S-1 1 d723141ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on May 22, 2015.

Registration Statement No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ALARM.COM HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 7372 26-4247032

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification Number)

8150 Leesburg Pike Vienna, Virginia 22182

Tel: (877) 389-4033

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Stephen Trundle

President and Chief Executive Officer Alarm.com Holdings, Inc. 8150 Leesburg Pike Vienna, Virginia 22182

Tel: (877) 389-4033

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

Eric Jensen

Nicole Brookshire

Peyton Worley

Cooley LLP

500 Boylston Street

Boston, Massachusetts 02116

(617) 937-2300

 

Mark T. Bettencourt

Gregg L. Katz

Goodwin Procter LLP

Exchange Place

53 State Street

Boston, Massachusetts 02109

(617) 570-1000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ¨

 

 

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  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Securities Being Registered   Proposed Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee

Common Stock, $0.01 par value per share

 

$75,000,000

 

$8,715

 

 

 

(1) In accordance with Rule 457(o) under the Securities Act of 1933, as amended, the number of shares being registered and the proposed maximum offering price per share are not included in this table.
(2) Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we and the selling stockholders are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED                     , 2015

                 Shares

 

LOGO

ALARM.COM HOLDINGS, INC.

Common Stock

 

 

This is an initial public offering of common stock of Alarm.com Holdings, Inc.

Alarm.com is offering                      shares of common stock to be sold in the offering. The selling stockholders identified in this prospectus are offering                  additional shares of common stock. Alarm.com will not receive any of the proceeds from the sale of the                  shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $         and $         per share. We have applied for listing of our common stock on the NASDAQ Global Select Market under the symbol “ALRM.”

We are an “emerging growth company” as defined under the U.S. federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for this and future filings.

See “Risk Factors” beginning on page 16 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

  Per Share   Total  

Initial public offering price

$                 $                

Underwriting discount(1)

$      $     

Proceeds, before expenses, to Alarm.com

$      $     

Proceeds, before expenses, to the selling stockholders

$      $     

 

(1) See the section of this prospectus titled “Underwriting” for a description of the compensation payable to the underwriters.

To the extent that the underwriters sell more than                  shares of common stock, the underwriters have the option to purchase up to an additional                  shares from Alarm.com at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2015.

 

Goldman, Sachs & Co. Credit Suisse BofA Merrill Lynch

 

Stifel Raymond James William Blair Imperial Capital

Prospectus dated                     , 2015


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LOGO

ALARM.COM®
The Platform for the Connected Home


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LOGO

Interactive Security
Intelligent Automation
Video Monitoring
Energy Management
2.3 MILLION
SUBSCRIBERS
25 MILLION
CONNECTED
SENSORS & DEVICES
20 BILLION
DATA POINTS
PROCESSED IN THE
LAST YEAR ALONE
powered by ALARM.COM®
Subscribers as of Dec 2014, other metrics as of Mar 2015


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LOGO

Alarm.com 12:42
Security Disarmed
Locks
All Locked
Video
72 Thermostats
iPad 12:42 PM 100%
The Smith Home
All
Tuesday Apr 2
12:30 pm
System Disarmed
Security
Video
Garage
Lights
Locks
Thermostats
System is Disarmed
DISARM
ARM (STAY)
ARM (AWAY)
Doors/Windows
Den Door OPEN
Kitchen Window OPEN
Motion Sensors
Living Room ACTIVATED
Basement ACTIVATED
View all Sensors
powered by ALARM.COM®
12:42 PM 85%
The Smith Home
Security System
System Disarmed
Thermostats
Living Room
72 F
Garage
Garage Closed
Video
powered by ALARM.COM®
ALARM.COM®
Revolutionizing the way people connect with their homes and businesses, making them safer, smarter and more efficient.


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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

  1   

RISK FACTORS

  16   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

  44   

USE OF PROCEEDS

  46   

DIVIDEND POLICY

  47   

CAPITALIZATION

  48   

DILUTION

  50   

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

  53   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  57   

BUSINESS

  95   

MANAGEMENT

  117   

EXECUTIVE AND DIRECTOR COMPENSATION

  124   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

  139   

PRINCIPAL AND SELLING STOCKHOLDERS

  144   

DESCRIPTION OF CAPITAL STOCK

  147   

SHARES ELIGIBLE FOR FUTURE SALE

  153   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

  156   

UNDERWRITING

  160   

LEGAL MATTERS

  166   

EXPERTS

  166   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

  166   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

  F-1   

Through and including                 , 2015 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

 

Neither we, the selling stockholders, nor the underwriters have authorized anyone to provide you with information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

For investors outside the United States: Neither we, nor the selling stockholders, nor any of the underwriters have done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included in this prospectus. Unless the context otherwise requires, we use the terms “Alarm.com,” “company,” “our,” “us,” and “we” in this prospectus to refer to Alarm.com Holdings, Inc. and, where appropriate, our consolidated subsidiaries.

Overview

We are the leading platform solution for the connected home. Through our cloud-based services, Alarm.com makes 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 invented solutions that connect people in new ways with their properties and devices, making them safer, smarter and more efficient. Our scalable, flexible platform is designed to meet a wide range of user needs with its breadth of services, depth of feature capability and broad support for the growing Internet of Things devices in the home. We power four primary solutions, which can be used individually or combined and integrated within a single user interface accessible through the web and mobile apps:

 

    Interactive Security.  Always-on intelligent security and awareness solution that operates through a dedicated, cellular connection to provide safe, reliable protection and withstand common vulnerabilities like line cuts, power outages and network connectivity issues. The solution includes a powerful mobile app, anytime alerts and customized triggers, and provides 24x7 emergency response through trusted and integrated service providers.

 

    Intelligent Automation.  Integrated home automation solution that allows users to easily and remotely connect and control devices and systems such as security systems, garage doors, lights, door locks, thermostats, electrical appliances, environmental sensors and other connected devices. The cloud-based platform uses data and sophisticated algorithms to learn activity patterns and recommend intelligent optimizations.

 

   

Video Monitoring.  Video-as-a-service solution delivering on demand viewing, cloud-based video storage and intelligently triggered recording with anytime access. The comprehensive

 

 

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suite of video services includes live streaming, smart clip capture, high definition continuous recording and instant video alerts delivered to users through the web and mobile apps.

 

    Energy Management.  Comprehensive energy monitoring and management solution for controlling energy consumption and comfort. Web and mobile apps integrate with connected thermostats, power meters, lights, shades, solar panels and appliances to control devices and manage temperature as well as provide real-time insights into home energy usage and efficiency. The intelligent platform delivers activity-based learning optimization as well as location-based adjustments for effortless energy management.

Homes and businesses are now ripe for reinvention, as most properties lack even basic automation or security monitoring. The intersection of four significant technology trends are making the intelligent, connected home now possible: broad adoption of mobile devices, the emergence of the Internet of Things, the power of big data and the extensibility of the cloud. Security systems, thermostats, door locks, video cameras, lights, garage doors, appliances and other devices that were once inert now have the potential to become sensor-enabled, intelligent and connected. The majority of broadband households are interested in smart home features. According to data from a 2014 survey from Parks Associates, 67% of all broadband households find smart home features very appealing.

Our innovative solutions offer a new experience for home and business owners. Here are some common examples of how subscribers can engage with our platform:

 

    A person driving to work gets an alert as soon as she is a mile away from home, notifying her that the garage door is open, and her security system is disarmed. With one click in the Alarm.com mobile app, the security system is armed and the garage door is automatically closed.

 

    As a person heads to bed, he arms the security system with his Alarm.com app and the doors automatically lock, the lights turn off, the thermostat goes into energy savings mode, the shades close and the garage door closes.

 

    A business owner receives an alert from Alarm.com that the security system was disarmed and the front door was opened at 8:00 a.m., letting her know the store opened on time. Later she receives an alert that the security system has not been armed by 10:00 p.m. and she glances at the Alarm.com app to see that her door is locked and there has been no activity for over two hours. She instantly arms the system from her mobile device.

 

    In the middle of the day, a house is empty, and both the husband and wife are at work. A would be intruder approaches the home and cuts the cable and phone lines from the outside in an attempt to disable the alarm. The intruder enters the home and locates the security panel using the entry delay beeps and smashes it to keep it from sending an alarm signal. Using the Alarm.com cellular communications and Crash and Smash technology, the central station is notified and police are dispatched to the home and capture the intruder. At the same time, the homeowners are notified via text message and phone call, the neighbor is notified via text message, a picture of the intruder is captured by the image sensor at the front door, and all the lights turn on to deter the intruder, ensuring full awareness and protection of the home.

 

    After a person leaves home, his thermostat is automatically set to an efficiency mode when he is a pre-defined distance away from his home. Later when he is returning and near home again, Alarm.com technology automatically adjusts the thermostat back to a comfort mode.

 

 

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    A homeowner creates a unique access code using Alarm.com to grant access to the dog walker during certain times of the day and specific days of the week. If the dog walker fails to arrive as scheduled, an alert is sent. When the dog walker arrives, Alarm.com automatically sends an alert with a short video clip to the dog’s owner.

 

    With smart schedules, Alarm.com learns activity patterns over time by analyzing the data provided by all the sensors within the home. Alarm.com considers these activity patterns along with other external information such as weather and humidity data to recommend adjustments to thermostat schedules that will reduce energy use without sacrificing comfort.

Our solutions are delivered through an extensive network of service providers, primarily comprised of security system dealers who are experts at delivering connected home solutions. Security and safety continue to be the top smart home features for consumers. According to a 2014 survey from Parks Associates, security and safety are the leading features driving smart home adoption. We believe that the combination of our solutions and our service providers, with their strong pedigree in security, is the most effective way to drive mass market adoption of the connected home.

We primarily generate revenue through our service providers who resell our services and pay us monthly fees. Our service providers have indicated that they typically have three to five year service contracts with home or business owners, whom we call subscribers. We believe that the length of these contracts, combined with our SaaS model and over a decade of operating experience, provides us with reasonable visibility into our future operating results. In addition, we generate hardware and other revenue primarily by selling our service providers and distributors an Alarm.com gateway module that enables cellular communications between the devices installed in the home or business and our cloud-based platform. We also sell other hardware devices such as video cameras as part of our video monitoring solution.

We have experienced significant growth since inception. As of the fourth quarter of 2014, we had significantly more subscribers than the next largest platform provider in North America. According to data from a fourth quarter 2014 Parks Associates report, Alarm.com had approximately 50% more subscribers than the next largest platform provider in North America. We have increased the number of homes and businesses we served from 0.5 million as of December 31, 2010 to 2.3 million as of December 31, 2014. Additionally, we grew revenue at a 46% compound annual growth rate from December 31, 2010 to December 31, 2014.

