
Average
Remaining Life
9.9
2.1
2.4
—
The following table reflects the future estimated amortization expense for intangible assets (in thousands):
Year Ended December 31,
2020
2021
2022
2023
2024
2025 and thereafter
Total future amortization expense
Amortization
16,071
$
15,224
14,075
12,763
11,580
33,725
103,438
$
Note 9. Other Assets
Purchases of Patents and Patent Licenses
From time to time, we enter into agreements to purchase patents or patent licenses. The carrying value, net of amortization,
of our purchased patents and patent licenses was $2.4 million and $2.9 million as of December 31, 2019 and 2018, respectively.
As of December 31, 2019 and 2018, $0.5 million of patent costs were included in other current assets and $1.9 million and $2.4
million of patent costs were included in other assets, respectively. In October 2018, we purchased six patents for $1.1 million,
which increased our historical patent costs related to purchased patents and patent licenses to $5.9 million. We are amortizing
the patent costs over the estimated useful lives of the patents, which range from three years to twelve years. Patent cost
amortization of $0.4 million, $0.5 million and $0.7 million was included in cost of SaaS and license revenue in our consolidated
statements of operations for the years ended December 31, 2019, 2018 and 2017, respectively. Patent cost amortization of $0.1
million and less than $0.1 million was included in amortization and depreciation in our consolidated statements of operations for
the year ended December 31, 2019 and 2018, respectively. There was no amortization of patent costs included in amortization
and depreciation during the year ended December 31, 2017.
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
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 to begin each year on September 1 and end each year on December 31. Interest on
the outstanding principal accrued 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 was due
in three installments beginning in July and ending in August following the advance period. The term date of the loan was August
31, 2019; however, the borrower had the option to extend the term of the loan for two successive terms of one year each.
In May 2018, the loan agreement with our distribution partner was amended to convert the entire $4.0 million note
receivable outstanding into a $4.0 million term loan. The term loan matures on July 31, 2022 and requires annual principal
repayments of $1.0 million on July 31 of each year, commencing on July 31, 2019. The term loan also requires monthly interest
payments, with interest accruing on the outstanding principal balance at a rate per annum equal to 6.0% through June 30, 2018
and a rate per annum equal to the LIBOR rate on the first of any interest period plus 7.0% beginning on July 1, 2018. As of
December 31, 2019 and 2018, $1.0 million of the note receivable balance was included in other current assets in our
consolidated balance sheets. As of December 31, 2019 and 2018, $2.0 million and $3.0 million of the note receivable balance
was included in other assets in our consolidated balance sheets, 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, 2019 and 2018.
For the years ended December 31, 2019, 2018 and 2017, we recognized $1.9 million, $1.3 million and $1.2 million of
revenue from the distribution partners associated with these loans.
Loan to a Hardware Supplier
In October 2018, we entered into a subordinate convertible promissory note with one of our hardware suppliers, or the
October 2018 Promissory Note, which was amended in November 2018, January 2019 and February 2019 as a result of the
hardware supplier's financial restructuring. In March 2019, we entered into a separate secured promissory note with the same
hardware supplier, which, together with the October 2018 Promissory Note, we refer to as the Promissory Notes. Under the
Promissory Notes, we agreed to provide the hardware supplier loans of up to $7.4 million, collateralized by all assets owned by
the supplier. Interest on the outstanding principal accrued at a rate per annum equal to 12.0%, of which 6.0% per annum was
payable in cash and the remaining 6.0% per annum was payable in kind. Payment of accrued interest was due quarterly
beginning with the quarter ended March 31, 2019. The repayment of principal was due at the term date, which was the earlier of
(i) the five-year anniversary of the issuance date of each of the Promissory Notes, (ii) the occurrence of a change of control, (iii)
one day following the maturity day of the hardware supplier's senior indebtedness or (iv) immediately upon the acceleration of
the hardware supplier's senior indebtedness.
In March 2019, we also purchased and acquired a secured promissory note, or the Acquired Promissory Note, that matured
on March 30, 2019 and was originally executed between our hardware supplier and another third-party secured creditor. The
Acquired Promissory Note had an outstanding balance of $26.6 million as of December 31, 2018, including interest. Interest on
the outstanding principal accrued at a rate per annum equal to 13.0%. Under the terms of the Acquired Promissory Note, we paid
$16.4 million to the third-party secured creditor in exchange for all of the rights associated with the Acquired Promissory Note,
including a security interest and a right to enforce that interest against all assets owned by the hardware supplier. In addition to
the $16.4 million paid in March 2019, we agreed to pay the third-party secured creditor an additional $6.0 million, subject to
certain contingencies measured as of May 4, 2019. Based on the outcome of those contingencies, we recorded a $6.0 million
liability in March 2019 related to the Acquired Promissory Note and paid the $6.0 million contingent liability during the three
months ended September 30, 2019. The fair value of the Acquired Promissory Note at the date of purchase was $22.4 million,
which represented the initial cash consideration paid in March 2019 and the contingent consideration paid in September 2019.
On May 6, 2019, we entered into a forbearance agreement with the hardware supplier, or the Forbearance Agreement.
Under the Forbearance Agreement, the hardware supplier agreed to pay us the outstanding balance of principal and interest
under the Promissory Notes and the Acquired Promissory Note before June 30, 2019. In consideration for the full and timely
payments under the Forbearance Agreement, we agreed to temporarily forbear from exercising the remedies available to us with
respect to the collateral securing the Promissory Notes and the Acquired Promissory Note. On June 24, 2019, we entered into a
Forbearance Extension Agreement with the hardware supplier, under which the hardware supplier agreed to pay us $7.4 million
on or before June 24, 2019. In consideration for the $7.4 million payment under the Forbearance Extension Agreement, we
agreed to temporarily forbear from exercising the remedies available to us with respect to the collateral securing the Promissory
Notes and the Acquired Promissory Note until July 10, 2019.
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
On June 24, 2019, we received a payment of $7.4 million from the supplier for the partial satisfaction of amounts due under
the Promissory Notes and the Acquired Promissory Note. On July 15, 2019, we received an additional payment of $25.0 million
from the supplier and converted the remaining $5.6 million outstanding notes receivable balance into an equity investment in the
hardware supplier within the Alarm.con segment. We have concluded that the $5.6 million equity investment does not meet the
criteria for consolidation and will be accounted for using the measurement alternative. Under the alternative, we measure
investments without readily determinable fair values at cost, less impairment, adjusted for observable price changes from orderly
transactions for identical or similar investments. As a result of the payments received, we reversed the $3.3 million reserve
related to the October 2018 Promissory Note that was previously recorded during the three months ended December 31, 2018.
The reversal of the reserve was recorded as a reduction to general and administrative expense in our consolidated statements of
operations during the three months ended June 30, 2019.
As a result of the $25.0 million payment received and conversion of the $5.6 million outstanding notes receivable balance
into an equity investment on July 15, 2019, we recorded interest of $1.7 million within interest income and a gain of $6.9 million
within other income, net, in our consolidated statements of operations during the year ended December 31, 2019, related to the
Promissory Notes and the Acquired Promissory Note.
