Alarm.com
Alarm.com Holdings, Inc. (Form: 10-Q, Received: 11/12/2015 06:13:47)
Table of Contents

          

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015
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
 
26-4247032
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
8150 Leesburg Pike, Vienna, VA
 
22182
(Address of principal executive offices)
 
(zip code)

Tel: (877) 389-4033
(Registrant's telephone number, including area code)
  
 

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. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No
    
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ]  
Accelerated Filer [ ]  
Non-accelerated Filer   x
Smaller Reporting Company [ ] 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨ Yes [X]  No  
As of October 30, 2015 , there were 45,574,172 outstanding shares of the registrant's common stock, par value of $0.01 per share.
 

ALARM.COM®



Table of Contents

ALARM.COM HOLDINGS, INC.

Table of Contents
 
Page
Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2015 and 2014
Condensed Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2015 and 2014
Condensed Consolidated Balance Sheets - September 30, 2015 and December 31, 2014
Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2015 and 2014
Condensed Consolidated Statements of Equity  - Nine Months Ended September 30, 2015
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
 
 


1

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

ALARM.COM HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
  SaaS and license revenue
$
36,158

 
$
28,473

 
$
102,247

 
$
80,652

  Hardware and other revenue
17,849

 
14,359

 
49,720

 
41,109

Total revenue
54,007

 
42,832

 
151,967

 
121,761

Cost of revenue: (1)
 
 
 
 
 
 
 
  Cost of SaaS and license revenue
6,764

 
6,002

 
19,094

 
16,679

  Cost of hardware and other revenue
13,205

 
11,546

 
38,171

 
32,893

Total cost of revenue
19,969

 
17,548

 
57,265

 
49,572

Operating expenses:
 
 
 
 
 
 
 
  Sales and marketing
8,425

 
8,107

 
24,405

 
19,873

  General and administrative
9,932

 
6,746

 
25,516

 
19,175

  Research and development
9,836

 
6,094

 
26,667

 
16,468

  Amortization and depreciation
1,504

 
1,058

 
4,370

 
2,714

Total operating expenses
29,697

 
22,005

 
80,958

 
58,230

Operating income
4,341

 
3,279

 
13,744

 
13,959

  Interest expense
(44
)
 
(40
)
 
(128
)
 
(153
)
  Other (expense) / income, net
(7
)
 
(80
)
 
(62
)
 
(70
)
Income before income taxes
4,290

 
3,159

 
13,554

 
13,736

  Provision for income taxes
1,061

 
492

 
4,775

 
4,720

Net income
3,229

 
2,667

 
8,779

 
9,016

  Dividends paid to participating securities

 

 
(18,987
)
 

  Income allocated to participating securities
(50
)
 
(2,549
)
 

 
(8,651
)
Net income / (loss) attributable to common stockholders
$
3,179

 
$
118

 
$
(10,208
)
 
$
365

 
 
 
 
 
 
 
 
Per share information attributable to common stockholders:
 
 
 
 
 
 
 
Net income / (loss) per share:
 
 
 
 
 
 
 
   Basic
$
0.07

 
$
0.05

 
$
(0.60
)
 
$
0.17

   Diluted
$
0.07

 
$
0.03

 
$
(0.60
)
 
$
0.10

Weighted average common shares outstanding:
 
 
 
 
 
 
 
   Basic
44,922,410

 
2,429,445

 
16,910,090

 
2,211,263

   Diluted
46,832,014

 
4,345,685

 
16,910,090

 
3,792,228

Cash dividends declared per share
$

 
$

 
$
0.36

 
$

_______________
(1)
Exclusive of amortization and depreciation shown below.
See accompanying notes to the condensed consolidated financial statements.

2

Table of Contents

ALARM.COM HOLDINGS, INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
3,229

 
$
2,667

 
$
8,779

 
$
9,016

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Change in unrealized gains on marketable securities

 
33

 

 
64

Comprehensive income
$
3,229

 
$
2,700

 
$
8,779

 
$
9,080

See accompanying notes to the condensed consolidated financial statements.

3

Table of Contents

ALARM.COM HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
126,601

 
$
42,572

Accounts receivable, net
21,746

 
17,259

Inventory
9,625

 
6,852

Deferred tax assets
3,809

 
3,242

Other current assets
4,535

 
1,919

Total current assets
166,316

 
71,844

Property and equipment, net
12,040

 
8,130

Intangible assets, net
6,879

 
5,092

Goodwill
24,723

 
21,374

Deferred tax assets
6,715

 
5,121

Other assets
6,452

 
9,371

Total Assets
$
223,125

 
$
120,932

Liabilities, redeemable convertible preferred stock and stockholders’ equity / (deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable, accrued expenses and other current liabilities
$
24,226

 
$
15,233

Accrued compensation
6,905

 
5,816

Deferred revenue
2,372

 
1,699

Total current liabilities
33,503

 
22,748

Deferred revenue
9,631

 
9,202

Long-term debt
6,700

 
6,700

Other liabilities
7,487

 
1,670

Total Liabilities
57,321

 
40,320

Commitments and contingencies (Note 11)

 

Redeemable convertible preferred stock
 
 
 
Series B redeemable convertible preferred stock, $0.001 par value, 0 and 1,809,685 shares authorized; 0 and 1,809,685 shares issued and outstanding as of September 30, 2015 and December 31, 2014, liquidation preference of $0 and $191,132 as of September 30, 2015 and December 31, 2014.

 
136,523

Series B-1 redeemable convertible preferred stock, $0.001 par value, 0 and 1,669,680 shares authorized; 0 and 82,934 shares issued and outstanding as of September 30, 2015 and December 31, 2014, liquidation preference of $0 and $8,759 as of September 30, 2015 and December 31, 2014.

 
6,265

Series A redeemable convertible preferred stock, $0.001 par value, 0 and 3,511,725 shares authorized; 0 and 1,998,257 shares issued and outstanding as of September 30, 2015 and December 31, 2014, liquidation preference of $0 and $24,309 as of September 30, 2015 and December 31, 2014.

 
59,668

Stockholders’ equity / (deficit)
 
 
 
Preferred stock, $0.001 par value, 10,000,000 and 0 shares authorized; 0 shares issued and outstanding as of September 30, 2015 and December 31, 2014.

 

Common stock, $0.01 par value, 300,000,000 and 100,000,000 shares authorized; 45,568,625 and 2,823,816 shares issued; and 45,443,547 and 2,614,444 shares outstanding as of September 30, 2015 and December 31, 2014.
454

 
26

Additional paid-in capital
296,444

 
7,168

Treasury stock (35,523 shares at cost of $1.20 per share)
(42
)
 
(42
)
Accumulated other comprehensive income

 

Accumulated deficit
(131,052
)
 
(128,996
)
Total Stockholders’ Equity / (Deficit)
165,804

 
(121,844
)
Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity / (Deficit)
$
223,125

 
$
120,932



See accompanying notes to the condensed consolidated financial statements.

4

Table of Contents

ALARM.COM HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
Cash flows from operating activities:
2015
 
2014
Net income
$
8,779

 
$
9,016

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Provision for doubtful accounts
420

 
909

Reserve for product returns
1,148

 
1,453

Amortization on patents
258

 
151

Amortization and depreciation
4,370

 
2,714

Amortization of debt issuance costs
81

 
43

Deferred income taxes
(2,160
)
 
(1,055
)
Change in fair value of contingent liability
180

 

Unrealized gain on derivative instrument

 
(155
)
Undistributed losses from equity investees
285

 
450

Stock-based compensation
2,198

 
2,365

Other, net
(49
)
 
(196
)
Changes in operating assets and liabilities (net of business acquisition):
 
 
 
Accounts receivable
(6,043
)
 
(4,436
)
Inventory
(2,724
)
 
(4,799
)
Other assets
(1,904
)
 
(1,971
)
Accounts payable, accrued expenses and other current liabilities
10,458

 
845

Deferred revenue
1,095

 
894

Other liabilities
4,784

 
260

Cash flows from operating activities
21,176

 
6,488

Cash flows used in investing activities:
 
 
 
Business acquisition, net of cash acquired
(5,849
)
 

Additions to property and equipment
(6,520
)
 
(6,150
)
Investment in cost method investee
(54
)
 

Sale of cost method investee

 
5

Issuances of notes receivable
(317
)
 
(687
)
Purchases of licenses to patents
(1,000
)
 

Cash flows used in investing activities
(13,740
)
 
(6,832
)
Cash flows from / (used in) financing activities
 
 
 
Proceeds from issuance of common stock from initial public offering, net of underwriting discount and commission
97,976

 

Proceeds from issuance of debt, net of debt issuance costs

 
6,376

Repayments of term loan

 
(7,500
)
Dividends paid to common stockholders
(1,013
)
 

Dividends paid to employees for unvested shares
(57
)
 

Dividends paid to redeemable convertible preferred stockholders
(18,930
)
 

Payments of offering costs
(2,632
)
 
(2,100
)
Repurchases of common stock
(1
)
 
(3
)
Proceeds from early exercise of stock-based awards
124

 
1,533

Issuances of common stock from equity based plans
300

 
530

Tax windfall benefit from stock-based awards
826

 
1,009

Cash flows from / (used in) financing activities
76,593

 
(155
)
Net increase / (decrease) in cash and cash equivalents
84,029

 
(499
)
Cash and cash equivalents at beginning of the period
42,572

 
33,583

Cash and cash equivalents at end of the period
$
126,601

 
$
33,084


See accompanying notes to the condensed consolidated financial statements.

5

Table of Contents


ALARM.COM HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows - Continued
(in thousands)
(unaudited)


 
Nine Months Ended September 30,
 
2015
 
2014
 
 
 
 
Supplemental disclosure of noncash investing and financing activities:
 
 
 
Conversion of redeemable convertible preferred stock to common stock
$
202,456

 
$

Cash not yet paid for business acquisitions
$
617

 
$

Contingent liability from business acquisition
$
880

 
$

Cash not yet paid for capital expenditures
$
232

 
$

Reclassification of deferred offering costs to additional paid-in-capital
$
5,024

 
$

Deferred offering costs in accounts payable, accrued expenses and other current liabilities
$

 
$
342


See accompanying notes to the condensed consolidated financial statements.