For the year ended December 31, 2014, our revenue was $167.3 million, representing year-over-year revenue growth of 28%. For the first quarter of 2015, our revenue was $46.0 million, representing year-over-year revenue growth of 25%. For the year ended December 31, 2014, our SaaS and license revenue was $111.5 million, representing year-over-year SaaS and license revenue growth of 35%. For the first quarter of 2015, our SaaS and license revenue was $32.0 million, representing year-over-year revenue growth of 27%. Our SaaS and license revenue represented 67% of our total revenue for the year ended December 31, 2014 and 69% of our total revenue in the first quarter of 2015. Hardware and other revenue accounted for 33% of our total revenue for the year ended December 31, 2014 and 31% of our total revenue in the first quarter of 2015. For the year ended December 31, 2014, and on a consolidated basis, we generated net income of $13.5 million and Adjusted EBITDA, a non-GAAP metric, of $28.3 million. For the first quarter of 2015, we generated net income of $3.0 million and Adjusted EBITDA, a non-GAAP metric, of $7.0 million. Please see footnote 5 to the table contained in the section of this prospectus titled “Selected Consolidated Financial and Other Data” for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measures calculated and presented in accordance with generally accepted accounting standards in the United States, or GAAP.

 

 

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Key Trends Driving the Adoption of the Connected Home

The intersection of the following significant technology trends is driving mass adoption of connected home solutions.

 

    The Mobile Era.  The proliferation of smartphones, wearables and tablets has transformed the way people interact with applications and content in both their personal and professional lives, and consumers are increasingly demanding a similarly efficient and convenient mobile experience to monitor and control their homes and businesses.

 

    The Internet of Things.  There has been significant growth in the number of connected devices. According to Gartner reports dated January 2015 and March 2014, the Internet of Things is forecast to reach 25 billion installed units by 2020, up from 0.9 billion in 2009. This trend includes “things” in consumers’ homes and businesses such as security systems, thermostats, door locks, video cameras, lights, garage doors, water heaters and appliances. The ability to remotely manage, monitor and control these devices using cloud-based applications and wireless technology is creating a large and fast growing market.

 

    Big Data and Analytics Capabilities.  According to an IDC report dated April 2014, the volume of digital information created and replicated worldwide will grow approximately 39% annually from 4.4 trillion gigabytes in 2013 to 44 trillion gigabytes in 2020. As the network of physical objects accessed through the Internet continues to grow, there is an opportunity to harvest and analyze the data that these devices generate. We believe a platform solution is best positioned to collect, process and analyze this previously unused data to provide insights. These insights can transform the way consumers interact with their homes and businesses through real-time, adaptive and predictive analytics.

 

    Cloud Infrastructure.  Advances in cloud technologies have enabled efficient scale, making it possible to deliver home security and automation software as a service to the mass market. This has made it possible for consumers to afford such services without the requirement of expensive and quickly outdated physical hardware to be purchased and set up on location.

What Consumers Want

Consumers increasingly are seeking a connected home solution as a way to make their lives more convenient, efficient and secure. They expect:

 

    Persistent Awareness and Control.  Persistent awareness and control of everything that is happening inside and around their homes through one simple, easy-to-use mobile app on the device of their choice.

 

    Unified Experience.  A platform that seamlessly works with a broad range of connected devices that will enable those devices to integrate with each other to create a unified connected home experience that is also affordable and easy to acquire.

 

    Adaptive Learning.  An intelligent system that adapts to their behavior and recommends optimizations to improve the safety and efficiency of their home.

 

    Trusted Provider.  A professionally configured or installed solution, monitored by a service provider that they can trust, because when it comes to their homes, consumers place a premium on their security and privacy.

 

 

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What Connected Home Service Providers Want

Service providers are a critical part of allowing the benefits of the connected home to be rapidly and effectively delivered to consumers. They want:

 

    Integrated Solution.  To be able to market and sell comprehensive connected home solutions that are adaptable to varying consumer requirements.

 

    Compelling Return on Investment.  To distribute a solution that can expand their addressable market and increase customer revenue and retention.

 

    Low Delivery and Support Costs.  A solution that can be installed and maintained cost-effectively in any home or business with low ongoing support costs — for instance, by being able to service or update a solution remotely instead of having to send personnel onsite.

 

    Hardware Choice.  A flexible platform that can support multiple hardware devices and manufacturers and that is future-proof, integrating with new technologies.

 

    Enterprise Grade Solution.  A highly reliable platform provided by a proven partner with a trusted brand, first-class support and value-added services.

Limitations of Existing and Legacy Products

Existing and legacy approaches to home automation generally have several limitations:

 

    Point Products.  Home control products are highly fragmented and made up of multiple disparate devices which provide only a single function and, if connected at all, require separate mobile apps. These point products often lack support services and can be time consuming for a consumer to manage.

 

    Closed Ecosystem.  Closed ecosystems with products that do not scale to support the expanding Internet of Things limit the ability of a consumer to add new devices, as they are restricted to a small set of compatible options.

 

    Lack Intelligence.  These products are only able to respond to direct commands and lack the ability to apply any automated intelligence to create a more efficient and simplified experience.

 

    Not Future Proof.  Since most legacy products are not cloud-based, they cannot receive automatic updates of new software, and generally require physical hardware and software replacements once new features, devices or technologies are introduced. These replacements typically have to be done onsite.

 

    Overly Complex and Expensive.  Systems that attempt to integrate disparate point products in a closed network are highly complex and require a significant level of customization. As a result, these systems lack flexibility and are often cost prohibitive to acquire, service and update for most consumers.

Market Opportunity

Our addressable market consists of residential homes and businesses. Our residential subscribers are typically owners of single-family homes, while our business subscribers include retail businesses, restaurants, small-scale commercial facilities, offices of professional services providers and similar businesses. According to a Juniper Research report dated February 2014, the global opportunity for home automation and security, smart metering and smart health monitoring in the home is expected to

 

 

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grow from $5.8 billion in 2013 to $14.9 billion in 2018, representing a compound annual growth rate of 21%. Approximately 81% of the total market size in each period is attributable to the home automation and security market, which Juniper Research defines as a bundled solution, including camera, lighting, heating control, door locks and others. According to Parks Associates reports dated December 2013 and July 2014, there are approximately 124 million U.S. households, of which 95 million have broadband internet access, and 21% of U.S. households with broadband access, or approximately 20 million homes, have a professionally monitored home security system. However, according to April 2015 data from Parks Associates, smart home controller penetration was only at 7.8% of U.S. households in 2014. We believe there is an opportunity for penetration rates to significantly increase, largely driven by the mass market adoption of connected home solutions by households with no solution today. In addition, we believe there are commonalities between the residential and business markets for these services, and the business market therefore represents a sizable related opportunity.

Benefits of Our Solutions

Our platform powers the connected home through four primary solutions, which can be integrated within a single user experience: interactive security, intelligent automation, video monitoring and energy management. In addition, we provide a comprehensive suite of enterprise-grade business management solutions to our service providers.

Benefits to Consumers

 

    Intuitive Experience.  We have designed our platform and user interfaces to be intuitive, simple and easy to operate without training or significant support. Our platform can be accessed through any mobile device and provides secure, intelligent control through a single user interface.

 

    Single Connected Platform.  Our cloud-based platform can be easily upgraded to incorporate new functionality and can be personalized to suit the individual consumer’s needs.

 

    Reliable Network Communications.  Our platform utilizes a highly secure and reliable cellular connection, which avoids vulnerabilities of phone lines and wired networks, such as lines being cut, power outages or network connectivity issues.

 

    Persistent Awareness.  Our platform helps subscribers maintain an awareness of what is happening at their properties at all times. Whether or not the security system is armed, the platform continuously monitors activity on each sensor and analyzes that data to determine whether the subscriber should be notified.

 

    Intelligent and Actionable.  Our platform monitors all the sensor and device activity in the property aggregating real-time, multi-point data about activity in the home. Our proprietary algorithms and custom rules use this data to drive intelligent triggers, learning and responsive automation for the consumer.

 

    Broad Device Compatibility.  Our platform supports a wide variety of connected devices and communications protocols, allowing seamless integration and automation of many devices throughout their home, as well as the addition of new devices in the future.

 

    Accessible and Affordable.  Our platform provides an affordable alternative to expensive home automation systems, legacy home control products and disparate point product solutions with minimal upfront expense and installation and support services.

 

    Trusted Provider of a Security Platform.  We have built a reputation and brand as a trusted, reliable and innovative technology provider. Our reputation is strengthened through our network of over 5,000 service providers, who have significant expertise in delivery of our platform.

 

 

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Benefits to Service Providers

 

    New Revenue Generation Opportunities.  Our solutions help broaden our service providers’ offerings beyond traditional home security and monitoring to include comprehensive connected home solutions, allowing the service providers to access new revenue streams and drive incremental recurring monthly revenue.

 

    Expanded Set of Value-Added Services.  We provide a set of value-added services to our service providers, including training, marketing, installation and support tools and business intelligence analytics.

 

    Improved Service Provider Economics.  Our cloud-based platform provides improved service provider economics by reducing delivery and support costs, allowing remote delivery of upgrades and increasing average monthly revenue. According to Parks Associates data released in April 2015, consumers are willing to pay a 25% premium over the cost of a basic security system for a professionally monitored system that includes an interactive security and home automation solution.

 

    Broad Device Interoperability.  We have an open platform supporting a wide range of communications protocols used in the home automation ecosystem, including Z-Wave, Wi-Fi and ZigBee, as well as cellular and broadband, allowing service providers to tailor their offerings to suit their customers now and in the future.

Competitive Advantages

We believe the benefits we deliver to our subscribers and our service providers create a significant competitive advantage for us in the connected home market. In addition, we believe there are a number of other factors that contribute to our competitive advantage:

 

    Scale of Subscriber Base and Service Provider Coverage.  We have over 2.3 million subscribers, over 5,000 service providers reselling Alarm.com solutions, and more than 25 million connected devices. We believe this combination of the size of our subscriber base and our established service provider network creates a competitive advantage for us and is challenging to replicate.

 

    Security Grade, Cloud-Based Architecture.  Our platform was built with life safety standards at the core, where the reliability standard is substantially higher than that required for home automation and energy management products. The cloud-based, multi-tenant architecture of our platform allows for reliable real-time updates and upgrades.

 

    Highly Scalable Data Analytics Engine.  We processed more than 20 billion data points in and out of properties last year alone. As consumer preferences shift towards more intelligence-based features, we believe the scale of our data combined with our proprietary analytics serve as a sustainable competitive advantage.

 

    Trusted Brand.  We believe that we have developed a trusted brand with both service providers and consumers for innovating and delivering connected home solutions. Our extensive service provider coverage enables us to utilize our marketing dollars efficiently nationwide to reinforce our brand and drive consumer referrals.

 

    Commitment to Innovation.  We are a pioneer in the connected home market and we continue to make significant investments in innovative research and development. Our investment has resulted in 35 patents which help ensure that our technology is competitively differentiated and protected.

 

 

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Growth Strategy

We intend to maintain our leadership position in the connected home market while continuing to innovate, add advanced capabilities and increase penetration of our connected home solutions. Our key growth strategies include:

 

    Drive SaaS and License Revenue Growth and Add New Service Providers.  We will continue to invest in making our service providers successful in driving adoption of the connected home by building out our sales, marketing and training services for our service providers. In addition, we plan to continue to grow our SaaS and license revenue and network of service providers.