As of December 31, 2019, there was no remaining outstanding balance of the Promissory Notes and the Acquired
Promissory Note. As of December 31, 2018, the outstanding balance of the Promissory Notes excluding interest was $3.3 million
and was included in other assets in our consolidated balance sheets prior to any adjustments for impairment.
Prepaid Expenses
As of December 31, 2019, $6.1 million of prepaid expenses were included in other current assets. As of December 31, 2018,
$5.0 million of prepaid expenses were included in other current assets. In February 2020, we made a prepayment of $4.7 million
for long lead-time parts related to our inventory.
Note 10. Fair Value Measurements
The following tables presents our assets and liabilities measured at fair value on a recurring basis (in thousands):
Fair value measurements in:
Assets:
Money market accounts
Total
Liabilities:
Subsidiary unit awards
Contingent consideration liability from acquisitions
Total
Fair value measurements in:
Assets:
Money market accounts
Total
Liabilities:
Subsidiary unit awards
Total
Fair Value Measurements on a Recurring Basis as of
December 31, 2019
Level 1
Level 2
Level 3
Total
93,303
93,303
$
$
— $
—
— $
— $
— $
— $
—
— $
— $
— $
171
2,595
2,766
$
$
93,303
93,303
171
2,595
2,766
Fair Value Measurements on a Recurring Basis as of
December 31, 2018
Level 1
Level 2
Level 3
Total
117,392
117,392
$
$
— $
— $
— $
— $
— $
— $
— $
— $
117,392
117,392
385
385
$
$
385
385
$
$
$
$
$
$
$
$
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
The following table summarizes the change in fair value of the Level 3 liabilities with significant unobservable inputs (in
thousands):
Fair Value Measurements Using Significant Unobservable Inputs
Year Ended December 31, 2019
Year Ended
December 31, 2018
Subsidiary Unit
Awards
Contingent
Consideration
Liability from
Acquisitions
Subsidiary Unit
Awards
Beginning of period balance
Acquired liabilities
Changes in fair value included in earnings
Settlements
End of period balance
$
$
385
$
—
(14)
(200)
— $
2,793
(198)
—
171
$
2,595
$
3,160
—
27
(2,802)
385
The money market accounts are 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 and future collection of financed customer receivables, the unobservable inputs, 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. During the year ended December 31, 2019,
we settled $0.2 million of the liability related to the subsidiary unit awards. The remaining liability balances are included in either
accounts payable, accrued expenses and other current liabilities or other liabilities in our consolidated balance sheets (see Note
13).
The contingent consideration liability consists of the potential earn-out payment related to our acquisition of 85% of the
issued and outstanding capital stock of OpenEye on October 21, 2019. The earn-out payment is contingent on the satisfaction of
certain calendar 2020 revenue targets and has a maximum potential payment of up to $11.0 million. We account for the
contingent consideration using fair value and establish a liability for the future earn-out payment based on an estimation of
revenue attributable to perpetual licenses and subscription licenses over the 2020 calendar year. We estimated the fair value of
the liability by using a Monte Carlo simulation model for determining each of the projected measures by using an expected
distribution of potential outcomes. The contingent consideration liability was valued with Level 3 unobservable inputs, including
the revenue volatility and the discount rate. At October 21, 2019, the fair value of the liability was $2.8 million. At each reporting
date until the payment date in 2021, we will remeasure the liability, using the same valuation approach. Changes in the fair value
resulting from information that existed subsequent to the acquisition date are recorded in the consolidated statements of
operations. During the year ended December 31, 2019, the contingent consideration liability decreased $0.2 million to $2.6
million as compared to the initial liability recorded at the acquisition date, primarily due to a change to OpenEye's 2020 projected
revenue. The unobservable inputs used in the valuation as of December 31, 2019 included a revenue volatility of 45% and a
discount rate of 3%. Selecting another revenue volatility or discount rate within an acceptable range would not result in a
significant change to the fair value of the contingent consideration liability.
The contingent consideration liability is included in other liabilities in our consolidated balance sheet as of December 31,
2019 (see Note 13).
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, 2019, 2018 and 2017.
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, 2019, 2018 and 2017.
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
Note 11. Leases
We lease office space, data centers and office equipment under non-cancelable operating leases with various expiration
dates through 2026. In August 2014, we signed a lease for office space in Tysons, Virginia, where we relocated our headquarters
to in February 2016. We have subsequently entered into amendments to this lease to provide us with additional office space. In
May 2019 and July 2019, we entered into two amendments to the lease for our corporate headquarters, which provides
for additional office space, additional parking spaces, the extension of additional storage space and additional tenant
improvement allowance. The lease term ends in 2026, includes a five-year renewal option and a cumulative tenant improvement
allowance of $11.2 million.
Supplemental information related to leases is presented in the table below (in thousands, except weighted-average term and
discount rate):
Operating lease cost
Cash paid for amounts included in the measurement of operating lease liabilities
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities
Weighted-average remaining lease term — operating leases
Weighted-average discount rate — operating leases
Maturities of lease liabilities are as follows (in thousands):
Year Ended
December 31, 2019
$
7,600
8,268
7,886
December 31,
2019
5.7 years
4.0%
Year Ended December 31,
Operating Leases(1)
2020
2021
2022
2023
2024
2025 and thereafter and thereafter
Total lease payments
Less: imputed interest(2)
Present value of lease liabilities
$
$
9,333
9,230
8,189
7,553
6,827
9,174
50,306
5,424
44,882
_______________
(1) Operating lease payments exclude $5.1 million of legally binding minimum lease payments for leases executed but not yet
commenced and includes less than $0.1 million for options to extend lease terms that were reasonably certain of being exercised.
(2) Imputed interest was calculated using the incremental borrowing rate applicable for each lease.
Prior to our adoption of Topic 842, rent expense was $6.3 million and $6.2 million for the years ended December 31, 2018
and 2017, respectively.
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
The following table presents the future minimum lease payments under the non-cancelable operating leases as of
December 31, 2018 prior to our adoption of Topic 842 (in thousands):
Year Ended December 31,
2019
2020
2021
2022
2023
2024 and thereafter
Total
Note 12. Liabilities
Minimum Lease Payments
7,044
$
7,168
6,974
6,719
6,348
14,838
49,091
$
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
Contingent consideration liability from acquisitions
Holdback liability from acquisitions
Other liabilities
Other liabilities
Note 13. Debt, Commitments and Contingencies
December 31,
2019
December 31,
2018
$
$
32,878
$
10,092
141
5,616
48,727
$
20,214
34,557
200
3,459
58,430
December 31,
2019
December 31,
2018
$
$
— $
11,656
2,595
1,650
3,244
7,489
$
—
—
1,650
13,306
The debt, commitments and contingencies described below would require us, or our subsidiaries, to make payments to third
parties under certain circumstances.
Debt
On October 6, 2017, we entered into a $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 our previous
credit facility. 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 being
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. During each of the years ended December 31, 2019 and 2018, we repaid $4.0 million of the
outstanding balance of the 2017 Facility.