6

Table of Contents

ALARM.COM HOLDINGS, INC.
Condensed Consolidated Statements of Equity
(in thousands)
(unaudited)
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In-
Capital
 
Treasury
Stock
 
Accumulated
Deficit
 
Accumulated Other Comprehensive Income
 
Total
Stockholders’
(Deficit) Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance, January 1, 2015

 
$

 
2,614

 
$
26

 
$
7,168

 
$
(42
)
 
$
(128,996
)
 
$

 
$
(121,844
)
Issuance of common stock from initial public offering, net of issuance costs

 

 
7,525

 
75

 
92,878

 

 

 

 
92,953

Conversion of redeemable convertible preferred stock to common stock

 

 
35,018

 
350

 
202,106

 

 

 

 
202,456

Common stock issued in connection with equity based plans

 

 
265

 
3

 
297

 

 

 

 
300

Vesting of common stock subject to repurchase

 

 
97

 
1

 
342

 

 

 

 
343

Stock-based compensation expense

 

 

 

 
2,198

 

 

 

 
2,198

Tax benefit from stock-based awards, net

 

 

 

 
665

 

 

 

 
665

Modification of employee stock-based award and repurchase of common stock

 

 
(75
)
 
(1
)
 
(45
)
 

 

 

 
(46
)
Dividends paid to common stockholders

 

 

 

 
(673
)
 

 
(340
)
 

 
(1,013
)
Dividends paid to employees with unvested common stock

 

 

 

 
(38
)
 

 
(19
)
 

 
(57
)
Dividends paid to redeemable convertible preferred stockholders

 

 

 

 
(8,454
)
 

 
(10,476
)
 

 
(18,930
)
Net income

 

 

 

 

 

 
8,779

 

 
8,779

Balance, September 30, 2015

 
$

 
45,444

 
$
454

 
$
296,444

 
$
(42
)
 
$
(131,052
)
 
$

 
$
165,804

See accompanying notes to the condensed consolidated financial statements.

7

Table of Contents

ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(unaudited)
Note 1. Organization
Alarm.com Holdings, Inc. (referred herein as “Alarm.com”, the “Company”, or “we”) is a cloud-based software platform solution for the connected home. Our multi-tenant software-as-a-service (“SaaS”) platform allows home and business owners to intelligently secure and manage their properties and remotely interact with a broad array of connected devices through a single, intuitive interface. Our solution is delivered through an established network of thousands of authorized and licensed service providers. Our four primary solutions are interactive security, intelligent automation, video monitoring and energy management, which can be used individually or integrated into a single user interface. We derive revenue from the sale of our software-as-a-service over our integrated platform, hardware, activation fees and other revenue. Our fiscal year ends on December 31st.
Initial Public Offering

Our registration statement on Form S-1 relating to our IPO was declared effective by the Securities and Exchange Commission (the "SEC") on June 25, 2015. On July 1, 2015, we closed our initial public offering ("IPO") of 7,000,000 shares of common stock at an offering price of $14.00 per share, resulting in gross proceeds of $98.0 million . In addition, on July 8, 2015, we closed the underwriters' exercise of their over-allotment option to purchase up to an additional 525,000 shares of our common stock from us and up to an additional 525,000 shares from the selling stockholders, we issued and sold an additional 525,000 additional shares of our common stock and certain selling stockholders affiliated with ABS Capital Partners sold 525,000 shares of our common stock, resulting in additional gross proceeds to us of $7.4 million . We did not receive any proceeds from the sale of shares by the selling stockholders. In total we issued 7,525,000 shares of common stock and raised $105.4 million in gross proceeds, or $93.0 million in net proceeds after deducting underwriting discounts and commissions of $7.4 million and offering costs of $5.0 million . Upon completion of the IPO, on July 1, 2015, all outstanding shares of convertible preferred stock converted into an aggregate of 35,017,884 shares of common stock.

In addition, upon the closing of the IPO, our Certificate of Incorporation was amended and restated to authorize 10,000,000 shares of undesignated preferred stock and 300,000,000 shares of common stock.

Dividend

On June 12, 2015, our board of directors declared a cash dividend on our common and preferred stock in the amount of (1) $0.36368 per share of common stock and Series A preferred stock and (2) $0.72736 per share of Series B preferred stock and Series B-1 preferred stock or $20.0 million in the aggregate. We paid the dividends on June 26, 2015 to our stockholders of record as of June 12, 2015.
Note 2. Basis of Presentation
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts and our results of operations and our majority owned and controlled subsidiaries. All intercompany balances and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements.
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all the information and footnotes required by GAAP for annual financial statements. They should be read together with our audited consolidated financial statements and related notes for the year ended December 31, 2014 appearing in our final prospectus for our IPO dated June 25, 2015 and filed with the SEC, pursuant to Rule 424(b) under the Securities Act of 1933, as amended on June 26, 2015. The condensed balance sheet data as of December 31, 2014 was derived from our audited financial statements, but does not include all disclosures required by GAAP.
In the opinion of management, these condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the results of operations, financial position and cash flows. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that can be expected for the entire fiscal year ending December 31, 2015 .
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets

8


and liabilities at the date of the financial statements and the reported amounts of revenues 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 receivable, 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.
Recent Accounting Pronouncements
Adopted
On April 10, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, “ Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which amends the definition of a discontinued operation in ASC 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The guidance narrowed the definition of discontinued operations for disposal of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. The guidance also expands the scope to include equity method investments and businesses that, upon initial acquisition, qualify as held for sale. The expanded disclosure requirements include statement of financial position and statement of cash flows disclosures for all comparative periods. The ASU 2014-08 is effective prospectively for all disposals (or classifications as held for sale) in periods beginning on or after December 15, 2014 with early adoption permitted. We adopted this pronouncement in the first quarter of 2015, and it did not have a material impact on our financial statements.
On August 18, 2015, the FASB issued ASU 2015-15, “Interest- Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015, EITF Meeting,” which clarifies the application of ASU 2015-03 related to presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements to allow for an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the line-of-credit arrangement, regardless of whether there are any outstanding borrowings. ASU 2015-03, “ Simplifying the Presentation of Debt Issuance Costs,” otherwise requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. We adopted these pronouncements in the third quarter of 2015. The adoption did not have an impact on our financial statements. We continue to present the debt issuance costs associated with our revolving credit facility as an asset that is amortized ratably over the term of the agreement.
Not yet adopted
On September 25, 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which requires entities to apply the guidance prospectively to adjustments to provisional amounts that occur after the effective date. Under current guidance, the acquirer retrospectively adjusts provisional amounts recognized as of the acquisition date with a corresponding adjustment to goodwill. Adjustments are required when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts initially recognized or would have resulted in the recognition of additional assets or liabilities. The amendments in ASU 2015-16 eliminate the requirement to retrospectively account for those adjustments. The amendment is effective for annual periods, including periods within those annual periods beginning after December 15, 2015 with early adoption permitted. We are required to adopt this pronouncement prospectively in the first quarter of 2016, and we do not anticipate that adoption of the pronouncement will have a material impact on our financial statements.
On August 12, 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers the effective date for all entities for one year of ASU 2014-09, “ Revenue from Contracts with Customers (Topic 606),” issued on May 28, 2014. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance supersedes the revenue recognition guidance in Topic 605, “Revenue Recognition,” and most industry-specific guidance throughout the Industry Topics of the FASB Accounting Standards Codification. The guidance also supersedes some cost guidance included in Subtopic 605-35, “ Revenue Recognition - Contract-Type and Production-Type Contracts." ASU 2014-9, as amended, is effective for annual periods, and interim periods within those years, beginning after December 31, 2017. An entity is required to apply the amendments using one of the following two methods: (1) retrospectively to each prior period presented with three possible expedients: (a) for completed contracts that begin and end in the same reporting period no restatement is required; (b) for completed contract with variable consideration an entity may use the transaction price at completion rather than restating estimated variable consideration amounts in comparable reporting periods; and (c) for comparable reporting periods before date of initial application reduced disclosure requirements related to transaction price; (2) retrospectively with the cumulative effect of initially applying the amendment recognized at the date of initial application with additional disclosures for the differences of the prior guidance to the reporting periods compared to the new guidance and an explanation of the reasons for significant changes. We are required to adopt ASU 2014-09 in the first quarter of 2018, and we are currently assessing the impact of this pronouncement on our financial statements.

9


On July 22, 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which requires entities to measure most inventory "at the lower of cost and net realizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures). The guidance does not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. Under current guidance, an entity subsequently measures inventory at the lower of cost or market, with market defined as replacement cost provided that it is not above the ceiling (net realizable value) or below the floor (net realizable value less an approximately normal profit margin) which is unnecessarily complex. The amendment does not change other guidance on measuring inventory. The amendment is effective for annual periods, including periods within those annual periods beginning after December 15, 2016 with early adoption permitted. We are required to adopt this pronouncement prospectively in the first quarter of 2017, and we are currently assessing the impact of this pronouncement on our financial statements.
On April 15, 2015, the FASB issued ASU 2015-05, “ Intangibles - Goodwill and Other - Internal- Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which clarifies the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. The amendment requires a customer to determine whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in a manner consistent with how the acquisition of other software licenses is accounted for under ASC 350-40; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. The amendment is effective for annual periods, including periods within those annual periods beginning after December 31, 2015 with early adoption permitted. We can elect to adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. We are required to adopt this pronouncement in the first quarter of 2016, and we are currently assessing the impact of this pronouncement on our financial statements.
On February 18, 2015, the FASB issued ASU 2015-02, “ Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which requires an entity to evaluate whether it should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The amendment modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs"). The amendment eliminates the presumption that a general partner should consolidate a limited partnership. The amendment affects the consolidation analysis of reporting entities that are involved with VIEs particularly those that have fee arrangements and related party relationships. The amendment also provides a scope exception from consolidation guidance for reporting entities that comply with the requirements for registered money market funds. We are required to adopt ASU 2015-02 in the first quarter of 2016, and we do not anticipate that adoption of the pronouncement will have a material effect on our financial statements.
On August 27, 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements — Going Concern (Subtopic 205-4 0),” which requires management to perform interim and annual assessments regarding conditions or events that raise substantial doubt about a company’s ability to continue as a going concern and to provide related disclosures, if applicable. We are required to adopt ASU 2014-15 in the first quarter of 2017, with early adoption permitted. We do not anticipate that the adoption of this standard will have a material effect on our financial statements.
On June 19, 2014, the FASB issued ASU 2014-12, “ Compensation - Stock Compensation (Topic 718),” which affects any entity that grants its employees share-based payments in which the terms of the award stipulate that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. We are required to adopt ASU 2014-12 in the first quarter of 2016 and the adoption of this standard is not expected to have a material effect on our financial statements.