 

    Upgrade Traditional Security Customers to Our Connected Home Solutions.  We intend to leverage our status as a trusted provider and drive consumer interest in these services to enable our service providers to upgrade their legacy security customers to our connected home solutions.

 

    Continue to Invest in Our Platform.  As a pioneer in connected home solutions, we have made significant investments in building our platform over the last 15 years. We are investing in adding innovative solutions that take advantage of the growth of the Internet of Things and that will seamlessly connect devices such as appliances, wearable devices and automobiles to our platform.

 

    Expand International Presence.  We are investing in international expansion because we believe there is a significant global market opportunity for our solutions. We believe that the strengths of our cloud-based architecture and our capabilities with cellular communication technology will enable us to capitalize on opportunities worldwide.

 

    Expand Channels into the Home.  Today, most consumers purchase a connected home solution through a security or home automation service provider. As the connected home market continues to grow we believe other home services providers, such as heating, ventilation and air conditioning installers, property management companies and other services companies will be valuable complements to our current security service provider network.

 

    Pursue Selective Strategic Acquisitions.  We may selectively pursue future acquisitions that complement our platform, represent a strategic fit and are consistent with our overall growth strategy.

Selected Risks Affecting Our Business

Our business is subject to a number of risks you should be aware of before making an investment decision. These risks are discussed more fully in “Risk Factors” beginning on page 16 and include:

 

    Our quarterly results of operations have fluctuated and are likely to continue to fluctuate. As a result, we may fail to meet or exceed the expectations of investors or securities analysts, which could cause our stock price to decline.

 

    We may not sustain our growth rate and we may not be able to manage any future growth effectively.

 

    The proper and efficient functioning of our network operations centers and data back-up systems is central to our solutions.

 

    We rely on our service provider network to grow our SaaS and license revenue, and the inability of our service providers to attract additional subscribers or retain their current subscribers could adversely affect our operating results.

 

 

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    The markets in which we participate are highly competitive and many companies, including large technology companies, broadband and security service providers and other managed service providers, are actively targeting the home automation, security monitoring, video monitoring and energy management markets. If we are unable to compete effectively with these companies, our sales and profitability could be adversely affected.

 

    We have relatively limited visibility regarding the consumers that ultimately purchase our solutions, and we often rely on information from third-party service providers to help us manage our business. If these service providers fail to provide timely or accurate information, our ability to quickly react to market changes and effectively manage our business may be harmed.

 

    We operate in the emerging and evolving connected home market, which may develop more slowly or differently than we expect. If the connected home market does not grow as we expect, or if we cannot expand our platform and solutions to meet the demands of this market, our revenue may decline, fail to grow or fail to grow at an accelerated rate, and we may incur additional operating losses.

 

    Failure to maintain the security of our information and technology networks, including information relating to our service providers, subscribers and employees, could adversely affect us.

 

    An assertion by a third party that we are infringing its intellectual property could subject us to costly and time-consuming litigation or expensive licenses that could harm our business and results of operations.

 

    Our future depends in part on the interests and influence of key stockholders. Following this offering, our directors, executive officers and holders of more than 5% of our common stock, all of whom are represented on our board of directors, together with their affiliates will beneficially own         % of the voting power of our outstanding capital stock.

Corporate Information

We were founded in 2000 as a business unit within MicroStrategy Incorporated. We were incorporated in 2003 as a majority-owned subsidiary of MicroStrategy. MicroStrategy sold all of its interests in Alarm.com Incorporated in 2009 and we established Alarm.com Holdings, Inc. in connection with the sale transaction. Our principal executive offices are located at 8150 Leesburg Pike, Vienna, Virginia. Our telephone number is (877) 389-4033. Our website address is www.alarm.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.

“Alarm.com”, the Alarm.com logo, and other trademarks or service marks of Alarm.com Incorporated appearing in this prospectus are the property of Alarm.com Incorporated. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or TM symbols.

 

 

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Implications of Being an Emerging Growth Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from specified disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

    exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting;

 

    reduced disclosure obligations regarding executive compensation; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1 billion in annual revenue, have more than $700 million in market value of our capital stock held by non-affiliates or issue more than $1 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of some reduced reporting requirements in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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The Offering

 

Common stock offered by us

                     shares

 

Common stock offered by the selling stockholders

                     shares

 

Common stock to be outstanding after this offering

                     shares

 

Over-allotment option

We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional                      shares from us.

 

Use of proceeds

We estimate that we will receive net proceeds of approximately $             million, assuming an initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriter discounts and commissions and estimated offering expenses payable by us. The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock, and facilitate our future access to the capital markets. We also expect to use the net proceeds of this offering for working capital and other general corporate purposes. We may use a portion of the proceeds from this offering for acquisitions or strategic investments in complementary businesses or technologies, although we do not currently have any plans for any such acquisitions or investments. These expectations are subject to change. We will not receive any of the proceeds from the sale of shares to be offered by the selling stockholders. See the section of this prospectus titled “Use of Proceeds” for additional information.

 

Risk factors

See the section of this prospectus titled “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Directed share program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to                      of the shares offered by this prospectus for sale to certain of our service providers and business associates as well as our directors, executive officers and other employees through a directed share program. If these service providers or business associates purchase shares through the directed share program, the number of shares available for sale to the general public will be reduced. Any reserved shares that are not purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

 

 

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Proposed NASDAQ Global Select Market Trading Symbol              “ALRM”

The number of shares of our common stock that will be outstanding after this offering is based on 37,846,440 shares of common stock outstanding as of March 31, 2015, and excludes:

 

    3,337,968 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2015, at a weighted-average exercise price of $2.68 per share;

 

    482,276 shares of common stock issuable upon the exercise of options to purchase common stock that were granted on May 15, 2015 with an exercise price of $11.55 per share;

 

                         shares of our common stock reserved for future issuance pursuant to our 2015 Equity Incentive Plan, or 2015 Plan, which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year (including 141,222 shares of common stock reserved for issuance under our previously existing Amended and Restated 2009 Stock Incentive Plan, or the 2009 Plan, that will be added to the shares reserved under the 2015 Plan upon its effectiveness);

 

                         shares of our common stock reserved for future issuance under our 2015 Employee Stock Purchase Program, which will become effective in connection with this offering and contains provisions that automatically increase its share reserve each year, as more fully described in “Executive and Director Compensation—Equity Incentive Plans”; and

 

    173,575 shares of common stock issuable upon the exercise of common stock warrants that were outstanding as of March 31, 2015, at a weighted-average exercise price of approximately $4.28 per share.

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

    a nine-for-one stock split of our common stock that occurred in June 2013 and resulted in a proportional adjustment to the conversion ratio of our preferred stock;

 

    the conversion of all of our outstanding shares of preferred stock into an aggregate of 35,017,884 shares of our common stock immediately prior to the completion of this offering;

 

    the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the adoption of our amended and restated bylaws, each of which will occur upon the completion of this offering;

 

    no exercise of outstanding options or warrants after March 31, 2015; and

 

    no exercise by the underwriters of their over-allotment option.

 

 

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Summary Consolidated Financial and Other Data

In the following tables, we provide our summary consolidated financial and other data. We derived the summary consolidated statements of operations data for the years ended December 31, 2012, 2013, and 2014 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary consolidated statements of operations data for the three months ended March 31, 2014 and 2015 and our summary consolidated balance sheet data as of March 31, 2015 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements on the same basis as the audited consolidated financial statements, and the unaudited condensed consolidated financial statements include, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of our financial position and results of operations for these periods. Our historical results are not necessarily indicative of the results to be expected in the future, and our operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2015. When you read this summary consolidated financial data, it is important that you read it together with the historical financial statements and related notes to those statements, as well as the sections of this prospectus titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

  Year Ended December 31,   Three Months Ended
March 31,
 
  2012(6)   2013   2014   2014   2015  
              (unaudited)  
  (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

Revenue:

SaaS and license revenue

$ 55,655    $ 82,620    $ 111,515    $ 25,204    $ 31,955   

Hardware and other revenue

  40,820      47,602      55,797      11,647      14,056   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  96,475      130,222      167,312      36,851      46,011   

Cost of revenue:(1)

Cost of SaaS and license revenue

  12,681      16,476      23,007      5,008      6,033   

Cost of hardware and other revenue

  28,773      38,482      44,172      8,993      10,776   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

  41,454      54,958      67,179      14,001      16,809   

Operating expenses:

Sales and marketing(2)

  13,232      21,467      25,836      5,096      7,916   

General and administrative(2)

  14,099      29,928      26,113      5,220      7,070   

Research and development(2)

  8,944      13,085      23,193      4,610      7,752   

Amortization and depreciation

  2,230      3,360      3,991      806      1,338   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  38,505      67,840      79,133      15,732      24,076   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  16,516      7,424      21,000      7,118      5,126   

Interest expense

  (312   (269   (196   (58   (42

Other income / (expense), net

  5      57      (485   10      7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

  16,209      7,212      20,319      7,070      5,091   

Provision for income taxes

  7,280      2,688      6,817      2,797      2,050   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  8,929      4,524      13,502      4,273      3,041   

Dividends paid on redeemable convertible preferred stock

  (8,182   —        —        —        —     

Cumulative dividend on redeemable convertible preferred stock

  (1,855   —        —        —        —     

Deemed dividend to redeemable convertible preferred stock upon recapitalization

  (138,727   —        —        —        —     

Income allocated to participating securities

  —        (4,402   (12,939   (4,125   (2,895
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common

stockholders

$ (139,835 $ 122    $ 563    $ 148    $ 146   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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  Year Ended December 31,   Three Months Ended
March 31,
 
  2012(6)   2013   2014   2014   2015  
              (unaudited)  
  (in thousands, except share and per share data)  

Per share information attributable to common stockholders:

Net (loss) income per share:

Basic

  $ (108.55)      $ 0.08      $ 0.25      $ 0.08      $ 0.06   

Diluted

  $ (108.55)      $ 0.04      $ 0.14      $ 0.04      $ 0.04   

Pro forma (unaudited):(3)

         

Basic

      $ 0.36        $ 0.08   

Diluted

      $ 0.34        $ 0.08   

Weighted average common shares outstanding:

         

Basic

    1,288,162        1,443,469        2,276,694        1,869,370        2,636,813   

Diluted

    1,288,162        2,795,345        3,890,121        3,467,288        4,172,787   

Pro forma (unaudited):(3)

         

Basic

        37,294,578          37,654,697   

Diluted

        38,908,005          39,190,671   

Other Financial and Operating Data:

         

SaaS and license revenue renewal rate(4)

    94%        93%        93%        92%        92%   

Adjusted EBITDA(5)

    $20,505        $28,259        $28,321        $8,775        $7,025   

 

    As of March 31, 2015  
    Actual         Pro Forma(7)          Pro forma as
adjusted(8)
 
   

(in thousands, except per share data)

 
    (unaudited)  

Consolidated Balance Sheet Data:

          

Cash and cash equivalents

  $ 39,189        $ 39,189         $                        

Working capital, excluding deferred revenue

    48,992          48,992        

Total assets

    126,731          126,731        

Redeemable convertible preferred stock

    202,456                 

Total long-term obligations

    19,027          19,027        

Total stockholders’ (deficit) equity

    (118,255       84,201        

Cash dividends per common share

                    

 

(1) Excludes amortization and depreciation.