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, 2019, 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
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ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
and greater than or equal to 3.00:1.00, respectively. The 2017 Facility also carries an unused line commitment fee of 0.20%. For
the years ended December 31, 2019, 2018 and 2017, the effective interest rate on the credit facilities was 4.45%, 4.13% and
4.16%, respectively.
The carrying value of the 2017 Facility was $63.0 million and $67.0 million as of December 31, 2019 and 2018, respectively.
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 approximated its fair value as of
December 31, 2019 and 2018. The 2017 Facility contains various financial and other covenants that require us to maintain a
maximum consolidated leverage ratio not to exceed 3.25:1.00 and a consolidated fixed charge coverage ratio of at least
1.25:1.00. As of December 31, 2019, we were in compliance with all financial and non-financial covenants and there were no
events of default.
On November 30, 2018, we amended the 2017 Facility to incorporate the parameters that must be met for us to repurchase
our outstanding common stock under the stock repurchase program authorized by our board of directors on November 29, 2018
(see Note 14).
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 based on the future collection of financed customer receivables from 2018 to 2020 that existed as of the valuation date.
During 2019 and 2018, we settled $0.2 million and $2.8 million of the liability related to the subsidiary unit awards, respectively.
We recorded a liability of $0.1 million in accounts payable, accrued expenses and other current liabilities and less than $0.1
million in other liabilities related to this commitment in our consolidated balance sheet as of December 31, 2019. We recorded a
liability of $0.2 million in accounts payable, accrued expenses and other current liabilities and a liability of $0.2 million in other
liabilities related to this commitment in our consolidated balance sheet as of December 31, 2018.
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).
Contingent Consideration
On October 21, 2019, we acquired 85% of the issued and outstanding capital stock of OpenEye. Certain stockholders of
OpenEye have the right to receive an earn-out payment of up to an additional $11.0 million based upon satisfaction of certain
calendar 2020 revenue targets. At October 21, 2019, the fair value of the contingent consideration liability was $2.8 million. At
each reporting date until the payment date in 2021, we will remeasure the liability, using the same valuation approach. Changes
in the fair value resulting from information that existed subsequent to the acquisition date are recorded in the consolidated
statements of operations. During the year ended December 31, 2019, the contingent consideration liability decreased $0.2
million to $2.6 million as compared to the initial liability recorded at the acquisition date, primarily due to a change to OpenEye's
2020 projected revenue. The contingent consideration liability is included in other liabilities in our consolidated balance sheet as
of December 31, 2019 (see Note 10).
Indemnification Agreements
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, 2019 and 2018, we had no outstanding letters of credit under the 2017 Facility.
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
108
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
damages and attorneys' 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 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 three patents that found certain claims unpatentable,
while certain other claims were not found to be unpatentable. Vivint appealed the decisions to the U.S. Court of Appeals for the
Federal Circuit, or the Federal Circuit, and we cross-appealed. In July 2018, the Federal Circuit issued orders affirming the
PTAB’s March 2017 decisions that invalidated all challenged claims of two patents. The U.S. District Court, District of Utah lifted
the stay on the litigation on June 26, 2017, with Vivint proceeding with its case on four of the six patents in its complaint. No trial
date has been set. In September 2017, the U.S. Patent and Trademark Office, or PTO, ordered ex parte reexaminations of
certain claims of two of the remaining patents in suit, at our request. On October 30, 2018 and November 5, 2018, the PTO
issued final office actions in the pending reexaminations rejecting all claims being examined as unpatentable over the prior art.
Vivint appealed these rejections to the PTAB on March 29, 2019 and April 4, 2019. The U.S. District Court, District of Utah has
ordered the litigation regarding the nine claims (from two patents) rejected by the PTO during the reexaminations be stayed until
May 15, 2020. On April 3, 2019, the U.S. District Court, District of Utah heard argument on the parties’ cross motions for claim
construction and Alarm.com’s motion for partial summary judgment as to invalidity. Decisions on these motions are pending. On
December 20, 2018, the Federal Circuit issued an order regarding the inter partes review of three of the remaining patents in suit
that vacated, reversed and remanded the PTAB’s ruling with regard to the construction of a term (“communication device
identification code”) as requested by Alarm.com and affirmed the PTAB’s May 2017 rulings invalidating certain of the Vivint
patents in all other respects. On July 24, 2019, the PTAB issued further decisions with respect to two of the remaining patents in
suit, finding additional claims unpatentable in view of the Federal Circuit’s December 20, 2018 decision. One of the claims
asserted in the litigation was found unpatentable in the July 14, 2019 decisions, and the U.S. District Court, District of Utah has
stayed the proceedings with respect to that claim until May 15, 2020. Vivint appealed the July 24, 2019 decisions to the Federal
Circuit on September 25, 2019.
Should Vivint prevail in proving Alarm.com infringes one or more of its patent claims, we could be required to pay damages
of Vivint’s lost profits and/or a reasonable royalty for sales of our solution. Since all remaining patent claims in the litigation have
expired, Vivint shall not be entitled to injunctive relief as a remedy in this matter. 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. Based on currently available
information, we have determined a loss is not probable or reasonably estimable at this time.
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 sought 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 asserted 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. In June 2017, Alarm.com filed an amended complaint against Protect America only in the Western
District of Texas and voluntarily dismissed SecureNet from the suit. In December 2019, Alarm.com entered into a confidential
settlement agreement with Protect America which resulted in the dismissal of the lawsuit without prejudice.
On October 22, 2019, EcoFactor, Inc., or EcoFactor, filed a complaint with the U.S. International Trade Commission, or ITC,
naming Alarm.com Incorporated and Alarm.com Holdings, Inc., among others, as proposed respondents. The complaint alleges
that Alarm.com’s smart thermostats infringe three U.S. patents owned by EcoFactor. EcoFactor is seeking a permanent limited
exclusion order and permanent cease and desist order. On November 22, 2019, the ITC instituted an investigation into
EcoFactor’s allegations naming Alarm.com Incorporated, Alarm.com Holdings, Inc. and others as respondents. We answered the
complaint on December 19, 2019. Among other things, we asserted defenses based on non-infringement and invalidity of the
patents in question. The administrative law judge presiding over the investigation has set March 15, 2021 as the target date for
completion of the investigation. The evidentiary hearing is scheduled to begin on July 21, 2020.
On November 11, 2019, EcoFactor filed a lawsuit against us in U.S. District Court, District of Massachusetts, alleging
infringement of the same three patents asserted against us in the ITC. EcoFactor is seeking permanent injunctions, enhanced
damages and attorneys' fees. On December 26, 2019, the court issued an order staying the lawsuit pending the conclusion of
the related ITC investigation.
On January 31, 2020, EcoFactor filed a second lawsuit against us in U.S. District Court, Western District of Texas, alleging
Alarm.com’s products and services infringe four additional U.S. patents owned by EcoFactor. EcoFactor is seeking permanent
injunctions, enhanced damages and attorneys' fees. Our response to the complaint is due on March 5, 2020.