Note 3. Accounts Receivable, Net
The components of accounts receivable are as follows (in thousands):

10


 
September 30, 2015
 
December 31, 2014
Accounts receivable
$
25,473

 
$
20,494

Allowance for doubtful accounts
(1,783
)
 
(1,397
)
Allowance for product returns
(1,944
)
 
(1,838
)
Accounts receivable, net
$
21,746

 
$
17,259

For the three and nine months ended September 30, 2015 , we recorded a $ 0.3 million and a $ 1.1 million reserve for product returns in our hardware and other revenue. For the three and nine months ended September 30, 2014 , we recorded a $0.5 million and a $ 1.5 million reserve for product returns in our hardware and other revenue. For the three and nine months ended September 30, 2015 , we recorded a $ 0.0 million and a $ 0.4 million provision for doubtful accounts receivable. For the three and nine months ended September 30, 2014 , we recorded a $ 0.4  million and a $ 0.9  million provision for doubtful accounts receivable. Historically, we have not experienced write-offs for uncollectible accounts or sales returns that have differed significantly from our estimates.
Note 4. Inventory
The components of inventory are as follows (in thousands):
 
September 30,
2015
 
December 31,
2014
Raw materials
$
6,633

 
$
3,371

Finished goods
2,992

 
3,481

Total inventory
$
9,625

 
$
6,852

Note 5. Acquisitions
SecurityTrax Acquisition
On March 13, 2015, in accordance with an asset purchase agreement, we completed our purchase of certain assets of HiValley Technology, Inc., (“SecurityTrax”) that constituted a business. SecurityTrax is a provider of SaaS-based, customer relationship management software tailored for security system dealers. The consideration included $ 5.6 million cash paid at closing and $ 0.4 million of cash not yet paid and established a contingent liability of $ 0.7 million for earn-out considerations to be paid to the former owners. The agreement also contains $ 2.0 million in potential payments associated with the continued employment of key employees through March 31, 2018 that will be accounted for as compensation expense over the period. We included the results of SecurityTrax’s operations since its acquisition date in the Alarm.com segment (see Note 18).
The table below sets forth the consideration paid to SecurityTrax’s sellers and the estimated fair value of the tangible and intangible net assets acquired (in thousands):
 
2015
Calculation of Consideration:
 
Cash paid, net of working capital adjustment
$
5,612

Cash not yet paid
400

Contingent consideration liability
700

Total consideration
$
6,712

Estimated Tangible and Intangible Net Assets:
 
Current assets
$
14

Customer relationships
1,699

Developed technology
1,407

Trade name
271

Current liabilities
(7
)
Goodwill
3,328

Total estimated tangible and intangible net assets
$
6,712

Goodwill of $ 3.3 million reflects the value of acquired workforce and expected synergies from pairing SecurityTrax's solutions to security service providers with our offerings. The goodwill will be deductible for tax purposes. We developed our estimate of the fair value of intangible net assets using a multi-period excess earnings method for customer relationships, the relief from royalty method for the developed technology, replacement cost method for the developed technology home page and the relief from royalty method for the trade name. The purchase price allocation presented above is preliminary as we are currently in the process of completing fair value estimates for the intangible assets.

11


Fair Value of Net Assets Acquired and Intangibles
In accordance with ASC 805, the assets and liabilities of SecurityTrax we acquired were recorded at their respective fair values as of March 13, 2015, the date of the acquisition.
Customer Relationships
We recorded the customer relationships intangible separately from goodwill based on determination of the length, strength and contractual nature of the relationship that SecurityTrax 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 revenue growth, operating expenses, charge for contributory assets, and a 22.5% discount rate used to calculate the present value of the cash flows. For the second group of customer relationships, we used the same assumptions in addition to a customer retention rate of 90% . We are amortizing the customer relationships, valued at $ 1.7 million , on a straight-line basis over a weighted-average estimated useful life of 7  years.
Developed Technology
Developed technology recorded separately from goodwill consists of intellectual property such as proprietary software used internally for revenue producing activities. SecurityTrax’s proprietary software is offered for sale on a SaaS hosted basis to customers. We valued the developed technology by applying the relief from royalty method, an income approach. We used several assumptions in the relief from royalty method, which included revenue growth, a market royalty rate of 25% and a 22.5% discount rate used to the calculate the present value of the cash flows. An additional component of the developed technology which we refer to as the "home page" organized customer data and functioned as the billing and administration tool. We valued the home page component by applying the replacement cost model, a cost approach. We used several assumptions in the replacement cost approach, which included analyzing costs that a company would expect to incur to recreate an asset of equivalent utility. In addition, we made an adjustment for developer’s profit of 30.4% which brought the asset to fair value on an exit-price basis. We are amortizing the developed technology, valued at $ 1.4 million , on a straight-line basis over a weighted-average estimated useful life of 8  years.
Contingent Consideration Liability
The amount of contingent consideration liability to be paid, up to a maximum of $ 2.0 million , to the former owners will be determined based on revenue and EBITDA of the acquired business for the year ended December 31, 2017. We estimated the fair value of the contingent consideration liability by using a Monte Carlo simulation model for determining projected revenue by using an expected distribution of potential outcomes. The fair value of contingent consideration liability is calculated with thousands of projected revenue outcomes, the results of which are averaged and then discounted to estimate the present value. We used several assumptions including an 8.45% discount rate and a 7.5% revenue risk adjustment. We recorded the contingent consideration, valued at $ 0.7 million , as a contingent consideration liability in other liabilities in our consolidated balance sheet. At each reporting date we will remeasure the liability and record any changes in general and administrative expense, until we pay the contingent consideration, if any, in the first quarter of 2018. As of September 30, 2015 , we adjusted the fair value of the contingent consideration liability to $0.9 million using the same method with a 10.75% discount rate and a 6.7% revenue risk adjustment, which resulted in $0.2 million of expense.
Secure-i Acquisition
On December 8, 2014, in accordance with an asset purchase agreement, we completed our purchase of certain assets of Secure-i, Inc. (“Secure-i”) that constituted a business. Secure-i is a provider of internet based remote video hosting services including off-site storage, viewing and management from web-based browsers and mobile applications. Total consideration included $ 2.6 million in cash and $ 0.3 million in cash not yet paid. We recorded $0.7 million of intangibles and $2.2 million of goodwill in connection with the acquisition. During the second quarter of 2015, we finalized the working capital adjustment and recorded an additional $20 thousand of goodwill. We included the results of Secure-i’s operations since its acquisition date in the Alarm.com segment.
Horizon Analog Acquisition
On December 10, 2014, in accordance with an asset purchase agreement, we completed our purchase of certain assets of Horizon Analog, Inc. (“Horizon Analog”) that constituted a business. Horizon Analog is a producer of research that focuses on cost-effective collection and analysis of data relating to energy usage and consumer behavior and energy disaggregation. Total consideration included $ 0.6 million in cash and $ 0.1 million in cash not yet paid. We recorded less than $ 0.1 million of property and equipment and $ 0.7 million of goodwill in connection with the acquisition, which reflects the acquired workforce and synergies expected from combining our operations with those of Horizon Analog. The goodwill is deductible for tax purposes. We included the results of Horizon Analog’s operations since its acquisition date in the Alarm.com segment.
Unaudited Pro Forma Information

12


The following pro forma data is presented as if Secure-i, Horizon Analog and SecurityTrax were included in our historical consolidated statements of operations beginning January 1, 2014. These pro forma results do not necessarily represent what would have occurred if all the business combinations had taken place on January 1, 2014, nor do they represent the results that may occur in the future.
This pro forma financial information includes our historical financial statements and those of our business combinations with the following adjustments: (1) we adjusted for amortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2014; (2) we adjusted for $ 0.1 million of transaction costs incurred in 2015 and reclassified them to 2014 and (3) we included adjustments for income taxes associated with these pro forma adjustments. 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):
 
Pro forma
Nine Months Ended 
 September 30,
 
2015
 
2014
Revenue
$
152,189

 
$
122,994

Net income
8,735

 
8,274

Note 6. Goodwill and Intangible Assets, Net
The changes in goodwill by operating segment are outlined below for the nine months ended September 30, 2015 (in thousands):
 
Alarm.com
 
Other
 
Total
Balance as of December 31, 2014
$
21,374

 
$

 
$
21,374

Goodwill acquired
3,349

 

 
3,349

Balance as of September 30, 2015
$
24,723

 
$

 
$
24,723

The $ 3.3 million of acquired goodwill in the Alarm.com segment was related to the acquisition of SecurityTrax in March 2015. See Note 5 for additional information regarding this acquisition.
There were no impairments of goodwill recorded during the three and nine months ended September 30, 2015 or 2014 .
The following table reflects changes in the net carrying amount of the components of intangible assets for the nine months ended September 30, 2015 (in thousands):
 
Customer
Relationships
 
Developed
Technology
 
Trade Name
 
Other
 
Total
Balance as of December 31, 2014
$
3,853

 
$
918

 
$
94

 
$
227

 
$
5,092

Intangible assets acquired
1,699

 
1,407

 
271

 

 
3,377

Amortization
(828
)
 
(613
)
 
(61
)
 
(88
)
 
(1,590
)
Balance as of September 30, 2015
$
4,724

 
$
1,712

 
$
304

 
$
139

 
$
6,879

For the three and nine months ended September 30, 2015 , we recorded $ 0.6 million and $ 1.6 million of amortization related to our intangible assets. For the three and nine months ended September 30, 2014 , we recorded $ 0.4 million and $ 1.2 million of amortization related to our intangible assets.