 

(2) Includes stock-based compensation expense as follows:

 

    Year Ended
December 31,
    

 

  Three Months Ended
March 31,
 
    2012          2013           2014            2014           2015    
    (in thousands)  

Sales and marketing

  $ 196         $ 102          $ 338         $ 77          $ 60   

General and administrative

    418           495            1,862           480            294   

Research and development

    1,145           244            1,067           231            207   
 

 

 

      

 

 

       

 

 

      

 

 

       

 

 

 

Total stock-based compensation expense

  $ 1,759         $ 841          $ 3,267         $ 788          $ 561   
 

 

 

      

 

 

       

 

 

      

 

 

       

 

 

 

 

(3) Pro forma basic and diluted net income per share represents net income divided by the pro forma weighted-average shares of common stock outstanding. Pro forma weighted-average shares outstanding reflects the conversion of preferred stock (using the if-converted method) into common stock as though the conversion had occurred as of the first day of the relevant period.

 

(4) We measure our SaaS and license revenue renewal rate on a trailing 12-month basis by dividing (a) the total SaaS and license revenue recognized during the trailing 12-month period from subscribers who were subscribers on the first day of the period, by (b) the 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. Our SaaS and license revenue renewal rate is expressed as an annualized percentage.

 

 

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(5) We define Adjusted EBITDA as our net income before interest and other expense / (income), income tax expense, amortization and depreciation expense, stock-based compensation expense, goodwill and intangible impairment charges, changes in fair value of acquisition-related contingent liabilities and legal costs incurred in connection with certain historical intellectual property litigation. We do not consider these items to be indicative of our core operating performance. The non-cash items include amortization and depreciation expense, stock-based compensation expense, goodwill and intangible impairment charges and gain from the release of an acquisition-related contingent liability. Please see footnote (5) to the table of the section of this prospectus titled “Selected Consolidated Financial and Other Data” for more information and for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

(6) We conducted a recapitalization in July 2012. Please see Note 17 to our consolidated financial statements for additional information regarding this transaction.

 

(7) Reflects, on a pro forma basis, the conversion described in footnote (3) above.

 

(8) Reflects, on a pro forma basis, the conversion described in footnote (3) above and, on an as adjusted basis as of the balance sheet date, our sale of                  shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

     The pro forma as adjusted information presented in the summary balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease pro forma as adjusted cash and cash equivalents, total assets and total stockholders’ equity by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions payable by us. We may also increase or decrease the number of shares we are offering. Each 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease pro forma as adjusted cash and cash equivalents, total assets and total stockholders’ equity by approximately $         million, assuming that the assumed initial price to public remains the same, and after deducting underwriting discounts and commissions payable by us.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks is realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

Our quarterly results of operations have fluctuated and are likely to continue to fluctuate. As a result, we may fail to meet or exceed the expectations of investors or securities analysts, which could cause our stock price to decline.

Our quarterly revenue and results of operations may fluctuate as a result of a variety of factors, including revenue related to the product mix that we sell, including the relative sales related to our platform and solutions and other factors which are outside of our control. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Fluctuations in our results of operations may be due to a number of factors, including:

 

    the portion of our revenue attributable to software-as-a-service, or SaaS, and license versus hardware and other sales;

 

    fluctuations in demand, including due to seasonality, for our platform and solutions;

 

    changes in pricing by us in response to competitive pricing actions;

 

    our ability to increase, retain and incentivize the service providers that market, sell, install and support our platform and solutions;

 

    the ability of our hardware vendors to continue to manufacture high-quality products and to supply sufficient products to meet our demands;

 

    the timing and success of introductions of new solutions, products or upgrades by us or our competitors and the entrance of new competitors;

 

    changes in our business and pricing policies or those of our competitors;

 

    the ability to accurately forecast revenue as we generally rely upon our service provider network to generate new revenue;

 

    our ability to control costs, including our operating expenses and the costs of the hardware we purchase;

 

    competition, including entry into the industry by new competitors and new offerings by existing competitors;

 

    our ability to successfully manage any future acquisitions of businesses;

 

    issues related to introductions of new or improved products such as shortages of prior generation products or short-term decreased demand for next generation products;

 

    the amount and timing of expenditures, including those related to expanding our operations, increasing research and development, introducing new solutions or paying litigation expenses;

 

    the ability to effectively manage growth within existing and new markets domestically and abroad;

 

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    changes in the payment terms for our platform and solutions;

 

    the strength of regional, national and global economies; and

 

    the impact of natural disasters or manmade problems such as terrorism.

Due to the foregoing factors and the other risks discussed in this prospectus, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. You should not consider our recent revenue and Adjusted EBITDA growth or results of one quarter as indicative of our future performance.

We may not sustain our growth rate and we may not be able to manage any future growth effectively.

We have experienced significant growth in a short period of time. Our revenue increased from $37.2 million in 2010 to $167.3 million in 2014. We do not expect to achieve similar growth rates in future periods. You should not rely on our operating results for any prior quarterly or annual periods as an indication of our future operating performance. If we are unable to maintain expected revenue growth in both absolute dollars and as a percentage of prior period revenue, our financial results could suffer and our stock price could decline.

Our future operating results depend to a large extent on our ability to successfully manage our anticipated expansion and growth. To manage our growth successfully and handle the responsibilities of being a public company, we believe we must effectively, among other things:

 

    maintain our relationships with existing service providers and add new service providers;

 

    increase our subscriber base and cross-sell additional solutions to our existing subscribers;

 

    add sales and marketing personnel;

 

    expand our international operations; and

 

    implement and improve our administrative, financial and operational systems, procedures and controls.

We intend to increase our investment in research and development, sales and marketing, and general and administrative functions and other areas to grow our business. We are likely to recognize the costs associated with these increased investments earlier than some of the anticipated benefits and the return on these investments may be lower, or may develop more slowly, than we expect, which could adversely affect our operating results.

If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new solutions or enhancements to our existing solutions and we may fail to satisfy subscriber and service provider requirements, maintain the quality of our solutions, execute on our business plan or respond to competitive pressures, which could result in our financial results suffering and a decline in our stock price.

We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or address competitive challenges adequately.

We increased our number of full-time employees from 165 to 253 to 400 at December 31, 2012, 2013 and 2014, respectively. Our revenue increased from $96.5 million in 2012 to $130.2 million in 2013 and to $167.3 million in 2014. Our growth has placed, and may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We intend to

 

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further expand our overall business, service provider network, subscriber base, headcount and operations. Creating a global organization and managing a geographically dispersed workforce will require substantial management effort and significant additional investment in our infrastructure. We will be required to continue to improve our operational, financial and management controls and our reporting procedures and we may not be able to do so effectively. As such, we may be unable to manage our expenses effectively in the future, which may negatively impact our gross profit or operating expenses in any particular quarter. If we fail to manage our anticipated growth and change in a manner that preserves the key aspects of our corporate culture, the quality of our solutions may suffer, which could negatively affect our brand and reputation and harm our ability to retain and attract service providers and consumers.

The markets in which we participate are highly competitive and many companies, including large technology companies, broadband and security service providers and other managed service providers, are actively targeting the home automation, security monitoring, video monitoring and energy management markets. If we are unable to compete effectively with these companies, our sales and profitability could be adversely affected.

We compete in several markets, including home automation, security monitoring, video monitoring and energy management. The markets in which we participate are highly competitive and competition may intensify in the future.

Our ability to compete depends on a number of factors, including:

 

    our platform and solutions’ functionality, performance, ease of use, reliability, availability and cost effectiveness relative to that of our competitors’ products;

 

    our success in utilizing new and proprietary technologies to offer solutions and features previously not available in the marketplace;

 

    our success in identifying new markets, applications and technologies;

 

    our ability to attract and retain service providers;

 

    our name recognition and reputation;

 

    our ability to recruit software engineers and sales and marketing personnel; and

 

    our ability to protect our intellectual property.

Consumers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. In the event a consumer decides to evaluate a new home automation, security monitoring, video monitoring or energy management solution, the consumer may be more inclined to select one of our competitors whose product offerings are broader than those that we offer.

Our current primary competitors include providers of other technology platforms for the connected home, including iControl Networks, Inc. and Honeywell International Inc., that sell to service providers such as cable operators and other home automation providers. In addition, our service providers compete with managed service providers, such as cable television, telephone and security companies like Comcast Corporation, AT&T Inc. and Time Warner Cable Inc., and providers of point products, including Nest Labs, Inc. (acquired by Google Inc.), which offers a thermostat, and DropCam, Inc. (acquired by Nest Labs, Inc.), which offers video monitoring. Because our service providers compete with these entities, we consider them competitive. For example, several cable and telecommunications companies have introduced home automation and security services packages, including interactive security services, which are competitive with our platform and solutions. In addition, we may compete with other large technology companies that offer control capabilities among their products, applications

 

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and services, and have ongoing development efforts to address the broader connected home market. For example, Apple, Inc. introduced a feature in 2014 that allows some manufacturers’ devices to be controlled through a service in the iOS operating system.

Most of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing, distribution and other resources than we have. We expect to encounter new competitors as we enter new markets as well as increased competition, both domestically and internationally, from other established and emerging home automation, security monitoring, video monitoring and energy management companies as well as large technology companies. In addition, there may be new technologies that are introduced that reduce demand for our solutions or make them obsolete. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties and rapidly acquire significant market share. Increased competition could also result in price reductions and loss of market share, any of which could result in lower revenue and negatively affect our ability to grow our business.

Aggressive business tactics by our competitors may reduce our revenue.

Increased competition in the markets in which we compete may result in aggressive business tactics by our competitors, including:

 

    selling at a discount;

 

    offering products similar to our platform and solutions on a bundled basis at no charge;

 

    announcing competing products combined with extensive marketing efforts;

 

    providing financing incentives to consumers; and

 

    asserting intellectual property rights irrespective of the validity of the claims.

Our service providers may switch and offer the products and services of competing companies, which would adversely affect our sales and profitability. Competition from other companies may also adversely affect our negotiations with service providers and suppliers, including, in some cases, requiring us to lower our prices. Opportunities to take market share using innovative products, services and sales approaches may also attract new entrants to the field. We may not be able to compete successfully with the offerings and sales tactics of other companies, which could result in the loss of service providers offering our platform and solutions and, as a result, our revenue and profitability could be adversely affected.