Should EcoFactor prevail in the ITC investigation, Alarm.com thermostats manufactured abroad could be excluded from
importation into the United States. Should EcoFactor prevail in its district court lawsuits we could be required to pay damages
and/or a reasonable royalty for sales of our solution, we could be 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, and we could be required to pay ongoing royalties
109
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
and comply with unfavorable terms if such a license is made available to us. While we believe we have valid defenses to
EcoFactor’s claims, the outcome of these legal claims cannot be predicted with certainty and any of these outcomes could result
in an adverse effect on our business. Based on currently available information, we have 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, or the Court, which alleged violations of the Telephone Consumer Protection Act, or TCPA, and sought to hold us
responsible for the marketing activities of one of our service providers as well as telemarketing calls made by one of this service
provider’s sub-dealer agents under principles of agency and vicarious liability. On August 30, 2018, we reached an agreement in
principle to settle the case for total cash consideration of $28.0 million. On October 25, 2018, we entered into a definitive
settlement agreement, or Settlement Agreement, and submitted it to the Court for approval. The Court granted preliminary
approval of the Settlement Agreement on December 19, 2018 and final approval on August 13, 2019.
In entering into the definitive settlement agreement, we made no admission of liability. Pursuant to the Settlement
Agreement, among other things, (1) we agreed to pay total cash consideration of $28.0 million into a settlement fund, (2) we
agreed to implement certain business practice changes to increase awareness of TCPA compliance, (3) each party to the
Settlement Agreement agreed to a mutual release of claims relating to any claim or potential claim relating to the marketing
activities described in the complaint, and (4) each party covenanted not to sue the other with regard to the released claims. In
addition, we agreed to no longer allow the service provider identified in the litigation as purportedly violating the TCPA to continue
activating new accounts for Alarm.com products and services following preliminary Court approval of the Settlement Agreement.
We made an initial payment of $5.0 million to the settlement administrator on January 2, 2019, and the remaining payment
of $23.0 million was made on September 30, 2019. The release of claims includes all alleged damages incurred related to the
lawsuit. Any attorneys’ fees awarded by the Court and all costs of notice and claims administration will be paid from the
settlement fund. We currently expect all distributions to be completed by August 2020. The $28.0 million settlement was reflected
in general and administrative expenses within our consolidated statements of operations for the three and nine months ended
September 30, 2018.
In addition to the matters described above, we may be required to provide indemnification to certain of our service provider
partners for certain claims regarding our solutions. For example, we are incurring costs associated with the indemnification of our
service provider ADT, LLC in two ongoing patent infringement suits: Applied Capital, Inc. v. The ADT Corporation et al. and
Varatec, LLC v. ADT, LLC.
On July 13, 2016, Applied Capital, Inc., or Applied Capital, filed a lawsuit against ADT, LLC, the ADT Corporation, and
Icontrol Networks, Inc. in U.S. District Court, the District of New Mexico. Applied Capital, Inc v. The ADT Corporation et al., D.
New Mexico Case No. 1-16-cv-00815. Icontrol was dismissed without prejudice on May 22, 2017. Applied Capital alleges that
ADT’s sales of ADT Pulse directly and indirectly infringes U.S. Patent Nos. 8,378,817 and 9,728,082, which were allegedly
purchased by Applied Capital. Applied Capital is seeking damages and attorneys’ fees. ADT answered Applied Capital’s
amended complaint on July 16, 2018. Among other things, ADT has asserted defenses based on non-infringement and invalidity
of the patents-in-suit. On April 5, 2019, Applied Capital filed a lawsuit for breach of contract against Rodney Fox, the inventor of
the patents-in-suit, in the Second Judicial District Court, County of Bernalillo in New Mexico State Court (No. D-202-
CV-2019-02841). Mr. Fox counterclaimed, alleging that he is the rightful owner of the patents-in-suit. Based on the dispute of
ownership, on October 15, 2019, ADT filed a motion to stay in this matter pending its resolution. Applied Capital and Mr. Fox
reached settlement and stipulated to dismissal of the New Mexico State Court action on October 31, 2019. The court issued its
claim construction order on August 12, 2019, fact discovery closed on November 12, 2019, and the parties served opening
expert reports on December 16, 2019. Rebuttal expert reports are due on February 10, 2020 and expert discovery closes on
February 28, 2020. Applied Capital filed its Second Amended Complaint on January 27, 2020 and ADT answered, adding a claim
of inequitable conduct, on February 10, 2020. The pretrial conference is scheduled for August 5, 2020; however, the trial date
has not yet been set.
On March 4, 2019, Varatec, LLC, or Varatec, sued ADT, LLC d/b/a ADT Security Services in U.S. District Court for the
Northern District of Illinois. Varatec, LLC v. ADT, LLC d/b/a ADT Security Services, N.D. Illinois Case No. 1-19-cv-01543. Varatec
alleges that ADT’s sales of ADT Pulse directly and indirectly infringe U.S. Patent No. 7,792,256, which was assigned to
Varatec. Varatec seeks a permanent injunction, enhanced damages, and attorneys’ fees. On May 23, 2019, ADT filed a motion
seeking to dismiss the complaint for failure to state a claim, on the basis that the asserted patent fails to claim patent eligible
subject matter. On July 3, 2019, third-party Unified Patents Inc. filed a petition seeking inter parties review of the asserted patent
by the PTAB. After the completion of briefing of ADT’s motion to dismiss, the parties agreed to stay the case pending resolution
of the inter partes review, and the court granted the parties’ motion on August 14, 2019. Unified Patent’s petition for inter parties
review was instituted on December 31, 2019 and Varatec’s response is due on March 23, 2020. The stay remains in place.
Should either Applied Capital or Varatec prevail on the claims that one or more elements of ADT’s products infringe, we
could be required to indemnify ADT for damages in the form of a reasonable royalty or ADT could be enjoined from making,
using and selling our solution if a license or other right to continue selling our technology is not made available to us or we are
110
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
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 these legal claims cannot be predicted with certainty. We believe there are valid
defenses to the claims made by Applied Capital and Varatec. Based on currently available information, we have determined a
loss is not probable or reasonably estimable at this time.
We may also 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 14. 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.
Common and Preferred Stock
As of December 31, 2019 and 2018, there were 48,700,963 and 48,103,038 shares of common stock issued, and
48,700,713 and 48,102,081 shares of common stock outstanding, respectively. As of December 31, 2019 and 2018, there were
no preferred shares issued and outstanding. Each outstanding share of common stock is entitled to one vote per share.
Stock Repurchase Program
On November 29, 2018, our board of directors authorized a stock repurchase program, under which we are authorized to
purchase up to an aggregate of $75.0 million of the Company’s outstanding common stock during the two-year period ending
November 29, 2020. No shares of the Company's stock were repurchased under this program during the years ended
December 31, 2019 and 2018.