13


The following tables reflect the weighted average remaining life and carrying value of finite-lived intangible assets as of September 30, 2015 and December 31, 2014 (in thousands):
 
September 30, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Value
 
Weighted-
average
Remaining Life
Customer relationships
$
10,666

 
$
(5,942
)
 
$
4,724

 
4.6
Developed technology
5,390

 
(3,678
)
 
1,712

 
5.1
Trade name
914

 
(610
)
 
304

 
5.2
Other
234

 
(95
)
 
139

 
1.2
Total intangible assets
$
17,204

 
$
(10,325
)
 
$
6,879

 
 
 
December 31, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Weighted-
average
Remaining Life
Customer relationships
$
8,967

 
$
(5,114
)
 
$
3,853

 
4.4
Developed technology
3,983

 
(3,065
)
 
918

 
1.6
Trade name
643

 
(549
)
 
94

 
1.8
Other
234

 
(7
)
 
227

 
1.9
Total intangible assets
$
13,827

 
$
(8,735
)
 
$
5,092

 
 
The following table reflects the future estimated amortization expense for intangible assets (in thousands):
Year ending December 31,
 
Amortization
2015
 
$
538

2016
 
1,726

2017
 
1,400

2018
 
1,329

2019 and thereafter
 
1,886

Note 7. Investments in Other Entities
Cost Method Investment in Connected Home Service Provider
On September 4, 2012, we purchased 20,000 Series A Convertible Preferred Membership Units of a Brazilian connected home solutions provider for $ 15.00 per unit, or $ 0.3 million , for a 12.2% interest on a fully diluted basis in this entity. On June 26, 2013, we entered into an agreement with the same company to purchase 2,667 Series B Convertible Preferred Membership Units at $ 26.22 per unit, or $ 0.1 million , which brought our aggregate interest to 12.4% on a fully diluted basis. On April 15, 2015, we entered into an additional agreement with the same company to purchase 2,333 Series B-1 Convertible Preferred Membership Units at $23.31 per unit or $0.1 million , which brought our aggregate equity interest to 12.6% on a fully diluted basis. The entity resells our products and services to residential and commercial customers in Brazil. Based upon the level of equity investment at risk, the connected home service provider is a VIE. We do not control the marketing, sales, installation, or customer maintenance functions of the entity and therefore do not direct the activities of the entity that most significantly impact its economic performance. We have determined that we are not the primary beneficiary of the entity and do not consolidate its financial results into ours. We account for this investment using the cost method. As of September 30, 2015 and December 31, 2014 , the fair value of this cost method investment was not estimated as there were no events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment. The $ 0.4 million investment balance is included in other assets in our consolidated balance sheets as of September 30, 2015 and December 31, 2014 .
Investments in and Loans to an Installation Partner
On November 20, 2013, we paid $ 1.0 million to purchase 48,190 common units of an installation partner for a 48.2% interest on a fully diluted basis in this entity. The entity performs installation services for security dealers. Based upon the level of equity investment at risk, we determined that the installation partner is not a VIE. We account for this investment under the equity method because we have the ability to exercise significant influence over the operating and financial policies of the entity. Under the equity method, we recognize our share of the earnings or losses of the installation partner in other (expense) / income, net in our consolidated statements of operations in the periods they are reported by the installation partner. The loss in

14


other (expense) / income, net was $ 0.1 million and $ 0.3 million for the three and nine months ended September 30, 2015 . The loss in other (expense) / income, net was $ 0.3 million and $ 0.5 million for the three and nine months ended September 30, 2014 . Our $ 1.0 million investment, net of equity losses, is included in other assets in our consolidated balance sheets and was $ 0.1 million and $ 0.4 million as of September 30, 2015 and December 31, 2014 .
In September 2014, we loaned $ 315,000 to our installation partner under a secured promissory note that accrues interest at 8.0% . The note receivable is included in other assets in our consolidated balance sheets. Interest is payable monthly with the entire principal balance plus accrued but unpaid interest due at maturity in September 2016. This event did not cause us to reconsider our conclusion that the installation partner has sufficient equity investment at risk and therefore is not a VIE. We continue to account for the investment under the equity method.
During the third quarter of 2015, there were indications of loan impairment and we evaluated the installation partner's ability to repay the note. The installation partner is current on the loan interest payments. Through examination of the installation partner's financial statements and forecast, management determined that it was not probable that our installation partner would default on the secured promissory note and therefore was not impaired. Management will continue to monitor indicators of impairment.
Investments in and Loans to a Platform Partner
A platform partner produces connected devices that are integrated into our connected home platform, and we invested in the platform partner to provide it with the capital required to bring its devices to market and integrate them onto our connected home platform. In the first quarter of 2013, we paid $ 3.5 million in cash to purchase 3,548,820 shares of our platform partner’s Series A convertible preferred shares, or an 18.7% interest on as-converted and fully diluted basis. In the fourth quarter of 2014, we entered into a Series 1 Preferred Stock purchase agreement with the platform partner and another investor. The other investor invested cash to purchase shares of the platform partner’s Series 1 Preferred Stock. As a result of the purchase, our 3,548,820 shares of Series A convertible preferred shares converted into 3,548,820 shares of common stock, and we hold an 8.6% interest in the platform partner on an as converted and fully diluted basis. In conjunction with the transaction, we received a $ 2.5 million dividend that we recorded as a return of investment as it was in excess of the accumulated earnings and profits of the investee since the date of the investment. Based upon the level of equity investment at risk, the platform partner is a VIE. We have concluded that we are not the primary beneficiary of the platform partner VIE. We do not control the product design, software development, manufacturing, marketing, or sales functions of the platform partner and, therefore, we do not direct the activities of the platform partner that most significantly impact its economic performance. We continue to conclude that we are not the primary beneficiary of our platform partner and, therefore, we do not consolidate it. We account for this investment under the cost method. As of September 30, 2015 , the fair value of this cost method investment was not estimated as there were no events or changes in circumstances that may have had a significant adverse effect on the fair value of the investment. As of September 30, 2015 and December 31, 2014 , our $ 1.0 million cost method investment in a platform partner was recorded in other assets in our consolidated balance sheets.
Note 8. Other Assets
Patent Licenses
From time to time, we enter into agreements to license patents. We have $ 3.3 million in patent licenses related to two such agreements. We are amortizing the patent licenses over the estimated useful lives of the patents, which range from three to eleven years. The net balance as of September 30, 2015 and December 31, 2014 was $2.4 million and $ 1.5 million . For the three and nine months ended September 30, 2015 , amortization expense on patent licenses was $0.2 million and $0.3 million . For the three and nine months ended September 30, 2014 , amortization expense on patent licenses was $0.1 million and $0.2 million .
Loan to a Distribution Partner
On July 25, 2013, we entered into a revolving loan agreement with a distribution partner. The distribution partner is also a service provider with whom we have a standard agreement to resell our connected home service and hardware. We evaluate the credit quality of our distribution partner for purposes of the revolving loan agreement using the same methods that we employ to evaluate its creditworthiness as a service provider, including a credit review at the inception of the arrangement and if risk indicators arise. At the inception of the loan agreement, we determined the credit quality of our distribution partner to be good. No risk indicators have arisen to cause us to change that assessment.
Under the terms of the revolving loan agreement, we agreed to loan our distribution partner up to $ 2.8 million , with the proceeds of the loan used to finance the creation of new customer accounts that use our products and services. The amount that our distribution partner may draw down on the loan is based on the number of its qualifying new customer accounts created each month. The loan bears interest at a rate of 8.0%  per annum, and requires monthly interest payments, with the entire principal balance due on the loan maturity date, July 24, 2018. The balance outstanding under the loan is collateralized by the customer accounts owned by our distribution partner, as well as all of the physical assets and accounts receivable associated with those customer accounts. As of September 30, 2015 and December 31, 2014 , our distribution partner has borrowed $2.3

15


million and $ 2.0 million under this loan agreement, respectively, and this note receivable is included in other assets on our consolidated balance sheets.

Note 9. Liabilities
The components of accounts payable, accrued expenses and other current liabilities are as follows (in thousands):
 
September 30,
2015
 
December 31,
2014
Accounts payable
$
17,902

 
$
11,179

Accrued expenses
2,498

 
1,911

Other current liabilities
3,826

 
2,143

Accounts payable, accrued expenses and other current liabilities
$
24,226

 
$
15,233


The components of other liabilities (in thousands):
 
September 30,
2015
 
December 31,
2014
Deferred rent
$
5,485

 
$
1,013

Other liabilities
2,002

 
657

Other liabilities
$
7,487

 
$
1,670


Note 10. Fair Value Measurements
The following presents our assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 (in thousands):
 
Fair Value Measurements on a Recurring Basis as of
September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market account
$
120,179

 
$

 
$

 
$
120,179

Liabilities:
 
 
 
 
 
 
 
Subsidiary unit awards

 

 
(194
)
 
(194
)
Contingent consideration liability from acquisition

 

 
(880
)
 
(880
)
 
$
120,179

 
$

 
$
(1,074
)
 
$
119,105

 
Fair Value Measurements on a Recurring Basis as of
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Money market account
$
38,578

 
$

 
$

 
$
38,578

 
$
38,578

 
$

 
$

 
$
38,578


The following table summarizes the change in fair value of the Level 3 liability for the three months ended September 30, 2015 (in thousands):

16


 
Fair Value
Measurements using
significant
unobservable inputs
(Level 3)
Beginning balance - June 30, 2015
$
782

Obligations assumed

Transfers

Payments

Realized (gain) / loss

Unrealized (gain) / loss
292

Ending Balance - September 30, 2015
$
1,074

The following table summarizes the change in fair value of the Level 3 liability for the nine months ended September 30, 2015 (in thousands):
 
Fair Value
Measurements using
significant
unobservable inputs
(Level 3)
Beginning balance - December 31, 2014
$