If we fail to compete successfully against our current and future competitors, or if our current or future competitors employ aggressive business tactics, including those described above, demand for our platform and solutions could decline, we could experience cancellations of our services to consumers, or we could be required to reduce our prices or increase our expenses.

The proper and efficient functioning of our network operations centers and data back-up systems is central to our solutions.

Our solutions operate with a cloud-based architecture and we update our solutions regularly while our solutions are operating. If our solutions and/or upgrades fail to operate properly, our solutions could stop functioning for a period of time, which could put our users at risk. Our ability to keep our business operating is highly dependent on the proper and efficient operation of our network operations centers and data back-up systems. Although our network operations centers have back-up computer and power systems, if there is a catastrophic event, natural disaster, terrorist attacks, security breach or other extraordinary event, we may be unable to provide our subscribers with uninterrupted monitoring service. Furthermore, because data back-up systems are susceptible to malfunctions and interruptions

 

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(including those due to equipment damage, power outages, human error, computer viruses, computer hacking, data corruption and a range of other hardware, software and network problems), we cannot guarantee that we will not experience data back-up failures in the future. A significant or large-scale malfunction or interruption of our network operations centers or data back-up systems could adversely affect our ability to keep our operations running efficiently. If a malfunction results in a wider or sustained disruption, it could have a material adverse effect on our reputation, business, financial condition, cash flows or results of operations.

We sell security and life safety solutions and if our solutions fail for any reason, we could be subject to liability and our business could suffer.

We sell security and life safety solutions, which are designed to secure the safety of our subscribers and their residences or business. If these solutions fail for any reason, including due to defects in our software, a carrier outage, a failure of our network operating center, a failure on the part of our service providers or user error, we could be subject to liability for such failures and our business could suffer.

Our platform and solutions may contain undetected defects in the software, infrastructure, third-party components or processes. If our platform or solutions suffer from defects, we could experience harm to our branded reputation, claims by our subscribers or service providers or lost revenue during the period required to address the cause of the defects. We may find defects in new or upgraded solutions, resulting in loss of, or delay in, market acceptance of our platform and solutions, which could harm our business, results of operations and financial condition.

Since solutions that enable our platform are installed by our service providers, if they do not install or maintain such solutions correctly, our platform and solutions may not function properly. If the improper installation or maintenance of our platform and solutions leads to service failures after introduction of, or an upgrade to, our platform or a solution, we could experience harm to our branded reputation, claims by our subscribers or service providers or lost revenue during the period required to address the cause of the problem. Further, we rely on our service providers to provide the primary source of support and ongoing service to our subscribers and, if our service providers fail to provide an adequate level of support and services to our subscribers, it could have a material adverse effect on our reputation, business, financial condition or results of operations.

Any defect in, or disruption to, our platform and solutions could cause consumers not to purchase additional solutions from us, prevent potential consumers from purchasing our platform and solutions or harm our reputation. Although our contracts with our service providers limit our liability to our service providers for these defects, disruptions or errors, we nonetheless could be subject to litigation for actual or alleged losses to our service providers or our subscribers, which may require us to spend significant time and money in litigation or arbitration, or to pay significant settlements or damages. Defending a lawsuit, regardless of its merit, could be costly, divert management's attention and affect our ability to obtain or maintain liability insurance on acceptable terms and could harm our business. Although we currently maintain some warranty reserves, we cannot assure you that these warranty reserves will be sufficient to cover future liabilities.

We rely on our service provider network to acquire additional subscribers, and the inability of our service providers to attract additional subscribers or retain their current subscribers could adversely affect our operating results.

Substantially all of our revenue is generated through the sales of our platform and solutions by our service providers, and our service providers are responsible for subscriber acquisition, as well as providing customer service and technical support for our platform and solutions to the subscribers. We provide our service providers with specific training and programs to assist them in selling and providing

 

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support for our platform and solutions, but we cannot assure that these steps will be effective. In addition, we rely on our service providers to sell our platform and solutions into new markets in the intelligent and connected home space. If our service providers are unsuccessful in marketing, selling, and supporting our platform and solutions, our operating results could be adversely affected.

In order for us to maintain our current revenue sources and grow our revenues, we must effectively manage and grow relationships with our service providers. Recruiting and retaining qualified service providers and training them in our technology and solutions requires significant time and resources. If we fail to maintain existing service providers or develop relationships with new service providers, our revenue and operating results would be adversely affected. In addition, to execute on our strategy to expand our sales internationally, we must develop relationships with service providers that sell into these markets.

Any of our service providers may choose to offer a product from one of our competitors instead of our platform and solutions, elect to develop their own competing solutions or simply discontinue their operations with us. For example, we entered into a license agreement in November 2013 with one of our largest service providers who represented at least 10% of our revenue in 2012, 2013 and 2014, pursuant to which we granted a license to use the intellectual property associated with our connected home solutions. Under the terms of this arrangement, this service provider has transitioned from selling our solutions directly to its customers to selling its own home automation product to its new customers. We now generate revenue from a monthly fee charged to this service provider on a per customer basis from sales of this service provider’s product; however, these monthly fees are less on a per customer basis than fees from our SaaS solutions. Therefore, we receive less revenue on a per customer basis from this service provider as compared to our SaaS subscriber base, which may result in a lower revenue growth rate. We must also work to expand our network of service providers to ensure that we have sufficient geographic coverage and technical expertise to address new markets and technologies. While it is difficult to estimate the total number of available service providers in our markets, there are a finite number of service providers that are able to perform the types of technical installations required for our platform and solutions. In the event that we saturate the available service provider pool, or if market or other forces cause the available pool of service providers to decline, it may be increasingly difficult to grow our business. If we are unable to expand our network of service providers, our business could be harmed.

As the consumers’ product and service options grow, it is important that we enhance our service provider footprint by broadening the expertise of our service providers, working with larger and more sophisticated service providers and expanding the mainstream solutions our service providers offer. If we do not succeed in this effort, our current and potential future service providers may be unable or unwilling to broaden their offerings to include our connected home solution, resulting in harm to our business.

We receive a substantial portion of our revenue from a limited number of service providers, and the loss of, or a significant reduction in, orders from one or more of our major service providers would result in decreased revenue and profitability.

Our success is highly dependent upon establishing and maintaining successful relationships with a variety of service providers. We market and sell our platform and solutions through an all-channel assisted sales model and we derive substantially all of our revenue from these service providers. We generally enter into agreements with our service providers outlining the terms of our relationship, including service provider pricing commitments, installation, maintenance and support requirements, and our sales registration process for registering potential sales to subscribers. These contracts, including our contract with Monitronics International, Inc., typically have an initial term of one year, with subsequent renewal terms of one year, and are terminable at the end of the initial term or renewal

 

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terms without cause upon written notice to the other party. In some cases, these contracts provide the service provider with the right to terminate prior to the expiration of the term without cause upon 30 days written notice, or, in the case of certain termination events, the right to terminate the contract immediately. While we have developed a network of over 5,000 service providers to sell, install and support our platform and solutions, we receive a substantial portion of our revenue from a limited number of channel partners. During the years ended December 31, 2012, 2013 and 2014, our 10 largest revenue service providers accounted for approximately 71.2%, 65.7% and 64.7% of our revenue. Vivint, Inc. represented greater than 10% but not more than 15% of our revenue in 2012, 2013 and 2014. Monitronics International, Inc. represented greater than 10% but not more than 15% of our revenue in 2012 and greater than 15% but not more than 20% of our revenue in 2013 and 2014. United Technologies Corporation represented greater than 10% but not more than 15% of our revenue in 2014.

We anticipate that we will continue to be dependent upon a limited number of service providers for a significant portion of our revenue for the foreseeable future and, in some cases, a portion of our revenue attributable to individual service providers may increase in the future. The loss of one or more key service providers, a reduction in sales through any major service providers or the inability or unwillingness of any of our major service providers to pay for our platform and solutions would reduce our revenue and could impair our profitability.

We have relatively limited visibility regarding the consumers that ultimately purchase our solutions, and we often rely on information from third-party service providers to help us manage our business. If these service providers fail to provide timely or accurate information, our ability to quickly react to market changes and effectively manage our business may be harmed.

We sell our solutions through service providers. These service providers work with consumers to design, install, update and maintain their connected home installations and manage the relationship with our subscribers. While we are able to track orders from service providers and have access to certain information about the configurations of their Alarm.com systems that we receive through our platform, we also rely on service providers to provide us with information about consumer behavior, product and system feedback, consumer demographics and buying patterns. We use this channel sell-through data, along with other metrics, to forecast our revenue, assess consumer demand for our solution, develop new solutions, adjust pricing and make other strategic business decisions. Channel sell-through data is subject to limitations due to collection methods and the third-party nature of the data and thus may not be complete or accurate. If we do not receive consumer information on a timely or accurate basis, or if we do not properly interpret this information, our ability to quickly react to market changes and effectively manage our business may be harmed.

Consumers may choose to adopt point products that provide control of discrete home functions rather than adopting our connected home platform. If we are unable to increase market awareness of the benefits of our unified solutions, our revenue may not continue to grow, or it may decline.

Many vendors have emerged, and may continue to emerge, to provide point products with advanced functionality for use in the home, such as a thermostat that can be controlled by an application on a smartphone. We expect more and more consumer electronic and consumer appliance products to be network-aware and connected — each very likely to have its own smart device (phone or tablet) application. Consumers may be attracted to the relatively low costs of these point products and the ability to expand their home control solution over time with minimal upfront costs, despite some of the disadvantages of this approach, may reduce demand for our connected home solutions. If so, our service providers may switch and offer the point products and services of competing companies,

 

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which would adversely affect our sales and profitability. If a significant number of consumers in our target market choose to adopt point products rather than our connected home solutions, then our business, financial condition and results of operations will be harmed, and we may not be able to achieve sustained growth or our business may decline.

Mergers or other strategic transactions involving our competitors could weaken our competitive position, which could adversely affect our ability to compete effectively and harm our results of operations.

Our industry is highly fragmented, and we believe it is likely that some of our existing competitors will consolidate or be acquired. In addition, some of our competitors may enter into new alliances with each other or may establish or strengthen cooperative relationships with systems integrators, third-party consulting firms or other parties. Any such consolidation, acquisition, alliance or cooperative relationship could adversely affect our ability to compete effectively and lead to pricing pressure and our loss of market share and could result in a competitor with greater financial, technical, marketing, service and other resources, all of which could harm our business, results of operations and financial condition.

We are dependent on our connected home solutions, and the lack of continued market acceptance of our connected home solutions would result in lower revenue.

Our connected home solutions account for substantially all of our revenue and will continue to do so for the foreseeable future. As a result, our revenue could be reduced by:

 

    any decline in demand for our connected home solutions;

 

    the failure of our connected home solutions to achieve continued market acceptance;

 

    the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our connected home solutions;

 

    technological innovations or new communications standards that our connected home solutions does not address; and

 

    our inability to release enhanced versions of our connected home solutions on a timely basis.