Note 15. 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,
2018
2017
2019
$
$
2,075
6,474
12,054
20,603
$
$
1,196
4,901
7,332
13,429
$
$
561
2,638
4,214
7,413
The following table summarizes the components of non-cash stock-based compensation expense (in thousands):
Year Ended December 31,
2018
2017
2019
Stock options and assumed options
Restricted stock units
Restricted stock awards
Employee stock purchase plan
Total stock-based compensation expense
Tax benefit from stock-based awards
$
$
$
3,783
16,627
—
193
20,603
5,154
$
$
$
3,511
9,770
1
147
13,429
7,581
$
$
$
3,913
3,366
19
115
7,413
12,719
111
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
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, 2019, 6,527,550 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 250 and 957 unvested shares of common stock outstanding subject to our right of repurchase as of
December 31, 2019 and 2018, respectively. We repurchased 27 and 107 of these unvested shares of common stock related to
early exercised stock options in connection with employee terminations during the years ended December 31, 2019 and 2018,
respectively. We recorded less than $0.1 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, 2019
and 2018.
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
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. Beginning in November 2019, the expected volatility for options granted is based on historical volatilities of our
stock over the estimated expected term of the stock options. The expected volatility for options granted prior to November 2019
was 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 186,500, 219,450 and 252,100 stock options granted during the years ended December 31, 2019, 2018 and
2017, 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 0%.
112
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
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
2019
39.6 - 42.2%
6.3 - 7.5 years
1.4 - 2.5%
—%
Year Ended December 31,
2018
41.9 - 60.8%
6.3 years
2.3 - 3.0%
—%
2017
44.4 - 61.6%
6.3 years
2.0 - 2.2%
—%
The following table summarizes stock option activity:
Outstanding as of December 31, 2018
Granted
Exercised
Forfeited
Expired
Outstanding as of December 31, 2019
Vested and expected to vest as of December 31, 2019
Exercisable as of December 31, 2019
Number of
Options
2,057,800
186,500
(321,768)
(15,627)
(1,154)
1,905,751
1,906,001
1,310,486
Weighted
Average Exercise
Price Per Share
$
$
$
$
15.37
56.32
7.81
22.82
15.47
20.60
20.60
13.06
Weighted Average
Remaining
Contractual Life
(in years)
6.3
Aggregate
Intrinsic Value
(in thousands)
75,101
$
15,061
45,344
45,351
39,459
6.0
6.0
5.1
$
$
$
The weighted average grant date fair value for our stock options granted during the years ended December 31, 2019, 2018
and 2017 was $25.01, $19.43 and $14.95, respectively. The total fair value of stock options vested during the years ended
December 31, 2019, 2018 and 2017 was $3.4 million, $3.5 million and $3.5 million, respectively. The aggregate intrinsic value of
stock options exercised during the years ended December 31, 2019, 2018 and 2017 was $15.1 million, $32.7 million and $35.0
million, respectively. As of December 31, 2019, the total compensation cost related to nonvested awards not yet recognized was
$5.3 million, which will be recognized over a weighted average period of 2.5 years. Cash received from exercises of stock
options was $2.5 million, $5.2 million and $2.6 million during the years ended December 31, 2019, 2018 and 2017, 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
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.
113
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
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:
Outstanding as of December 31, 2018
Exercised
Forfeited
Expired
Outstanding as of December 31, 2019
Vested and expected to vest as of December 31, 2019
Exercisable as of December 31, 2019
Number of
Options
Weighted
Average Exercise
Price Per Share
21,633
(5,672)
(22)
(134)
15,805
15,805
15,177
$
$
$
$
6.61
4.72
4.55
10.54
7.26
7.26
7.08
Weighted Average
Remaining
Contractual Life
(in years)
6.5
Aggregate
Intrinsic Value
(in thousands)
979
$
319
5.7
5.7
5.7
$
$
$
564
564
545
The weighted average grant date fair value for the assumed stock options granted during the year ended December 31, 2017
was $4.78. There were no new grants assumed under the Icontrol Plans in 2019 and 2018. The total fair value of assumed stock
options vested during the years ended December 31, 2019, 2018 and 2017 was $0.1 million. The aggregate intrinsic value of
assumed stock options exercised during the years ended December 31, 2019, 2018 and 2017 was $0.3 million, $0.7 million and
$0.3 million, respectively. As of December 31, 2019, the total compensation cost related to the nonvested awards not yet
recognized was less than $0.1 million, which will be recognized over a weighted average period of 0.2 years. Cash received from
exercises of stock options was less than $0.1 million, $0.1 million and less than $0.1 million during the years ended
December 31, 2019, 2018 and 2017, respectively.
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 years ended December 31, 2018 and 2017. There were no outstanding RSAs as of
December 31, 2018. There were no repurchases of RSAs during the year ended December 31, 2018. We repurchased 750
RSAs in connection with employee terminations during the year ended December 31, 2017.
Restricted Stock Units
There was an aggregate of 827,764, 381,545 and 534,146 RSUs granted to certain of our employees during the years
ended December 31, 2019, 2018 and 2017, respectively. 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, 2019, the total
unrecognized compensation expense related to RSU awards granted amounted to $44.6 million, which is expected to be
recognized over a weighted average period of 2.8 years.
114
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
The following table summarizes RSU activity:
Outstanding as of December 31, 2018
Granted
Vested
Forfeited
Outstanding as of December 31, 2019
Vested and expected to vest as of December 31, 2019
Employee Stock Purchase Plan
Number of
RSUs
Weighted
Average Grant
Date Fair Value
Aggregate
Intrinsic Value
(in thousands)
871,752
827,764
(243,701)
(69,327)
1,386,488
1,386,488
$
$
$
38.37
52.16
36.90
45.12
46.52
46.52
$
$
$
45,218
13,592
59,577
59,577
Our board of directors adopted our 2015 ESPP in June 2015. As of December 31, 2019, 2,004,184 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, 2019, 2018 and 2017, an aggregate of 26,811,
29,131 and 25,616 shares were purchased by employees for which we recognized $0.2 million, $0.1 million and $0.1 million of
compensation expense, respectively. Compensation expense is recognized for the amount of the discount, net of actual
forfeitures and voluntary withdrawals, over the six-month purchase period.
Note 16. Earnings Per Share
Basic and Diluted Earnings Per Share
The components of basic and diluted earnings per share are as follows (in thousands, except share and per share
amounts):
Net income
Net loss attributable to redeemable noncontrolling interest
Net income allocated to participating securities
Net income attributable to common stockholders (A)
Weighted average common shares outstanding — basic (B)
Dilutive effect of stock options, restricted stock units and restricted stock awards
Weighted average common shares outstanding — diluted (C)
Net income per share:
Basic (A/B)
Diluted (A/C)
Year Ended December 31,
2018
2017
2019
53,330
201
—
53,531
48,427,446
1,846,443
50,273,889
$
$
$
$
21,524
—
(3)
21,521
47,633,739
2,058,445
49,692,184
29,251
—
(13)
29,238
46,682,141
2,471,807
49,153,948
1.11
1.06
$
$
0.45
0.43
$
$
0.63
0.59
$
$
$
$
115
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
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
Restricted stock awards
Restricted stock units
Common stock subject to repurchase
Year Ended December 31,
2018
2017
2019
223,259
—
136,600
250
229,294
—
148,175
957
258,917
129
188,050
13,281
Participating securities are composed of certain stock options granted under the 2015 Plan, and previously granted under
the 2009 Equity Incentive Plan, that may be exercised before the options have vested. Unvested shares have a non-forfeitable
right to dividends. 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 common stock subject to repurchase is no longer classified as
participating securities when shares revert to common stock outstanding as the awards vest and our repurchase right lapses.