Obligations assumed
700

Transfers
152

Payments

Realized (gain) / loss

Unrealized (gain) / loss
222

Ending Balance - September 30, 2015
$
1,074

The money market account is included in our cash and cash equivalents in our consolidated balance sheets.
The liability for the subsidiary unit awards relates to agreements established with the presidents of two of our subsidiaries, who are also our employees, for cash awards contingent upon the subsidiary companies meeting certain financial milestones. Before our IPO, we used the intrinsic method available to non-public companies under ASC 718, "Compensation - Stock Compensation" to account for our liability for our subsidiary units. After our IPO, we have accounted for these subsidiary awards using fair value. The effect of this change had an immaterial impact to our consolidated financial statements. We established liabilities for the future payment for the repurchase of subsidiary units under the terms of the agreements based on estimating revenue, working capital, EBITDA and EBITDA margin of the subsidiary units for the periods of the two awards. We estimated the fair value 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 we will record any changes in general and administrative expense. The liability balances are included in our other liabilities in our consolidated balance sheets.
The amount of contingent consideration liability to be paid, up to a maximum of $ 2.0 million , from our acquisition of SecurityTrax in the first quarter of 2015, will be determined based on revenue and adjusted EBITDA for the year ended December 31, 2017. We estimated the fair value of the contingent consideration liability by using a Monte Carlo simulation model for determining projected revenue by using an expected distribution of potential outcomes. The fair value of contingent consideration liability is calculated with thousands of projected revenue outcomes, the results of which are averaged and then discounted to estimate the present value. At each reporting date until payment in first quarter of 2018, we will remeasure the contingent consideration liability, using the same valuation approach based on our subsidiary’s revenue, an unobservable input, and we will record any changes in general and administrative expense. The contingent consideration liability balance is included in our other liabilities in our consolidated balance sheets.
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 three and nine months ended September 30, 2015 and 2014 . 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 three and nine months ended September 30, 2015 and 2014 .

17


Note 11. Debt, Commitments and Contingencies
The debt, commitments and contingencies described below are currently in effect and would require us, or our subsidiaries, to make payments to third parties under certain circumstances.
Debt
On May 8, 2014, we repaid all of the outstanding principal and interest under our previous term loan, which was accounted for as an extinguishment of debt, and replaced it with a $ 50.0 million revolving credit facility (the “2014 Facility”) with Silicon Valley Bank, as administrative agent, and a syndicate of lenders. We utilized $ 6.7 million under this facility to repay in full our indebtedness under our previous term loan. The 2014 Facility includes an option to increase the borrowing capacity available under the 2014 Facility to $ 75.0 million with the consent of the lenders. The 2014 Facility is available to us to finance working capital and certain permitted acquisitions and investments, and is secured by substantially all of our assets, including our intellectual property. The principal outstanding under the 2014 Facility is due upon maturity in May 2017.
The outstanding principal balance on the 2014 Facility accrues interest at a rate equal to either (1) the Eurodollar Base Rate, or LIBOR, plus an applicable margin based on our consolidated leverage ratio, or (2) the higher of (a) the Wall Street Journal prime rate and (b) the Federal Funds rate plus 0.50% plus an applicable margin based on our consolidated leverage ratio, or ABR, at our option. Borrowings under LIBOR rates accrue interest at LIBOR plus 2.25% , LIBOR plus 2.5% , and LIBOR plus 2.75% when our consolidated leverage ratio is less than or equal to 1.00 :1.00, greater than or equal to 1.00 :1.00 but less than 2.00 :1.00, and greater than 2.00 :1.00, respectively. Borrowings under ABR rates accrue interest at ABR plus 1.25% , ABR plus 1.5% , and ABR plus 1.75% when our consolidated leverage ratio is less than or equal to 1.00 :1.00, greater than or equal to 1.00 :1.00 but less than 2.00 :1.00, and greater than 2.00 :1.00, respectively. The 2014 Facility also carries an unused line commitment fee of 0.20% to 0.25% depending on our consolidated leverage ratio. For the nine months ended September 30, 2015 , the effective interest rate on the 2014 Facility was 2.54% . The carrying value of 2014 Facility was $ 6.7 million as of September 30, 2015 and December 31, 2014. The 2014 Facility includes a variable interest rate that approximates market and, as such, we determined that the carrying amount of the 2014 Facility approximates its fair value.
The 2014 facility contains various financial and other covenants that require us to maintain a maximum consolidated leverage ratio not to exceed 2.50 :1.00 and a consolidated fixed charge coverage ratio of at least 1.25 :1.00. During the nine months ended September 30, 2015 , we were in compliance with all financial and non-financial covenants and there were no events of default.
Commitments and Contingencies
Repurchase of Subsidiary Units
In September 2012, we formed a subsidiary to develop and market home and commercial energy management devices and services. We granted an award of subsidiary stock to the founder and president. The terms of the award for the founder, who is also our employee, require a payment in cash on either the third or the fourth anniversary from the date the subsidiary first makes its products and services commercially available, which was determined to be April 1, 2014. The vesting of the award is based on the subsidiary meeting certain minimum financial targets. We recorded a liability of $0.0 million related to this commitment in other liabilities in our consolidated balance sheets as of September 30, 2015 and December 31, 2014 .
In February 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. We granted an award of subsidiary stock awards to the founder and president. The terms of the award for the founder, who is our employee, require a payment in cash on between the fourth and sixth anniversary of the date that the subsidiary’s products and services first become commercially available, which was determined to be June 1, 2013. The vesting of the award is based on the subsidiary meeting certain minimum financial targets. We have recorded a liability of $ 0.2 million related to the commitment in other liabilities in our consolidated balance sheets as of September 30, 2015 and December 31, 2014 .
At each reporting date until the respective payment dates, we will remeasure these liabilities, and we will record any changes in fair value in general and administrative expense. The liability balances are included in our other liabilities in our consolidated balance sheets.
Leases
We lease office space and office equipment under non-cancelable operating leases with various expiration dates through 2026. Per the terms of our lease, the landlord provided us a $8.0 million tenant improvement allowance. As of September 30, 2015, we have utilized $3.2 million of this allowance. Rent expense was $ 1.2 million and $ 3.6 million for the three and nine months ended September 30, 2015 and $ 0.8 million and $ 1.6 million for the three and nine months ended September 30, 2014 .

18


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.
Legal Proceedings

On June 2, 2015, Vivint, Inc. filed a lawsuit against us in U.S. District Court, District of Utah, alleging that our technology directly and indirectly infringes six patents that Vivint purchased. Vivint is seeking preliminary and permanent injunctions, enhanced damages and attorney’s fees. We answered the complaint on July 23, 2015. Among other things, we asserted defenses based on non-infringement and invalidity of the patents in question. Should Vivint prevail on its claims that one or more elements of our solution infringe one or more of its patents, we could be required to pay damages of Vivint’s lost profits and/or a reasonable royalty for sales of our solution, enjoined from making, using and selling our solution if a license or other right to continue selling such elements is not made available to us or we are unable to design around such patents, and required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us. The outcome of the legal claim and proceeding against us cannot be predicted with certainty. We believe we have valid defenses to Vivint’s claims. Based on currently available information, we determined a loss is not probable or reasonably estimable at this time.

In addition, from time to time, we are 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 matter, 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 12. Employee Benefit Plans
Employee Stock Purchase Plan
We adopted our Employee Stock Purchase Plan (the "2015 ESPP") in June 2015. Under the 2015 ESPP, 1,200,000 shares have been initially reserved for future grant 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 ESPP will allow eligible employees to purchase shares of our common stock through payroll deductions at a discount not to exceed 10% of the market value on the date of each purchase period. The maximum number of shares of our common stock that a participant may purchase during any calendar year for the 2015 ESPP 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 ESPP is considered compensatory for purposes of share-based compensation expense. For the nine months ended September 30, 2015 , no shares were purchased by employees and we did not recognize any compensation expense. As of September 30, 2015 , 1,200,000 shares remain available for future issuance.

19


Note 13. Redeemable Convertible Preferred Stock
Summary of Activity
Upon completion of the IPO on July 1, 2015, all outstanding shares of convertible preferred stock converted into an aggregate of 35,017,884 shares of common stock.
The following table presents a summary of activity for our redeemable convertible preferred stock issued and outstanding for the nine months ended September 30, 2015 (in thousands):
 
SERIES B
Redeemable
Convertible
Preferred Stock
 
SERIES B-1
Redeemable
Convertible
Preferred Stock
 
NEW SERIES A
Redeemable
Convertible
Preferred Stock
 
Total
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance, December 31, 2014
1,810
 
$136,523
 
83
 
$6,265
 
1,998
 
$59,668
 
$202,456
Conversion of Preferred Stock into Common Stock
(1,810)
 
$(136,523)
 
(83)
 
$(6,265)
 
(1,998)
 
$(59,668)
 
$(202,456)
Balance, September 30, 2015
 
$—
 
 
$—
 
 
$—
 
$—
Note 14. Stock-Based Compensation
Stock Options
In June 2015, our board of directors adopted, our stockholders approved, and we registered the shares for our 2015 Equity Incentive Plan (the "2015 Plan"), pursuant to which we initially reserved and registered 4,700,000 shares of common stock for issuance to our employees, directors and non-employee directors and consultants including 141,222 shares of our common stock previously reserved for issuance under our Amended and Restated 2009 Stock Incentive Plan (the "2009 Plan") that were added to the shares reserved under the 2015 Plan upon its effectiveness. The 2015 Plan provides for the grant of incentive stock options to employees and for the grant of nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, and other forms of equity compensations to employees, directors and non-employee directors and consultants. The number of shares of common stock reserved for issuance under the 2015 Plan will automatically increase on January 1 each year, for a period of not more than ten years, commencing on January 1, 2015 through January 1, 2024, by 5% of the total number of shares of common stock outstanding on December 31st 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 described below. As of September 30, 2015 we made one grant under the 2015 Plan and 4,674,312 shares remained available for future grant.
The 2009 Plan provided for the grant of incentive stock options to employees and for the grant of nonqualified stock options and restricted stock to our employees, directors and non-employee directors and consultants. Stock options have been granted at exercise prices as determined by the board of directors to our officers and employees. These stock options generally vest over a five year period and each option, if not exercised or terminated, expires on the ten th anniversary of the grant date.
The 2009 Plan allows for the granting of options that 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. As of September 30, 2015 , there were 124,791 unvested shares of common stock outstanding subject to our right of repurchase. As of December 31, 2014 , there were 209,372 unvested shares of common stock outstanding subject to our right of repurchase. During the nine months ended September 30, 2015 , we repurchased 287 unvested shares of common stock related to early exercised stock options in connection with employee terminations. As of September 30, 2015 and December 31, 2014 , we recorded $ 0.5 million and $ 0.7 million in accounts payable, accrued expenses and other current liabilities on the consolidated balance sheets for the proceeds from the early exercise of the unvested stock options.
Included in the stock-based compensation expense for the nine months ended September 30, 2015 was $0.8 million related to the cash settlement of recently exercised stock options of a terminated employee, at the company's election. We accounted for this cash settlement as a liability modification of the stock option awards.
We account for stock-based compensation awards 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 estimated 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.