We are vulnerable to fluctuations in demand for Internet-connected devices in general and interactive security systems in particular. If the market for connected home solutions grows more slowly than anticipated or if demand for connected home solutions does not grow as quickly as anticipated, whether as a result of competition, product obsolescence, technological change, unfavorable economic conditions, uncertain geopolitical environment, budgetary constraints of our consumers or other factors, we may not be able to continue to increase our revenue and earnings and our stock price would decline.

A significant decline in our SaaS and license revenue renewal rate would have an adverse effect on our business, financial condition and operating results.

We generally bill our service providers based on the number of subscribers they have on our platform and the features being utilized by subscribers on a monthly basis in advance. Subscribers could elect to terminate our services in any given month. If our efforts and our service providers’ efforts to satisfy our existing subscribers are not successful, we may not be able to retain them or sell additional functionality to them and, as a result, our revenue and ability to grow could be adversely affected. We track our SaaS and license revenue renewal rates on an annualized basis, as reflected in the section of this prospectus titled “Management’s Discussion and Analysis — Key Metrics —SaaS and License Revenue Renewal Rate.” However, we may not be able to accurately predict future trends in

 

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renewals and the resulting churn. Subscribers may choose not to renew their contracts for many reasons, including the belief that our service is not required for their needs or is otherwise not cost-effective, a desire to reduce discretionary spending, or a belief that our competitors’ services provide better value. Additionally, our subscribers may not renew for reasons entirely out of our control, such as moving a residence or the dissolution of their business, which is particularly common for businesses. A significant increase in our churn would have an adverse effect on our business, financial condition, and operating results.

If we are unable to develop new solutions, sell our platform and solutions into new markets or further penetrate our existing markets, our revenue may not grow as expected.

Our ability to increase sales will depend in large part on our ability to enhance and improve our platform and solutions, introduce new solutions in a timely manner, sell into new markets and further penetrate our existing markets. The success of any enhancement or new solution or service depends on several factors, including the timely completion, introduction and market acceptance of enhanced or new solutions, the ability to maintain and develop relationships with service providers, the ability to attract, retain and effectively train sales and marketing personnel and the effectiveness of our marketing programs. Any new product or service we develop or acquire may not be introduced in a timely or cost-effective manner, and may not achieve the broad market acceptance necessary to generate significant revenue. Any new markets into which we attempt to sell our platform and solutions, including new vertical markets and new countries or regions, may not be receptive. Our ability to further penetrate our existing markets depends on the quality of our platform and solutions and our ability to design our platform and solutions to meet consumer demand.

We benefit from integration of our solutions with third-party security platform providers. If these developers choose not to partner with us, or are acquired by our competitors, our business and results of operations may be harmed.

Our solutions are incorporated into the hardware of our third-party security platform providers. For example, our hardware platform partners produce control devices that deliver our platform services to subscribers. It may be necessary in the future to renegotiate agreements relating to various aspects of these solutions or other third parties. The inability to easily integrate with, or any defects in, any third-party solutions could result in increased costs, or in delays in new product releases or updates to our existing solutions until such issues have been resolved, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and future prospects and could damage our reputation. In addition, if these third-party solution providers choose not to partner with us, choose to integrate their solutions with our competitors’ platforms, or are unable or unwilling to update their solutions, our business, financial condition and results of operations could be harmed. Further, if third-party solution providers that we partner with or that we would benefit from partnering with are acquired by our competitors, they may choose not to offer their solutions on our platform, which could adversely affect our business, financial condition and results of operations.

We rely on wireless carriers to provide access to wireless networks through which we provide our wireless alarm, notification and intelligent automation services, and any interruption of such access would impair our business.

We rely on wireless carriers to provide access to wireless networks for machine-to-machine data transmissions, which are an integral part of our services. Our wireless carriers may suspend wireless service to expand, maintain or improve their networks. Any suspension or other interruption of services would adversely affect our ability to provide our services to our service providers and subscribers and may adversely affect our reputation. In addition, the inability to maintain our existing contracts with our wireless carriers or enter into new contracts with such wireless carriers could have a material adverse effect on our business, financial condition and results of operations.

 

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If we are unable to adapt to technological change, including maintaining compatibility with a wide range of devices, our ability to remain competitive could be impaired.

The market for connected home solutions is characterized by rapid technological change, frequent introductions of new products and evolving industry standards. Our ability to attract new subscribers and increase revenue from existing subscribers will depend in significant part on our ability to anticipate changes in industry standards, to continue to enhance our existing solutions or introduce new solutions on a timely basis to keep pace with technological developments, and to maintain compatibility with a wide range of connected devices in the home and business. We may change aspects of our operating system and may utilize open source technology in the future, which may cause difficulties including compatibility, stability and time to market. The success of this or any enhanced or new product or solution will depend on several factors, including the timely completion and market acceptance of the enhanced or new product or solution. Similarly, if any of our competitors implement new technologies before we are able to implement them, those competitors may be able to provide more effective products than ours, possibly at lower prices. Any delay or failure in the introduction of new or enhanced solutions could harm our business, results of operations and financial condition.

The technology we employ may become obsolete, and we may need to incur significant capital expenditures to update our technology.

Our industry is characterized by rapid technological innovation. Our platform and solutions interact with the hardware and software technology of systems and devices located at our subscribers’ properties. We may be required to implement new technologies or adapt existing technologies in response to changing market conditions, consumer preferences or industry standards, which could require significant capital expenditures. For example, many of our service providers are currently working to upgrade our solutions that were installed using 2G wireless technology. It is also possible that one or more of our competitors could develop a significant technical advantage that allows them to provide additional or superior quality products or services, or to lower their price for similar products or services, which could put us at a competitive disadvantage. Our inability to adapt to changing technologies, market conditions or consumer preferences in a timely manner could materially and adversely affect our business, financial condition, cash flows or results of operations.

We depend on our suppliers, and the loss of any key supplier could materially and adversely affect our business, financial condition and results of operations.

Our hardware products depend on the quality of components that we procure from third-party suppliers. Reliance on suppliers, as well as industry supply conditions, generally involves several risks, including the possibility of defective parts, which can adversely affect the reliability and reputation of our platform and solutions, and a shortage of components and reduced control over delivery schedules and increases in component costs, which can adversely affect our profitability. We have several large hardware suppliers from which we procure hardware on a purchase order basis, including one supplier that supplies products and components that accounted for 47% of our hardware and other revenue in 2014. If these suppliers are unable to continue to provide a timely and reliable supply, we could experience interruptions in delivery of our platform and solutions to service providers, which could have a material adverse effect on our business, financial condition and results of operations. If we were required to find alternative sources of supply, qualification of alternative suppliers and the establishment of reliable supplies could result in delays and a possible loss of sales, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Growth of our business will depend on market awareness and a strong brand, and any failure to develop, maintain, protect and enhance our brand would hurt our ability to retain or attract subscribers.

We believe that building and maintaining market awareness, brand recognition and goodwill in a cost-effective manner is critical to our overall success in achieving widespread acceptance of our existing and future solutions and is an important element in attracting new service providers and subscribers. An important part of our business strategy is to increase service provider and consumer awareness of our brand and to provide marketing leadership, services and support to our service provider network. This will depend largely on our ability to continue to provide high-quality solutions, and we may not be able to do so effectively. While we may choose to engage in a broader marketing campaign to further promote our brand, this effort may not be successful. Our efforts in developing our brand may be hindered by the marketing efforts of our competitors and our reliance on our service providers and strategic partners to promote our brand. If we are unable to cost-effectively maintain and increase awareness of our brand, our business, results of operations and financial condition could be harmed.

We operate in the emerging and evolving connected home market, which may develop more slowly or differently than we expect. If the connected home market does not grow as we expect, or if we cannot expand our platform and solutions to meet the demands of this market, our revenue may decline, fail to grow or fail to grow at an accelerated rate, and we may incur additional operating losses.

The market for solutions that bring objects and systems not typically connected to the Internet, such as home automation, security monitoring, video monitoring and energy management solutions, into an Internet-like structure is in an early stage of development, and it is uncertain whether, how rapidly or how consistently this market will develop, and even if it does develop, whether our platform and solutions will be accepted into the markets in which we operate. Some consumers may be reluctant or unwilling to use our platform and solutions for a number of reasons, including satisfaction with traditional solutions, concerns about additional costs and lack of awareness of the benefits of our platform and solutions. Our ability to expand the sales of our platform and solutions into new markets depends on several factors, including the awareness of our platform and solutions, the timely completion, introduction and market acceptance of our platform and solutions, the ability to attract, retain and effectively train sales and marketing personnel, the ability to develop relationships with service providers, the effectiveness of our marketing programs, the costs of our platform and solutions and the success of our competitors. If we are unsuccessful in developing and marketing our platform and solutions into new markets, or if consumers do not perceive or value the benefits of our platform and solutions, the market for our platform and solutions might not continue to develop or might develop more slowly than we expect, either of which would harm our revenue and growth prospects.

Risks of liability from our operations are significant.

The nature of the solutions we provide, including our interactive security solutions, potentially exposes us to greater risks of liability for employee acts or omissions or system failure than may be inherent in other businesses. Substantially all of our service provider agreements contain provisions limiting our liability to service providers and our subscribers in an attempt to reduce this risk. However, in the event of litigation with respect to these matters, we cannot assure you that these limitations will be enforced, and the costs of such litigation could have a material adverse effect on us. In addition, there can be no assurance that we are adequately insured for these risks. Certain of our insurance policies and the laws of some states may limit or prohibit insurance coverage for punitive or certain other types of damages or liability arising from gross negligence.

 

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Failure to maintain the security of our information and technology networks, including information relating to our service providers, subscribers and employees, could adversely affect us.

We are dependent on information technology networks and systems, including the Internet, to process, transmit and store electronic information and, in the normal course of our business, we collect and retain certain information pertaining to our service providers, subscribers and employees, including credit card information for many of our service providers and certain of our subscribers. If security breaches in connection with the delivery of our solutions allow unauthorized third parties to access any of this data or obtain control of our subscribers’ systems, our reputation, business, results of operations and financial condition could be harmed.

The legal, regulatory and contractual environment surrounding information security, privacy and credit card fraud is constantly evolving and companies that collect and retain such information are under increasing attack by cyber-criminals around the world. A significant actual or potential theft, loss, fraudulent use or misuse of service provider, subscriber, employee or other personally identifiable data, whether by third parties or as a result of employee malfeasance or otherwise, non-compliance with our contractual or other legal obligations regarding such data or a violation of our privacy and security policies with respect to such data could result in loss of confidential information, damage to our reputation, early termination of our service provider contracts, significant costs, fines, litigation, regulatory investigations or actions and other liabilities or actions against us. Moreover, to the extent that any such exposure leads to credit card fraud or identity theft, we may experience a general decline in consumer confidence in our business, which may lead to an increase in attrition rates or may make it more difficult to attract new subscribers. Such an event could additionally result in adverse publicity and therefore adversely affect the market's perception of the security and reliability of our services. Security breaches of, or sustained attacks against, this infrastructure could create system disruptions and shutdowns that could result in disruptions to our operations. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. We cannot be certain that advances in cyber-capabilities or other developments will not compromise or breach the technology protecting the networks that access our platform and solutions. If any one of these risks materializes our business, financial condition, results of operations and cash flows could be materially and adversely affected.