Our redeemable noncontrolling interest relates to our 85% equity ownership interest in OpenEye. The OpenEye stockholder
agreement contains a put option that gives the minority OpenEye stockholders the right to sell their OpenEye shares to us based
on the fair value of the shares. The OpenEye stockholder agreement also contains a call option that gives us the right to
purchase the remaining OpenEye shares from the minority OpenEye stockholders based on the fair value of the shares. The put
and call options can each be exercised beginning in the first quarter of 2023. This redeemable noncontrolling interest is
considered temporary equity and we report it between liabilities and stockholders’ equity in the consolidated balance sheets. The
amount of the net income or loss attributable to redeemable noncontrolling interests is recorded in the consolidated statements
of operations.
Note 17. Significant Service Providers
During the years ended December 31, 2019, 2018 and 2017, our 10 largest revenue service provider partners accounted for
52%, 57% and 60% 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 years ended December 31, 2019, 2018 and 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 year ended December 31, 2017.
One individual service provider partner in the Alarm.com segment represented more than 10% of accounts receivable as
of December 31, 2019 and 2018.
Note 18. Income Taxes
The Tax Cuts and Jobs Act, or the Tax Act, was signed into law on December 22, 2017. This legislation made significant
changes 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 income tax rate
from 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 which was recorded during the year ended December 31,
2017.
Additionally, on December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No.
118, or SAB 118, to address the application of 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 completed the accounting for the tax effects of the Tax Act during the three months ended September 30, 2018
and decreased our provisional estimate from $8.8 million to $8.7 million.
116
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
The components of our income tax expense are as follows (in thousands):
Year Ended December 31,
2018
2017
2019
Current
Federal
State
Foreign
Total Current
Deferred
Federal
State
Foreign
Total Deferred
Total
$
$
1,615
900
452
2,967
2,622
(23)
—
2,599
5,566
$
$
$
741
653
263
1,657
584
(88)
6
502
(8,821)
(2,643)
(18)
(11,482)
(9,825) $
3,837
(1,368)
19
2,488
2,990
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,
2018
2017
2019
Federal statutory rate
State income tax expense, net of federal benefits
Nondeductible meals and entertainment
Nondeductible employee fringe benefits
Research and development tax credits
Tax windfall benefits
Change in tax rate due to tax reform
Change in tax rate
Other
Effective rate
21.0%
0.6
0.8
—
(7.9)
(7.5)
—
0.4
2.1
9.5%
21.0 %
(3.4)
2.1
1.3
(48.7)
(55.7)
—
(1.4)
0.8
(84.0)%
35.0%
0.1
0.6
—
(16.1)
(36.5)
27.8
(0.6)
(1.0)
9.3%
117
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
The components of our net deferred tax assets (liabilities) are as follows (in thousands):
Deferred tax assets, non-current
Provision for doubtful accounts
Depreciation
Provision for notes receivable
Accrued expenses
Deferred revenue
Operating lease liabilities
Deferred rent
Stock-based compensation
Acquisition costs
Subsidiary unit compensation
Equity investments
Inventory reserve
Net operating losses
Tax credits
Intangible assets and prepaid patent licenses
Other
Total deferred tax assets, non-current prior to valuation allowance
Valuation allowance
Total deferred tax assets, non-current, net of valuation allowance
Deferred tax liabilities, non-current
Intangible assets and prepaid patent licenses
Operating lease right-of-use assets
Depreciation
Sales commissions
Contingent liability
Internally developed software
Total deferred tax liabilities, non-current
Net deferred tax assets, non-current
December 31,
2019
2018
$
$
606
267
—
3,114
2,060
10,929
—
8,840
2,811
185
243
30
1,289
7,755
—
106
38,235
(322)
37,913
(6,162)
(7,441)
(3,030)
(766)
(170)
(1,208)
(18,777)
19,136
$
$
576
—
829
9,588
2,226
—
3,334
6,064
3,092
138
119
—
1,210
5,140
758
158
33,232
—
33,232
(12)
—
(3,393)
(704)
(172)
—
(4,281)
28,951
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,
2018
2017
2019
Beginning balance
Additions based on tax positions of the current year
Additions based on tax positions of prior year
Decreases based on tax positions of prior year
Additions resulting from acquisitions
Decreases due to lapse of applicable statute of limitations
Ending balance
$
$
2,801
718
18
(253)
—
(219)
3,065
$
$
1,973
857
147
—
—
(176)
2,801
$
$
681
718
373
—
277
(76)
1,973
Our effective income tax rates were 9.5%, (84.0)% and 9.3% for the years ended December 31, 2019, 2018 and 2017,
respectively. Our effective tax rates were below the statutory rate primarily due to the tax windfall benefits from employee stock-
based payment transactions, foreign derived intangible income deductions and research and development tax credits claimed,
partially offset by the impact of non-deductible meal and entertainment expenses and state taxes.
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. Due to the uncertainty of realization of
118
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
certain deferred tax assets acquired as part of the Acquisition in 2017 related to our Canadian net operating losses and research
and development tax credits totaling $0.3 million, we established a valuation allowance of $0.3 million during the second quarter
of 2019, which remained at $0.3 million as of December 31, 2019. As of December 31, 2018, based on our historical and
expected future taxable earnings, we believed it was more likely than not that we would realize all of the benefit of the existing
deferred tax assets. Accordingly, we did not record a valuation allowance as of December 31, 2018.
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 $0.6 million, $0.8 million and $1.0 million for research and
development tax credits claimed during the years ended December 31, 2019, 2018 and 2017, respectively.
As of December 31, 2019 and 2018, we accrued $0.2 million and $0.1 million of total interest related to unrecognized tax
benefits, respectively. 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 $3.1 million and
$2.8 million as of December 31, 2019 and 2018, 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 2016, with the exception that operating loss carryforwards generated prior to 2016 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
2016.
As of December 31, 2019, we had federal net operating loss carryforwards of $4.9 million, which are scheduled to begin to
expire in 2030. As of December 31, 2019, we had state net operating loss carryforwards of $1.7 million, which are scheduled to
begin to expire in 2027. As of December 31, 2019, we had federal research and development tax credit carryforwards of $5.2
million, which are scheduled to begin to expire in 2038. As of December 31, 2019, we had state research and development tax
credit carryforwards of $4.3 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 19. 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 and Software platforms for the intelligently connected property and
related solutions that contributed 93%, 93% and 94% of our revenue for the years ended December 31, 2019, 2018 and 2017,
respectively. 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.