The following table summarizes the components of stock-based compensation expense for the three and nine months ended September 30, 2015 and 2014 (in thousands):

20


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Stock options
$
809

 
$
724

 
$
2,005

 
$
2,300

Compensation related to the sale of common stock

 
22

 
193

 
65

Compensation related to the repurchase of stock options

 

 
777

 

Total equity based compensation expense
$
809

 
$
746

 
$
2,975

 
$
2,365

Tax benefit / (expense) from stock-based awards
$
424

 
$
(73
)
 
$
665

 
$
675

Stock-based compensation expense is included in the following line items in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Sales and marketing
$
114

 
$
80

 
$
260

 
$
235

General and administrative
305

 
434

 
1,825

 
1,396

Research and development
390

 
232

 
890

 
734

Total stock-based compensation expense
$
809

 
$
746

 
$
2,975

 
$
2,365

There were 514,276 stock options granted during the nine months ended September 30, 2015 . The dividends declared and paid in June 2015 were in anticipation of our IPO, which we closed on July 1, 2015. After the IPO, we do not expect to declare or pay dividends on a recurring basis. As such, we assume that the dividend rate is zero . The following table summarizes the assumptions used for estimating the fair value of stock options granted during the three and nine months ended September 30, 2015 and 2014 :
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Volatility
51.0
%
 
47.2
%
 
48.5 - 51.8%

 
47.2 - 49.6%

Expected term
6.3 years

 
5.6 years

 
4.5 - 6.3 years

 
4.0 - 5.7 years

Risk-free interest rate
1.8%

 
1.8
%
 
1.3 - 1.8%

 
1.4 - 1.9%

Dividend rate
%
 
%
 
%
 
%
The following table summarizes the stock option activity for the nine months ended September 30, 2015 :
 
Number of
Options
 
Weighted
Average Exercise
Price Per Share
 
Weighted Average
Remaining
Contractual Life
(in years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 31, 2014
3,345,993

 
$
2.68

 
7.0
 
$
27,725

Granted
514,276

 
11.90

 

 

Exercised
(276,925
)
 
1.53

 

 
3,119

Forfeited
(28,544
)
 
4.69

 

 

Cancelled
(4,476
)
 
1.54

 

 

Outstanding at September 30, 2015
3,550,324

 
$
4.09

 
6.8
 
$
27,038

Vested and expected to vest at September 30, 2015
3,506,414

 
$
4.05

 
6.8
 
$
26,681

Exercisable at September 30, 2015
1,844,358

 
$
1.78

 
5.4
 
$
18,221

The weighted average grant date fair value for our stock options granted during the nine months ended September 30, 2015 was $ 11.90 . There were 514,276 stock options granted during the nine months ended September 30, 2015 . The total fair value of stock options vested during the nine months ended September 30, 2015 and 2014 was $ 1.2 million and $ 0.4 million . The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2015 and 2014 was $ 3.1 million and $ 7.1 million . As of September 30, 2015 , the total compensation cost related to nonvested awards not yet recognized was $ 4.0 million , which will be recognized over a weighted average period of 2.2 years.

21


Warrants
In 2010, we issued a performance-based warrant to an executive officer that gives this individual the right to purchase up to 91,881 shares of our common stock in the aggregate if certain performance targets and market conditions are achieved. In 2012, we issued an additional performance-based warrant to an executive officer that gives that executive officer the right to purchase up to 27,000 shares of our common stock if certain performance targets and market conditions are achieved. On March 30, 2015, we issued performance-based warrants to two employees. These warrants give these individuals the right to purchase up to 54,694 shares of our common stock in the aggregate if certain performance targets are achieved.
The first performance-based warrant for 91,881 shares of our common stock has an exercise price of $ 0.41 per share and becomes exercisable if we have a change in control or if we complete an initial public offering. This warrant for 91,881 shares of our common stock expired in May 2015 upon the cessation of the holder of the warrant's employment with us.
The second performance-based warrant for 27,000 shares of our common stock has an exercise price of $ 3.89 per share and becomes exercisable if we have a change in control or if we complete an initial public offering. This warrant expired in July 2015 because the minimum annual revenue and EBITDA targets of the subsidiary unit required under the warrant were not met during the exercise period. The exercise period began upon the occurrence of a triggering event, which occurred on June 25, 2015, upon the effectiveness of the registration statement for our IPO, and closed 30 days after the effectiveness of our registration statement.
The third and fourth performance-based warrants, each for 27,347 shares of our common stock, have an exercise price of $ 10.97 per share and we may elect to terminate the warrants in exchange for a one-time cash settlement in the event of a change in control. If the warrants become exercisable, the number of shares that become exercisable which cannot exceed 27,347  shares for each warrant, is based upon the achievement of certain minimum annual revenue targets. These warrants will expire upon the earlier of March 2025 and the date upon which the holder of the warrant is no longer our employee or an employee of an affiliate of ours. We believe that the achievement of the minimum annual revenue targets is probable, and we began recognizing expense related to these performance-based warrants on April 1, 2015.
As of September 30, 2015 and December 31, 2014 , none of the warrants that remained outstanding were exercisable because the performance requirements had not been met. We recorded $0.0 million of expense associated with the performance-based warrants during the three months ended September 30, 2015 and 2014 and $0.0 million of expense associated with the performance-based warrants during the nine months ended September 30, 2015 and 2014 .
Note 15. Earnings Per Share
Basic and Diluted Earnings Per Share
The components of basic and diluted EPS are as follows (in thousands, except share and per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
3,229

 
$
2,667

 
$
8,779

 
$
9,016

Less: dividends paid to participating securities

 

 
(18,987
)
 

Less: income allocated to participating securities
(50
)
 
(2,549
)
 

 
(8,651
)
Net income available for common stockholders (A)
$
3,179

 
$
118

 
$
(10,208
)
 
$
365

Weighted average common shares outstanding — basic (B)
44,922,410

 
2,429,445

 
16,910,090

 
2,211,263

Dilutive effect of stock options
1,909,604

 
1,916,240

 

 
1,580,965

Weighted average common shares outstanding — diluted (C)
46,832,014

 
4,345,685

 
16,910,090

 
3,792,228

Earnings per share:
 
 
 
 
 
 
 
Basic (A/B)
$
0.07

 
$
0.05

 
$
(0.60
)
 
$
0.17

Diluted (A/C)
$
0.07

 
$
0.03

 
$
(0.60
)
 
$
0.10

The following securities have been excluded from the calculation of diluted weighted average common shares outstanding because the effect is anti-dilutive for the three and nine months ended September 30, 2015 and 2014 :

22


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Redeemable convertible preferred stock:
 
 
 
 
 
 
 
Series A

 
1,998,257

 

 
1,998,257

Series B

 
1,809,685

 

 
1,809,685

Series B-1

 
82,934

 

 
82,934

Stock options
32,000

 
185,150

 
537,525

 
185,150

Common stock subject to repurchase
124,791

 
357,392

 
124,791

 
357,392

Note 16. Significant Service Providers
During the three months ended September 30, 2015 and 2014 , our 10 largest revenue service providers accounted for 63.7% and 61.5% of our revenue. One of our service providers individually represented greater than 15% but not more than 20% of our revenue for the three months ended September 30, 2015 . One of our service providers individually represented greater than 10% but not more than 15% of our revenue for the three months ended September 30, 2014 . One of our service providers individually represented greater than 15% but not more than 20% of our revenue for the three months ended September 30, 2014 . During the nine months ended September 30, 2015 and 2014 , our 10 largest revenue service providers accounted for 63.7% and 65.9% of our revenue. One of our service providers individually represented greater than 15% but not more than 20% of our revenue for the nine months ended September 30, 2015 . Two of our service providers individually represented greater than 10% but not more than 15% of our revenue for the nine months ended September 30, 2014 . One of our service providers individually represented greater than 15% but not more than 20% of our revenue for the nine months ended September 30, 2014 .
Trade accounts receivable from two service providers totaled $3.0 million and $2.9 million as of September 30, 2015 . No other individual service provider represented more than 10% of accounts receivable as of September 30, 2015 . Trade accounts receivable from three service providers totaled $ 3.1 million , $ 2.7 million and $ 1.1 million , as of December 31, 2014 . No other individual service provider represented more than 10% of accounts receivable as of December 31, 2014 .
Note 17. Income Taxes
For purposes of interim reporting, our annual effective income tax rate is estimated in accordance with ASC 740-270, " Interim Reporting ." This rate is applied to the pre-tax book income of the entities expected to be benefited during the year. Discrete items that impact the tax provision were recorded in the period incurred.
Our effective income tax rates were 24.7% and 15.6% for the three months ended September 30, 2015 and 2014 and 35.2% and 34.4% for the nine months ended September 30, 2015 and 2014 . For the nine months ended September 30, 2015 , our effective tax rate was approximately the same as the statutory rate primarily due to the discrete benefit of $0.7 million for research and development tax credits claimed for prior years, offset by the impact of state taxes and non-deductible meal and entertainment expenses. For the nine months ended September 30, 2014 , our effective tax rate was below the statutory rate primarily due to the discrete benefit of $0.8 million for research and development tax credits claimed for prior years, partially offset by the impact of state taxes and non-deductible meal and entertainment expenses. For the three months ended September 30, 2015, our effective tax rate was below the statutory rate primarily due to the discreet benefit for research and development tax credits claimed for prior years recorded during the quarter. For the three months ended September 30, 2014, our effective tax rate was below the statutory rate primarily due to the discrete benefit for research and development tax credits claimed for prior years recorded during the quarter.
We recognize a valuation allowance if, based on the weight of available evidence, both positive and negative, it is more likely than not that some portion, or all, of net deferred tax assets will not be realized. Based on our historical and expected future taxable earnings, we believe it is more likely than not that we will realize all of the benefit of the existing deferred tax assets at September 30, 2015 and December 31, 2014 . Accordingly, we have not recorded a valuation allowance as of September 30, 2015 and December 31, 2014 .
We apply guidance for uncertainty in income taxes that requires the application of a more likely than not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, this guidance permits us to recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is more likely than not to be realized upon settlement. We recorded an unrecognized tax benefit of $0.2 million for research and development tax credits for the 2011 and 2014 tax years during the three and nine months ended September 30, 2015 . We established a $0.1 million liability for uncertain tax positions related to research and development tax credits for the 2012 and 2013 tax years during the three and