Our strategy includes pursuing acquisitions, and our potential inability to successfully integrate newly-acquired technologies, assets or businesses may harm our financial results. Future acquisitions of technologies, assets or businesses, which are paid for partially or entirely through the issuance of stock or stock rights, could dilute the ownership of our existing stockholders.

We have acquired businesses in the past. For example, we acquired EnergyHub, Inc. in 2013 and we acquired the assets of Horizon Analog, Inc. and Secure-i, Inc. in December 2014, and of HiValley Technology Inc. in March 2015. We also believe part of our growth will be driven by acquisitions of other companies or their technologies, assets and businesses. Any acquisitions we complete will give rise to risks, including:

 

    incurring higher than anticipated capital expenditures and operating expenses;

 

    failing to assimilate the operations and personnel or failing to retain the key personnel of the acquired company or business;

 

    failing to integrate the acquired technologies, or incurring significant expense to integrate acquired technologies into our platform and solutions;

 

    disrupting our ongoing business;

 

    diverting our management’s attention and other company resources;

 

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    failing to maintain uniform standards, controls and policies;

 

    incurring significant accounting charges;

 

    impairing relationships with employees, service providers or subscribers;

 

    finding that the acquired technology, asset or business does not further our business strategy, that we overpaid for the technology, asset or business or that we may be required to write off acquired assets or investments partially or entirely;

 

    failing to realize the expected synergies of the transaction;

 

    being exposed to unforeseen liabilities and contingencies that were not identified prior to acquiring the company; and

 

    being unable to generate sufficient revenue and profits from acquisitions to offset the associated acquisition costs.

Fully integrating an acquired technology, asset or business into our operations may take a significant amount of time. We may not be successful in overcoming these risks or any other problems encountered with acquisitions. To the extent we do not successfully avoid or overcome the risks or problems related to any such acquisitions, our results of operations and financial condition could be harmed. Acquisitions also could impact our financial position and capital requirements, or could cause fluctuations in our quarterly and annual results of operations. Acquisitions could include significant goodwill and intangible assets, which may result in future impairment charges that would reduce our stated earnings. We may incur significant costs in our efforts to engage in strategic transactions and these expenditures may not result in successful acquisitions.

We expect that the consideration we might pay for any future acquisitions of technologies, assets or businesses could include stock, rights to purchase stock, cash or some combination of the foregoing. If we issue stock or rights to purchase stock in connection with future acquisitions, net income per share and then-existing holders of our common stock may experience dilution.

We may pursue business opportunities that diverge from our current business model, which may cause our business to suffer.

We may pursue business opportunities that diverge from our current business model, including expanding our platform and solutions and investing in new and unproven technologies. For example, in 2013 we entered the energy management market through our acquisition of EnergyHub, and in 2015 we have an initiative to develop smart home devices targeting the global retail market. We can offer no assurance that any such new business opportunities will prove to be successful. Among other negative effects, our pursuit of such business opportunities could reduce operating margins and require more working capital, materially and adversely affect our business, financial condition, results of operations and cash flows.

Evolving government and industry regulation and changes in applicable laws relating to the Internet and data privacy may increase our expenditures related to compliance efforts or otherwise limit the solutions we can offer, which may harm our business and adversely affect our financial condition.

As Internet commerce continues to evolve, federal, state or foreign agencies have adopted and could in the future adopt regulations covering issues such as user privacy and content. We are particularly sensitive to these risks because the Internet is a critical component of our SaaS business model. In addition, taxation of products or services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may be imposed. Any

 

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regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business.

Our platform and solutions enable us to collect, manage and store a wide range of data related to our subscribers’ interactive security, intelligent automation, video monitoring and energy management systems. A valuable component of our platform and solutions is our ability to analyze this data to present the user with actionable business intelligence. We obtain our data from a variety of sources, including our service providers, our subscribers and third-party providers. We cannot assure you that the data we require for our proprietary data sets will be available from these sources in the future or that the cost of such data will not increase. The United States federal government and various state governments have adopted or proposed limitations on the collection, distribution, storage and use of personal information. Several foreign jurisdictions, including the European Union and the United Kingdom, have adopted legislation (including directives or regulations) that is more rigorous governing data collection and storage than in the United States. If our privacy or data security measures fail to comply, or are perceived to fail to comply, with current or future laws and regulations, we may be subject to litigation, regulatory investigations or other liabilities. Further, in the event of a breach of personal information that we hold, we may be subject to governmental fines, individual claims, remediation expenses, and/or harm to our reputation. Moreover, if future laws and regulations limit our ability to use and share this data or our ability to store, process and share data over the Internet, demand for our platform and solutions could decrease, our costs could increase, and our results of operations and financial condition could be harmed.

Although we are not currently subject to the Health Insurance Portability and Accountability Act of 1996, and its implementing regulations, or HIPAA, which regulates the use, storage, and disclosure of personally identifiable health information, we may modify our platform and solutions to become HIPAA compliant. Becoming fully HIPAA compliant involves adopting and implementing privacy and security policies and procedures as well as administrative, physical and technical safeguards. Additionally, HIPAA compliance requires certain agreements with contracting partners to be in place and the appointment of a Privacy and Security Officer. Endeavoring to become HIPAA compliant may be costly both financially and in terms of administrative resources. It may take substantial time and require the assistance of external resources, such as attorneys, information technology, and/or other consultants. We would have to be HIPAA compliant to provide services for or on behalf of a health care provider or health plan pursuant to which patient information was exchanged. Thus, if we do not become fully HIPAA compliant, our expansion opportunities may be limited. Furthermore, it is possible that HIPAA may be expanded in the future to apply to certain of our platform and/or solutions as currently constituted.

We rely on the performance of our senior management and highly skilled personnel, and if we are unable to attract, retain and motivate well-qualified employees, our business and results of operations could be harmed.

We believe our success has depended, and continues to depend, on the efforts and talents of senior management and key personnel, including Stephen Trundle, our Chief Executive Officer, and our senior information technology managers. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract them. In addition, the loss of any of our senior management or key personnel could interrupt our ability to execute our business plan, as such individuals may be difficult to replace. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business and results of operations could be harmed.

 

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We provide minimum service level commitments to certain of our service providers, and our failure to meet them could cause us to issue credits for future services or pay penalties, which could harm our results of operations.

Certain of our service provider agreements currently, and may in the future, provide minimum service level commitments regarding items such as uptime, functionality or performance. If we are unable to meet the stated service level commitments for these service providers or suffer extended periods of service unavailability, we are or may be contractually obligated to provide these service providers with credits for future services, provide services at no cost or pay other penalties, which could adversely impact our revenue. We do not currently have any reserves on our balance sheet for these commitments.

We have already incurred and expect to incur a material amount of indebtedness, which could adversely affect our financial health.

We are party to a senior line of credit with Silicon Valley Bank, or SVB, and a syndicate of lenders, which we refer to as our Credit Facility, that allows us to draw down an aggregate amount equal to $50.0 million. As of March 31, 2015, we had an outstanding balance of $6.7 million under our Credit Facility. This indebtedness and certain covenants and obligations contained in the related documentation could adversely affect our financial health and business and future operations by, among other things:

 

    making it more difficult for us to satisfy our obligations, including with respect to our indebtedness;

 

    increasing our vulnerability to adverse economic and industry conditions; and

 

    limiting our flexibility in planning for, or reacting to, changes in our business and in the industry in which we operate.

Furthermore, substantially all of our assets, including our intellectual property, secure our Credit Facility. If an event of default under the credit agreement occurs and is continuing, SVB may request the acceleration of the related indebtedness and foreclose on the security interests.

In addition, our Credit Facility restricts our ability to make dividend payments and requires us to maintain a certain leverage ratio, which may restrict our ability to invest in future growth. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings or enter into credit facilities for other reasons. In the future, we may not be able to timely secure debt or equity financing on favorable terms or at all. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering. If we are unable to obtain

 

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adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be limited.

Goodwill and other identifiable intangible assets represent a significant portion of our total assets, and we may never realize the full value of our intangible assets.

As of March 31, 2015, we had $32.7 million of goodwill and identifiable intangible assets. Goodwill and other identifiable intangible assets are recorded at fair value on the date of acquisition. We review such assets for impairment at least annually. Impairment may result from, among other things, deterioration in performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the solutions we offer, challenges to the validity of certain registered intellectual property, reduced sales of certain products or services incorporating registered intellectual property, increased attrition and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge to results of operations. Depending on future circumstances, it is possible that we may never realize the full value of our intangible assets. Any future determination of impairment of goodwill or other identifiable intangible assets could have a material adverse effect on our financial position and results of operations.

We may be subject to additional tax liabilities, which would harm our results of operations.

We are subject to income, sales, use, value added and other taxes in the United States and other countries in which we conduct business, which laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect sales, use, value added or other taxes on our sales may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Significant judgment is required in determining our worldwide provision for income taxes. These determinations are highly complex and require detailed analysis of the available information and applicable statutes and regulatory materials. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be different from our historical tax practices, provisions and accruals. If we receive an adverse ruling as a result of an audit, or we unilaterally determine that we have misinterpreted provisions of the tax regulations to which we are subject, our tax provision, results of operations or cash flows could be harmed. In addition, liabilities associated with taxes are often subject to an extended or indefinite statute of limitations period. Therefore, we may be subject to additional tax liability (including penalties and interest) for a particular year for extended periods of time.

Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by manmade problems such as terrorism or global or regional economic, political and social conditions.

A significant natural disaster, such as an earthquake, fire or a flood, or a significant power outage could harm our business, results of operations and financial condition. Natural disasters could affect our hardware vendors, our wireless carriers or our network operations centers. Further, if a natural disaster occurs in a region from which we derive a significant portion of our revenue, such as metropolitan areas in North America, consumers in that region may delay or forego purchases of our platform and solutions from service providers in the region, which may harm our results of operations for a particular period. In addition, terrorist acts or acts of war could cause disruptions in our business or the business of our hardware vendors, service providers, subscribers or the economy as a whole. More generally, these geopolitical, social and economic conditions could result in increased volatility in worldwide financial markets and economies that could harm our sales. Given our concentration of

 

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sales during the second and third quarters, any disruption in the business of our hardware vendors, service providers or subscribers that impacts sales during the second or third quarter could have a greater impact on our annual results. All of the aforementioned risks may be augmented if the disaster recovery plans for us, our service providers and our suppliers prove to be inadequate. To the extent that any of the above results in delays or cancellations of orders, or delays in the manufacture, deployment or shipment of our platform and solutions, our business, financial condition and results of operations would be harmed.

Downturns in general economic and market conditions and reductions in spending may reduce demand for our platform and solutions, which could harm our revenue, results of operations and cash flows.