119
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
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 tables
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
317,580
156,265
473,845
52,046
589,952
Alarm.com
278,013
119,221
397,234
16,927
482,666
Alarm.com
227,583
92,445
320,028
41,439
Year Ended December 31, 2019
Intersegment
Alarm.com
Intersegment
Other
Other
19,795
20,919
40,714
(1,639)
17,844
$
— $
— $
(4,301)
(4,301)
134
(49,997)
(7,895)
(7,895)
(128)
—
Year Ended December 31, 2018
Intersegment
Alarm.com
Intersegment
Other
Other
13,059
20,316
33,375
(4,708)
19,629
$
— $
— $
(4,749)
(4,749)
(273)
(61,309)
(5,366)
(5,366)
256
(1)
Year Ended December 31, 2017
Intersegment
Alarm.com
Intersegment
Other
Other
8,700
15,154
23,854
(8,248)
$
— $
— $
(2,945)
(2,945)
(175)
(2,000)
(2,000)
358
Total
337,375
164,988
502,363
50,413
557,799
Total
291,072
129,422
420,494
12,202
440,985
Total
236,283
102,654
338,937
33,374
Our SaaS and license revenue for the Alarm.com segment included software license revenue of $43.4 million, $41.3 million
and $29.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. There was no software license revenue
recorded for the Other segment during the years ended December 31, 2019, 2018 and 2017.
Depreciation and amortization expense was $22.1 million, $21.4 million and $17.4 million for the Alarm.com segment for the
years ended December 31, 2019, 2018 and 2017, respectively. Depreciation and amortization expense was less than $0.1
million, $0.3 million and $0.3 million for the Other segment for the years ended December 31, 2019, 2018 and 2017, respectively.
Additions to property and equipment were $15.6 million, $11.7 million and $9.3 million for the Alarm.com segment for the years
ended December 31, 2019, 2018 and 2017, respectively. Additions to property and equipment were $0.7 million, $0.1 million and
$0.1 million for the Other segment for the years ended December 31, 2019, 2018 and 2017, respectively.
We derived substantially all revenue from North America for the years ended December 31, 2019, 2018 and 2017.
Substantially all our long-lived assets were in North America as of December 31, 2019 and 2018.
Note 20. Related Party Transactions
Installation Partner
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. We account for this investment using the equity method.
As of December 31, 2019 and 2018, our investment balance in our installation partner was zero. During the years ended
December 31, 2019, 2018 and 2017, we recorded $0.4 million, $0.4 million and $0.7 million of cost of hardware and other
revenue in connection with this installation partner. As of December 31, 2019 and 2018, the accounts payable balance to our
installation partner was less than $0.1 million.
120
ALARM.COM HOLDINGS, INC.
Notes to the Consolidated Financial Statements - (Continued)
December 31, 2019, 2018 and 2017
Affiliate Lease
OpenEye leases its production and administration operations facility from a company that is controlled by certain employees
of OpenEye, or the Landlord. The lease term is one year with an expiration date of October 20, 2020. OpenEye can terminate
the lease at any time by providing 30 days' prior written notice and the Landlord can terminate the lease by providing 90 days'
prior written notice. Total minimum lease payments over the term of the lease are $0.2 million. During the year ended
December 31, 2019, we recorded less than $0.1 million of rent expense in connection with this lease arrangement. There was no
accounts payable balance due to the Landlord under this lease arrangement as of December 31, 2019.
Note 21. 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.
Information about prior period acquisitions that may affect the comparability of the selected financial information presented
below is included in Note 7. Information about the $28.0 million expense recorded in general and administrative expense during
the three months ended September 30, 2018, which relates to the agreement reached to settle the legal matter alleging
violations of the TCPA and may affect the comparability of the quarterly financial data presented below, is included in Note 13.
Information about the $1.7 million of interest recorded within interest income and the $6.9 million of gain recorded within other
income, net, during the three months ended September 30, 2019, which relates to the Promissory Notes proceeds and the
Acquired Promissory Note proceeds received from one of our hardware suppliers and may affect the comparability of the
quarterly financial data presented below, is included in Note 9. The selected consolidated statements of operation data in
amounts are presented below (in thousands, except per share data):
Three Months Ended
Mar. 31,
2018
$ 92,756
28,377
June 30,
2018
$ 104,488
36,488
Sept. 30,
2018
$ 111,848
41,992
Dec. 31,
2018
$ 111,402
38,858
Mar. 31,
2019
$ 112,335
38,950
June 30,
2019
$ 121,660
44,556
Sept. 30,
2019
$ 127,880
47,523
Dec. 31,
2019
$ 140,488
52,570
10,515
10,733
(7,652)
7,928
9,010
13,796
17,690
12,834
10,512
10,732
(7,652)
7,928
9,010
13,796
17,690
13,035
Total revenue
Total cost of revenue
Net income / (loss)
Net income / (loss) attributable to
common stockholders
Net income / (loss) per share
attributable to common
stockholders
Basic
Diluted
$
$
0.22
0.21
$
$
0.23
0.22
$
$
(0.16) $
(0.16) $
0.16
0.16
$
$
0.19
0.18
$
$
0.29
0.27
$
$
0.36
0.35
$
$
0.27
0.26
121
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, 2019
Allowance for doubtful accounts
Allowance for product returns
Allowance for notes receivable
Deferred tax valuation allowance
Year Ended December 31, 2018
Allowance for doubtful accounts
Allowance for product returns
Allowance for notes receivable
Year Ended December 31, 2017
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
$
$
$
$
$
$
1,425
1,915
3,319
—
1,449
2,471
—
1,282
2,314
— $
(123)
—
—
— $
273
—
— $
2,055
$
$
$
1,170
105
(3,272)
322
149
—
3,319
453
—
(11) $
(822)
(31)
—
(173) $
(829)
—
(286) $
(1,898)
2,584
1,075
16
322
1,425
1,915
3,319
1,449
2,471
122
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 Securities and Exchange Commission'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, 2019. Based on the evaluation of our disclosure
controls and procedures as of December 31, 2019, 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, 2019 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, 2019.
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, 2019. The report of PricewaterhouseCoopers LLP is incorporated by reference to Item 8 of this Annual Report on
Form 10-K.
On October 21, 2019, we acquired 85% of the issued and outstanding capital stock of PC Open Incorporated, a Washington
corporation, doing business as OpenEye. In accordance with guidance issued by the Securities and Exchange Commission,
management's assessment of the effectiveness of our internal control over financial reporting excluded the internal control
activities of OpenEye, which is included in our December 31, 2019 consolidated financial statements, for which total assets and
total revenue of OpenEye represented 1% of the related consolidated financial statement amounts as of and for the year
ended December 31, 2019.
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, 2019 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
123
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
Election of New Director
Effective February 21, 2020, we appointed Simone Wu to serve on the Board of Directors, or the Board, as a Class II
director. Ms. Wu will serve for the term expiring at our upcoming 2020 Annual Meeting of Stockholders or until her earlier death,
resignation or removal. Ms. Wu has been appointed to the Audit Committee of the Board.
Ms. Wu, 55, is the Senior Vice President, General Counsel, Corporate Secretary and External Affairs for Choice Hotels
International, Inc., a position she has held since 2015, and previously served as the Senior Vice President, General Counsel,
Corporate Secretary & Chief Compliance Officer at Choice Hotels from 2012 to 2015. From 2001 to 2012, she held a number of
positions of increasing responsibility with XO Communications, including serving as its General Counsel. Ms. Wu earned a B.A.
in Political Science from the University of Michigan and a J.D. from Columbia University.