23


nine months ended September 30, 2014 . During 2014, we recorded an unrecognized tax benefit of $ 0.2 million for research and development tax credits for the 2012 , 2013 and 2014 tax years.
Note 18. Segment Information
We have two reportable segments:
Alarm.com segment
Other segment
Our chief operating decision maker is the chief executive officer. Management determined that the operational data used by the chief operating decision maker is that of the 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 platform for the connected home and related solutions. Our Alarm.com segment also includes the results of Horizon Analog, a research company that focuses on cost-effective collection and analysis of data relating energy usage and consumer behavior and energy disaggregation, Secure-i, a commercial video as a service provider, and SecurityTrax, a provider of SaaS-based, customer relationship management software tailored for security system dealers. This segment contributed over 97% of our revenue for the three and nine months ended September 30, 2015 and 2014 . Our Other segment is focused on researching and developing home and commercial automation, and energy management products and services in adjacent markets.
Management evaluates the performance of its segments and allocates resources to them based on operating income on a pre-tax basis. The reportable segment operational data is presented in the table below as of September 30, 2015 and December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended September 30,
Segment
Information
2015
 
2014
 
Alarm.com
 
Other
 
Intersegment
Alarm.com
 
Intersegment
Other
 
Total
 
Alarm.com
 
Other
 
Intersegment
Alarm.com
 
Intersegment
Other
 
Total
Revenue
$
52,684

 
$
2,073

 
$
(50
)
 
(700
)
 
$
54,007

 
$
42,274

 
$
638

 
$
(80
)
 
$

 
$
42,832

Operating income / (loss)
8,865

 
(4,561
)
 
4

 
33

 
4,341

 
6,810

 
(3,658
)
 
(8
)
 
135

 
3,279

 
Nine Months Ended September 30,
Segment
Information
2015
 
2014
 
Alarm.com
 
Other
 
Intersegment
Alarm.com
 
Intersegment
Other
 
Total
 
Alarm.com
 
Other
 
Intersegment
Alarm.com
 
Intersegment
Other
 
Total
Revenue
$
148,302

 
$
5,714

 
$
(570
)
 
(1,479
)
 
$
151,967

 
$
120,948

 
$
1,225

 
$
(412
)
 
$

 
$
121,761

Operating income / (loss)
27,195

 
(13,467
)
 
(167
)
 
183

 
13,744

 
23,900

 
(9,937
)
 
(88
)
 
84

 
13,959

 
As of September 30, 2015
 
As of December 31, 2014
 
Alarm.com
 
Other
 
Total
 
Alarm.com
 
Other
 
Total
Total Assets
$
209,194

 
$
13,931

 
$
223,125

 
$
108,935

 
$
11,997

 
$
120,932

We derived substantially all revenue from the United States for the three and nine months ended September 30, 2015 and 2014 . Substantially all our long lived assets were in the United States as of September 30, 2015 and December 31, 2014 .
Note 19. Related Party Transactions
Our installation partner in which we have a 48.2% ownership interest performs installation services for security dealers and also provides installation services for us and certain of our subsidiaries. We account for this investment using the equity method (see Note 7). During the nine months ended September 30, 2015 and 2014 , we recorded $0.5 million and $0.2 million of cost of hardware and other revenue in connection with this installation partner and, as of September 30, 2015 and December 31, 2014 the accounts payable balance was $0.0 million and $0.1 million . In September 2014, we loaned $315,000 to our installation partner under a secured promissory note that accrues interest at 8.0% . Interest is payable monthly with the entire principal balance plus accrued but unpaid interest due at maturity in September 2016. For the three and nine months ended September 30, 2015 , we recorded $6,000 and $19,000 of interest income related to this note receivable.

24



In June 2015, two of our significant stockholders, entities affiliated with Technology Crossover Ventures ("TCV"), and entities affiliated with ABS Capital Partners ("ABS"), entered into a Securities Purchase Agreement (the "Secondary Sale Agreement"). Pursuant to the terms of the Secondary Sale Agreement, ABS agreed to sell to TCV, and TCV agreed to buy from ABS, 888,988 shares of our common stock at a purchase price of $13.02 per share.




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ITEM 2: 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 (1) our condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31. 2014 included in the final prospectus for our initial public offering, or IPO, dated as of June 25, 2015 and filed with the SEC pursuant to Rule 424(b)(4) of the Securities Act of 1933, as amended, or the Securities Act, on June 26, 2015. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in this Quarterly Report and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
Alarm.com is the leading platform solution for the connected home. Through our cloud-based services, we make connected home technology broadly accessible to millions of home and business owners. Our multi-tenant software-as-a-service, or SaaS, platform enables home and business owners to intelligently secure their properties and automate and control a broad array of connected devices through a single, intuitive user interface. Our connected home platform currently has more than 2.3 million residential and business subscribers and connects to more than 25 million devices. More than 20 billion data points were generated and processed by those subscribers and devices in the last year alone. This scale of subscribers, devices and data makes Alarm.com the largest connected home platform.
Our solutions are delivered through an established network of over 5,000 trusted service providers, who are experts at designing, selling, installing and supporting our solutions. Our technology platform was purpose-built for the entire connected home ecosystem, including the consumers who use it, the service providers who deliver it and the hardware partners whose devices are enabled by the platform. Our solutions are used by both home and business owners, and we refer to this market as the connected home market.
We primarily generate revenue through our service providers who resell our services and pay us monthly fees, which comprises our SaaS revenue. Our service providers sell, install and support Alarm.com solutions that enable home and business owners to intelligently secure, connect, control and automate their properties. Our service providers have indicated that they typically have three to five year service contracts with home or business owners, whom we refer to as our subscribers. We derive a small portion of our revenue from licensing our intellectual property to service providers on a per customer basis. SaaS and license revenue represented 67% and 66% of our revenue for the nine months ended September 30, 2015 and 2014, and 67% and 66% of our revenue in the third quarters of 2015 and 2014. Our comprehensive solution primarily includes interactive security, intelligent automation, video monitoring and energy management, which can be integrated together or provided on a standalone basis. As of the end of our last fiscal year, December 31, 2014, we had 2.3 million subscribers, a substantial majority of which were residential.
We also generate revenue from the sale of hardware that enables our solutions, including cellular radio modules, video cameras, image sensors and peripherals. We have a rich history of innovation in cellular technology that enables our robust SaaS offering. Hardware and other revenue represented 33% and 34% of our revenue for the nine months ended September 30, 2015 and 2014, and 33% and 34% of our revenue in the third quarters of 2015 and 2014. We expect hardware and other revenue to continue to decline as a percentage of total revenue as we continue to grow our SaaS and license revenue.
We were founded in 2000 to revolutionize home security and improve the way people secure and interact with their homes and businesses. In the decade before we launched our first solution in 2003, the security industry had been slow to innovate or adopt emerging technologies. We identified an opportunity to apply new technology - in this case two-way wireless data transmission, cloud computing technologies and the rapid growth of Internet usage - to disrupt legacy security applications. We built our technology platform to capitalize on the connected home opportunity. We believe we were the first company to launch a SaaS platform providing an interactive home security solution. In 2006, we transitioned our solution to the cellular wireless network to broaden our coverage footprint and use the most reliable communication channel available to enable our services. In 2010, we further expanded our intelligent, connected home and business platform to include our energy management and other home and business automation features. Over this period, we have established a robust cloud-based platform that connects a broad ecosystem of devices and supports a large variety of communications protocols. This platform enables continued scalability of our solutions and allows us to rapidly introduce new devices, features and capabilities as consumer preferences continue to evolve. We partner with experienced hardware manufacturers to enable a large ecosystem of devices on our

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platform to meet a wide range of consumer and service provider needs. We have also developed novel hardware components and devices where we have seen an opportunity to innovate. Our cellular communication module, image sensor and smart thermostat offer new and unique capabilities, enabling our service providers to differentiate themselves in the market. Our extensive ecosystem of integrated hardware partners paired with our focused hardware devices offers a broad range of connected devices on our platform.
To date, nearly all of our revenue growth has been organic. As part of our development efforts, we occasionally make investments in companies that are developing technology or services complementary to our offerings, and we also invest in developing new offerings for markets adjacent to our current markets.
Highlights of our financial performance for the periods covered in this report include:
Revenue increased from $121.8 million in the first nine months of 2014 to $152.0 million in the first nine months of 2015. Revenue increased from $42.8 million in the third quarter of 2014 to $54.0 million in the third quarter of 2015.
SaaS and license revenue increased from $80.7 million in the first nine months of 2014 to $102.2 million in the first nine months of 2015. SaaS and license revenue increased from $28.5 million in the third quarter of 2014 to $36.2 million in the third quarter of 2015.
Net income was $8.8 million in the first nine months of 2015 compared to $9.0 million in the first nine months of 2014. Net income increased from $2.7 million in the third quarter of 2014 to $3.2 million in the third quarter of 2015.
Adjusted EBITDA, a non-GAAP measurement of operating performance, increased from $19.1 million in the first nine months of 2014 to $24.6 million in the first nine months of 2015. Adjusted EBITDA increased from $5.1 million in the third quarter of 2014 to $9.7 million in the third quarter of 2015.
Please see Non-GAAP Measures below in this section of the report for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measurement, for the third quarter and first nine months of 2015 and 2014.
Key Metrics
We use the following key business metrics to help us monitor the performance of our business and to identify trends affecting our business: our SaaS and license revenue, Adjusted EBITDA and our SaaS and license revenue renewal rate. We believe these metrics are useful to understanding the underlying trends in our business. The following table summarizes our key operating metrics for the three and nine months ended September 30, 2015 and 2014 and for the trailing 12-month periods ended September 30, 2015 and 2014.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
SaaS and license revenue
$
36,158