Ms. Wu will be compensated in accordance with our standard compensation arrangements for non-employee directors,
which are described in greater detail in our definitive proxy statement on Schedule 14A relating to our 2019 Annual Meeting of
Stockholders, which was filed with the Securities and Exchange Commission, or the SEC, on April 26, 2019.
In connection with her appointment, we entered into an indemnity agreement with Ms. Wu, a copy of which has been filed as
Exhibit 10.24 hereto and incorporated herein by reference.
Ms. Wu was not selected as a director pursuant to any arrangements or understandings with us or with any other person,
and there are no related party transactions between us and Ms. Wu that would require disclosure under Item 404(a) of
Regulation S-K.
124
PART III.
We will file a definitive Proxy Statement for our Annual Meeting, or our 2020 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 2020 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 2020 Proxy Statement under
the captions "Information Regarding Committees of the Board of Directors," "Election of Directors," "Executive Officers" and
"Delinquent Section 16(a) Reports."
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 2020 Proxy Statement under
the captions "Executive Compensation," "Director Compensation" and “Information Regarding Committees of the Board of
Directors."
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 2020 Proxy Statement under
the captions "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information."
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 2020 Proxy Statement under
the captions "Transactions with Related Persons" and "Independence of the Board of Directors."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is hereby incorporated by reference to the section of our 2020 Proxy Statement under
the caption "Principal Accountant Fees and Services" and “Pre-Approval Policies and Procedures.”
125
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
(b) Exhibits
Exhibit
Description
2.1
2.2
3.1
3.2
4.1
4.2
4.3*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
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
Description of Securities Registered Pursuant To Section 12 of the
Securities Exchange Act of 1934, As Amended
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
Sixth Amendment to Deed of Office Lease Agreement by and
between Alarm.com Incorporated and TMG TMC 3, L.L.C., dated
October 10, 2018
Seventh Amendment to Deed of Office Lease Agreement by and
between Alarm.com Incorporated and TMG TMC 3,
L.L.C., dated May 16, 2019
Eighth Amendment to Deed of Office Lease Agreement by and
between Alarm.com Incorporated and TMG TMC 3, L.L.C.,
dated July 17, 2019
Incorporated by Reference
File Number Exhibit
File Date
Schedule /
Form
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
10.2
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
10-K
001-37461
10.8 March 1, 2019
10-Q
001-37461
10.1
August 9, 2019
10-Q
001-37461
10.2
August 9, 2019
10.10†
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
S-1
333-204428
10.3
May 22, 2015
10.11†
2015 Equity Incentive Plan
10-Q
001-37461
10.1
10.12†
Form of Option Grant Package under 2015 Equity Incentive Plan
10-K
001-37461
10.10
August 14,
2015
February 28,
2018
126
10.13†
Form of RSU Notice and Agreement under 2015 Equity
Incentive Plan
10-K
001-37461
10.12 March 1, 2019
10.14†
Form of Early Exercise Restricted Stock Purchase Agreement
10-K
001-37461
10.7
10.15†
2015 Employee Stock Purchase Plan
10-Q
001-37461
10.2
February 29,
2016
August 14,
2015
10.16†
Alarm.com Holdings, Inc. Executive Bonus Plan
10-Q
001-37461
10.1
May 9, 2019
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
S-1/A
333-204428
10.9
June 11, 2015
8-K
001-37461
10.1
Reformed Master Services Agreement by and between Alarm.com
Incorporated and ADT LLC, effective as of August 19, 2016
10-Q
001-37461
10.2
10-Q
001-37461
10.2
November 14,
2016
November 14,
2016
November 9,
2017
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
First Amendment to the 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 November
30, 2018
Class Action Settlement Agreement by and between Alarm.com
Holdings, Inc., Alarm.com Incorporated, Abante Rooter and
Plumbing, Inc., Mark Hankins and Philip J. Charvat, individually
and on behalf of all others similarly situated
10-K
001-37461
10.25 March 1, 2019
10-K
001-37461
10.27 March 1, 2019
10.17†
10.18†
10.19#
10.20
10.21
10.22
10.23*^
First Amendment to Reformed Master Services Agreement by
and between Alarm.com Incorporated and ADT LLC, effective as
of December 9, 2019
10.24*
Indemnity Agreement by and between Alarm.com Holdings, Inc.
and Simone Wu
21.1*
23.1*
31.1*
31.2*
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**
101.INS
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
Inline XBRL Instance Document - the instance document does not
appear in the Interactive Data File because its XBRL tags are
embedded within the Inline XBRL document
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase
Document
104*
Cover Page Interactive Data File - the cover page interactive data
is embedded within the Inline XBRL document or included within
the Exhibit 101 attachments
* Filed herewith.
** Furnished herewith.
† Indicates management contract or compensatory plan.
# Confidential treatment has been granted by the Securities and Exchange Commission as to certain portions of this document.
^ Portions of this document (indicated by "[***]") have been omitted because they are not material and would likely cause
competitive harm to Alarm.com Holdings, Inc. if disclosed.
127
ITEM 16. FORM 10-K SUMMARY
Not applicable.
128
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 25, 2020
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 25, 2020
/s/ Steve Valenzuela
Steve Valenzuela
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
February 25, 2020
/s/ Timothy McAdam
Timothy McAdam
Chairman of the Board of Directors
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
February 25, 2020
/s/ Donald Clarke
Donald Clarke
Director
/s/ Darius G. Nevin
Director
Darius G. Nevin
/s/ Hugh Panero
Hugh Panero
Director
/s/ Mayo Shattuck
Mayo Shattuck
Director
Director
Simone Wu
129
BOARD OF DIRECTORS
CORPORATE INFORMATION
Stephen Trundle
President and Chief Executive Of�icer
Alarm.com
Timothy McAdam
General Partner
Technology Crossover Ventures
Donald Clarke
Chief Financial Of�icer
Plex Systems, Inc.
Darius G. Nevin
Member
G3 Capital Partners, LLC
Hugh Panero
Owner
Yellow Brick Road Ventures, LLC
Mayo Shattuck
Chairman
Exelon Corporation
Simone Wu
Senior Vice President, General Counsel,
Corporate Secretary & External Aff airs,
Choice Hotels International, Inc.
EXECUTIVE OFFICERS
Stephen Trundle
President and Chief Executive Of�icer
Steve Valenzuela
Chief Financial Of�icer
Jeff rey Bedell
Chief Strategy and Innovation Of�icer
David Hutz
Chief Systems Architect
Daniel Kerzner
Chief Product Of�icer
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
www.ast�inancial.com
Annual Meeting of Stockholders
June 3, 2020 at 9:00 a.m. ET
COMMITTEE COMPOSITION
Nominating
& Corporate
Governance
Audit
Compensation
Timothy McAdam
Donald Clarke
Darius G. Nevin
Hugh Panero
Mayo Shattuck
Simone Wu
Jean-Paul Martin
Chief Technology Of�icer and Co-Founder
Daniel Ramos
Senior Vice President and Corporate Secretary
Chairman
of the Board
Chair
Member