 
$
28,473

 
$
102,247

 
$
80,652

Adjusted EBITDA
9,654

 
5,083

 
24,602

 
19,101

 
 
 
 
 
Twelve Months Ended
September 30,
 
 
 
 
 
2015
 
2014
SaaS and license revenue renewal rate
 
 
 
 
93
%
 
94
%
SaaS and License Revenue
We believe that increasing SaaS and license revenue is an indicator of the productivity of our existing service providers and their ability to increase the number of subscribers using the Alarm.com connected home solutions, our ability to add new service providers reselling the Alarm.com solutions, the demand for our connected home solutions, and the pace at which the market for connected home solutions is growing.
Adjusted EBITDA
Adjusted EBITDA represents our net income before interest and other expense / (income), net, provision for income taxes, amortization and depreciation expense, stock-based compensation expense, goodwill and intangible impairment charges and legal costs incurred in connection with certain 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.
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

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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. Please see Non-GAAP Measures below 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 three and nine months ended September 30, 2015 and 2014.
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 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 providers, 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 providers. We believe that our SaaS and license revenue renewal rate allows us to measure our ability to retain and grow our SaaS and license revenue and serves as an indicator of the lifetime value of our subscriber base.
Basis of Presentation
Our fiscal year ends December 31. The key elements of our operating results include:
Revenue
We generate revenue primarily through the sale of our software-as-a-service, or SaaS, over our cloud-based connected home platform through our service provider channel. We also generate revenue from the sale of hardware products that enable our solutions.
SaaS and License Revenue
We generate the majority of our SaaS and license revenue primarily from monthly recurring fees charged to our service providers sold on a per subscriber basis for access to our cloud-based connected home platform and related solutions. Our fees per subscriber vary based upon the service plan and features utilized. We enter into contracts with our service providers that establish our pricing as well as other business terms and conditions. These contracts typically have an initial term of one year, with subsequent annual renewal terms. Our service providers typically enter into underlying contracts with their end-user customers, which we refer to as our subscribers, for their engagement with our solutions. Our service providers have indicated that those contracts generally range from three to five years in length.
We offer multiple service level packages for our solutions, including integrated solutions and a range of a la carte add-ons for additional features. The price paid by our service providers each month for the delivery of our solutions is based on the combination of packages and add-ons enabled for each subscriber. We use tiered pricing plans where our service providers may receive prospective pricing discounts driven by volume. We recognize our SaaS and license revenue on a monthly basis as we deliver our solutions to our subscribers.
We also generate SaaS and license revenue from the fees paid to us when we license our intellectual property to service providers on a per customer basis for use of our patents. In November 2013, we entered into a license agreement with Vivint Inc., or Vivint, who represented at least 10% of our revenue in 2014, pursuant to which we granted Vivint a license to use the intellectual property associated with our connected home solutions. Vivint began generating customers and began paying us license revenue in the second quarter of 2014. Pursuant to this arrangement, Vivint has transitioned from selling our SaaS solutions directly to its customers to selling its own home automation product to its new customers, and we receive less revenue from Vivint from license fees as compared to its subscribers that continue to utilize our SaaS platform. Additionally, in some markets, our EnergyHub subsidiary sells its demand response software with an annual service fee, with pricing based on the number of subscribers or amount of aggregate electricity demand made available for a utility’s or market’s control.
Hardware and Other Revenue
We generate hardware and other revenue primarily from the sale of cellular radio modules that provide access to our cloud-based platform, video cameras and the sale of other devices, including image sensors and other peripherals. We sell hardware to our service providers as well as distributors. The purchase of hardware occurs in a transaction that is separate and typically in advance of the purchase of our platform services. We recognize hardware and other revenue when the hardware is delivered to our service providers or distributors, net of a reserve for estimated returns. Our terms for hardware sales typically allow service providers to return hardware up to one year past the date of original sale. We expect our hardware and other revenue to remain flat in the short term but increase in the longer term as we expect the volume of sales of our cellular radio modules to increase as we support new lines of control panels as well as from the expected increase in the number of devices

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installed per home or business. We expect hardware and other revenue to decrease as a percentage of total revenue as we anticipate such revenue to grow at a lower rate than SaaS and license revenue.
Hardware and other revenue also includes activation fees charged to service providers for activation of a subscriber’s account on our platform. We record activation fees initially as deferred revenue and we recognize these fees on a straight-line basis over an estimated life of the subscriber relationship, which is currently ten years. Hardware and other revenue also includes fees paid by service providers for our marketing services.
Cost of Revenue
Our cost of SaaS and license revenue primarily includes the amounts paid to wireless network providers and, to a lesser extent, the costs of running our network operating centers. Our cost of hardware and other revenue primarily includes cost of raw materials and amounts paid to our third-party manufacturer for production and fulfillment of our cellular radio modules and image sensors, and procurement costs for our video cameras, which we purchase from an original equipment manufacturer, and other devices.
We record the cost of SaaS and license revenue as expenses are incurred, which corresponds to the delivery period of our services to our subscribers. We record the cost of hardware and other revenue when the hardware and other services are delivered to the service provider, which is when title transfers. Our cost of revenue excludes amortization and depreciation.
To the extent that we are able to increase revenue without increasing cost of revenue on a percentage basis, we intend to invest those cost efficiencies back into growing our SaaS and license revenue.
Operating Expenses
Our operating expenses consist of sales and marketing, general and administrative, research and development, and amortization and depreciation expenses. Salaries, bonuses, stock-based compensation, benefits and other personnel related costs are the most significant components of each of these expense categories. We include stock-based compensation expense in connection with the grant of stock options 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 253 employees at January 1, 2014 to 491 employees at September 30, 2015, and we expect to continue to hire new employees to support future growth of our business.
Sales and Marketing Expense.   Sales and marketing expense consists primarily of personnel and related expenses for our sales and marketing teams, including salaries, bonuses, stock-based compensation, benefits, travel, and commissions. Our sales and marketing teams engage in sales, account management, service provider and sales support, advertising, promotion of our products and services and marketing.
The number of employees in sales and marketing functions grew from 102 at January 1, 2014 to 186 at September 30, 2015. 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 in absolute dollars and as a percentage of our total revenue in the short term. We intend to increase the size of our sales force to provide additional support to our existing service provider base to drive their productivity in selling our solutions as well as to enroll new service providers in North America and in international markets. We also intend to increase our marketing investments to support our service providers’ efforts to enroll new subscribers and to enable our service providers to expand the adoption of our solutions.
General and Administrative Expense.   General and administrative expense consists primarily of personnel and related expenses for our administrative, legal, information technology, human resources, finance and accounting personnel, including salaries, bonuses, stock-based compensation, benefits and other personnel costs. Additional expenses included in this category are legal costs incurred to defend and license our intellectual property and 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 valuation gains or losses on acquisition related contingent liabilities and goodwill and intangible asset impairment.
The number of employees in general and administrative functions grew from 34 at January 1, 2014 to 58 at September 30, 2015. We expect our general and administrative expense to increase in absolute dollars and decrease as a percentage of our total revenue in 2015. We anticipate that we will incur additional costs for personnel and professional services as we continue to operate as a public company. These costs include increases in our finance and legal personnel, additional external legal and audit fees and expenses and costs associated with compliance with the Sarbanes-Oxley Act of 2002 and other regulations governing public companies. We also expect to incur increased costs for directors’ and officers’ liability insurance and an enhanced investor relations function. In August 2014, we signed a lease for new office space for our headquarters with a lease term of 11.3 years. We expect to incur additional expenses in the near term as we move our headquarters to a new commercial space with a higher rental rate, and if we are unable to sublease our current headquarters office space.

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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 to third-party development resources.
The number of employees in research and development functions grew from 117 at January 1, 2014 to 247 at September 30, 2015. Our research and development efforts are focused on innovating new features and enhancing the functionality of our platform and the solutions we offer to our service providers and subscribers. We will also continue to invest in efforts to extend our platform to adjacent markets and internationally. We expect research and development expenses to continue to increase on an absolute basis and as a percentage of revenue in the short term as our ability to continue to innovate is critical to maintaining our competitive position.
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 platform and capitalized expenditures.
Interest Expense
Interest expense consists of interest expense associated with our debt facilities.
Other (Expense) / Income, Net
Other (expense) / income, net consists of our portion of the income or loss with respect to minority investments by us in other businesses accounted for under the equity method, interest income earned on our cash and cash equivalents and our notes receivable and gain or loss on the fair value of derivative instruments.
Provision for Income Taxes
We are subject to U.S. federal, state and local income taxes as well as foreign income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes will be due. Our effective tax rate differs from the statutory rate primarily due to the tax impact of state taxes, goodwill impairment, non-deductible transaction costs, non-deductible meals and entertainment and the impact of research and development tax credits.

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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:
Consolidated Statements of Operations
(in thousands)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  SaaS and license revenue
$
36,158

 
67
 %
 
$
28,473

 
66
 %
 
$
102,247

 
67
 %
 
$
80,652

 
66
 %
  Hardware and other revenue
17,849

 
33

 
14,359

 
34

 
49,720

 
33

 
41,109

 
34

Total revenue
54,007

 
100

 
42,832

 
100

 
151,967

 
100

 
121,761

 
100

Cost of revenue: (1)