Our revenue, results of operations and cash flows depend on the overall demand for our platform and solutions. Concerns about the systemic impact of a potential widespread recession, energy costs, geopolitical issues, the availability and cost of credit and the global housing and mortgage markets have contributed to increased market volatility, decreased consumer confidence and diminished growth expectations in the U.S. economy and abroad. The current unstable general economic and market conditions have been characterized by a dramatic decline in consumer discretionary spending and have disproportionately affected providers of solutions that represent discretionary purchases. While the decline in consumer spending has recently moderated, these economic conditions could still lead to continued declines in consumer spending over the foreseeable future, and may have resulted in a resetting of consumer spending habits that may make it unlikely that such spending will return to prior levels for the foreseeable future.

During weak economic times, the available pool of service providers may decline as the prospects for home building and home renovation projects diminish, which may have a corresponding impact on our growth prospects. In addition, there is an increased risk during these periods that an increased percentage of our service providers will file for bankruptcy protection, which may harm our reputation, revenue, profitability and results of operations. In addition, we may determine that the cost of pursuing any claim may outweigh the recovery potential of such claim. Likewise, consumer bankruptcies can detrimentally affect the business stability of our service providers. Prolonged economic slowdowns and reductions in new home construction and renovation projects may result in diminished sales of our platform and solutions. Further worsening, broadening or protracted extension of the economic downturn could have a negative impact on our business, revenue, results of operations and cash flows.

Failure to comply with laws and regulations could harm our business.

We conduct our business in the United States and are expanding internationally in various other countries. We are subject to regulation by various federal, state, local and foreign governmental agencies, including, but not limited to, agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, federal securities laws and tax laws and regulations.

We are subject to the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. Travel Act, and possibly other anti-bribery laws, including those that comply with the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and other international conventions. Anti-corruption laws are interpreted broadly and prohibit our company from authorizing, offering, or providing directly or indirectly improper payments or benefits to recipients in the public or private-sector. Certain laws could also prohibit us from soliciting or accepting bribes or kickbacks. Our company has direct government interactions and in several cases uses third-party representatives, including dealers, for regulatory compliance, sales and other purposes in a variety of countries. These factors increase our

 

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anti-corruption risk profile. We can be held liable for the corrupt activities of our employees, representatives, contractors, partners and agents, even if we did not explicitly authorize such activity. Although we have implemented policies and procedures designed to ensure compliance with anti-corruption laws, there can be no assurance that all of our employees, representatives, contractors, partners, and agents will comply with these laws and policies.

We are also subject to data privacy and security laws, anti-money laundering laws (such as the USA PATRIOT Act), and import/export laws and regulations in the United States and in other jurisdictions.

Our global operations require us to import from and export to several countries, which geographically stretches our compliance obligations. Our platform and solutions are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our platform and solutions must be made in compliance with these laws and regulations. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers. In addition, if our service providers fail to obtain appropriate import, export or re-export licenses or authorizations, we may also be adversely affected through reputational harm and penalties. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. In addition, changes in our platform or solutions or changes in applicable export or import laws and regulations may create delays in the introduction and sale of our platform and solutions in international markets, prevent our service providers with international operations from deploying our platform and solutions or, in some cases, prevent the export or import of our platform and solutions to certain countries, governments or persons altogether. Any change in export or import laws and regulations, shift in the enforcement or scope of existing laws and regulations, or change in the countries, governments, persons or technologies targeted by such laws and regulations, could also result in decreased use of our platform and solutions, or in our decreased ability to export or sell our platform and solutions to existing or potential service providers with international operations. Any decreased use of our platform and solutions or limitation on our ability to export or sell our platform and solutions would likely adversely affect our business, financial condition and results of operations.

In addition, our software contains encryption technologies, certain types of which are subject to U.S. and foreign export control regulations and, in some foreign countries, restrictions on importation and/or use. Any failure on our part to comply with encryption or other applicable export control requirements could result in financial penalties or other sanctions under the U.S. export regulations, including restrictions on future export activities, which could harm our business and operating results. Regulatory restrictions could impair our access to technologies needed to improve our platform and solutions and may also limit or reduce the demand for our platform and solutions outside of the United States.

Furthermore, U.S. export control laws and economic sanctions programs prohibit the shipment of certain products and services to countries, governments and persons that are subject to U.S. economic embargoes and trade sanctions. Even though we take precautions to prevent our platform and solutions from being shipped or provided to U.S. sanctions targets, our platform and solutions could be shipped to those targets or provided by third-parties despite such precautions. Any such shipment could have negative consequences, including government investigations, penalties and reputational harm. Furthermore, any new embargo or sanctions program, or any change in the countries, governments, persons or activities targeted by such programs, could result in decreased use of our

 

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platform and solutions, or in our decreased ability to export or sell our platform and solutions to existing or potential service providers, which would likely adversely affect our business and our financial condition.

Changes in laws that apply to us could result in increased regulatory requirements and compliance costs which could harm our business, financial condition and results of operations. In certain jurisdictions, regulatory requirements may be more stringent than in the United States. Noncompliance with applicable regulations or requirements could subject us to whistleblower complaints, investigations, sanctions, settlements, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions, suspension or debarment from contracting with certain governments or other customers, the loss of export privileges, multi-jurisdictional liability, reputational harm, and other collateral consequences. If any governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations and financial condition could be materially harmed. In addition, responding to any action will likely result in a materially significant diversion of management’s attention and resources and an increase in defense costs and other professional fees. Enforcement actions and sanctions could further harm our business, results of operations, and financial condition.

From time to time, we are involved in legal proceedings as to which we are unable to assess our exposure and which could become significant liabilities in the event of an adverse judgment.

We are involved and have been involved in the past in legal proceedings from time to time. Companies in our industry have been subject to claims related to patent infringement and product liability, as well as contract and employment-related claims. We may not be able to accurately assess the risks related to these suits, and we may be unable to accurately assess our level of exposure. As a result of these proceedings, we have, and may be required to seek, licenses under patents or intellectual property rights owned by third parties, including open-source software and other commercially available software, which can be costly. For example, we have initiated and been involved with intellectual property litigation as a result of which we have entered into cross-license agreements relating to our and third-party intellectual property, and in one such case we initiated in 2013 and settled in January 2014, we incurred $11.2 million of legal expense in 2013.

Our business operates in a regulated industry.

Our business, operations and service providers are subject to various U.S. federal, state and local consumer protection laws, licensing regulation and other laws and regulations, and, to a lesser extent, similar Canadian laws and regulations. Our advertising and sales practices and that of our service provider network are subject to regulation by the U.S. Federal Trade Commission, or the FTC, in addition to state consumer protection laws. The FTC and the Federal Communications Commission have issued regulations that place restrictions on, among other things, unsolicited automated telephone calls to residential and wireless telephone subscribers by means of automatic telephone dialing systems and the use of prerecorded or artificial voice messages. If our service providers were to take actions in violation of these regulations, such as telemarketing to individuals on the “Do Not Call” registry, we could be subject to fines, penalties, private actions or enforcement actions by government regulators. Although we have taken steps to insulate ourselves from any such wrongful conduct by our service providers, and to require our service providers to comply with these laws and regulations, no assurance can be given that we will not be exposed to liability as result of our service providers’ conduct. Further, to the extent that any changes in law or regulation further restrict the lead generation activity of our service providers, these restrictions could result in a material reduction in subscriber acquisition opportunities, reducing the growth prospects of our business and adversely affecting our financial condition and future cash flows. In addition, most states in which we operate

 

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have licensing laws directed specifically toward the monitored security services industry. Our business relies heavily upon cellular telephone service to communicate signals. Cellular telephone companies are currently regulated by both federal and state governments. Changes in laws or regulations could require us to change the way we operate, which could increase costs or otherwise disrupt operations. In addition, failure to comply with any such applicable laws or regulations could result in substantial fines or revocation of our operating permits and licenses, including in geographic areas where our services have substantial penetration, which could adversely affect our business and financial condition. Further, if these laws and regulations were to change or if we fail to comply with such laws and regulations as they exist today or in the future, our business, financial condition and results of operations could be materially and adversely affected.

If the U.S. insurance industry were to change its practice of providing incentives to homeowners for the use of alarm monitoring services, we could experience a reduction in new subscriber growth or an increase in our subscriber attrition rate.

It has been common practice in the U.S. insurance industry to provide a reduction in rates for policies written on homes that have monitored alarm systems. There can be no assurance that insurance companies will continue to offer these rate reductions. If these incentives were reduced or eliminated, new homeowners who otherwise may not feel the need for alarm monitoring services would be removed from our potential subscriber pool, which could hinder the growth of our business, and existing subscribers may choose to disconnect or not renew their service contracts, which could increase our attrition rates. In either case, our results of operations and growth prospects could be adversely affected.

We face many risks associated with our plans to expand internationally, which could harm our business, financial condition, and operating results.

We anticipate that our efforts to expand internationally will entail the marketing and advertising of our platform, solutions and brand. While our platform and solutions are designed for ease of localization, revenue in countries outside of the United States and Canada accounted for less than 1% of our revenue for the year ended December 31, 2014. We also do not have substantial experience in selling our platform and solutions in international markets outside of the United States and Canada or in conforming to the local cultures, standards, or policies necessary to successfully compete in those markets, and we may be required to invest significant resources in order to do so. We may not succeed in these efforts or achieve our consumer acquisition, service provider expansion or other goals. In some international markets, consumer preferences and buying behaviors may be different, and we may use business or pricing models that are different from our traditional model to provide our platform and solutions to consumers in those markets or we may be unsuccessful in implementing the appropriate business model. Our revenue from new foreign markets may not exceed the costs of establishing, marketing, and maintaining our international offerings. In addition, the current instability in the eurozone could have many adverse consequences on our international expansion, including sovereign default, liquidity and capital pressures on eurozone financial institutions, reducing the availability of credit and increasing the risk of financial sector failures and the risk of one or more eurozone member states leaving the euro, resulting in the possibility of capital and exchange controls and uncertainty about the impact of contracts and currency exchange rates.

In addition, conducting expanded international operations subjects us to new risks that we have not generally faced in our current markets. These risks include:

 

    localization of our solutions, including the addition of foreign languages and adaptation to new local practices and regulatory requirements;

 

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    lack of experience in other geographic markets;

 

    strong local competitors;

 

    the cost and burden of complying with, lack of familiarity with, and unexpected changes in, foreign legal and regulatory requirements, including more stringent privacy regulations;

 

    difficulties in managing and staffing international operations;

 

    fluctuations in currency exchange rates or restrictions on foreign currency;

 

    potentially adverse tax consequences, including the complexities of transfer pricing, value added or other tax systems, double taxation and restrictions and/or taxes on the repatriation of earnings;

 

    dependence on third parties, including commercial partners with whom we do not have extensive experience;

 

    increased financial accounting and reporting burdens and complexities;

 

    political, social, and economic instability, terrorist attacks, and security concerns in general; and

 

    reduced or varied protection for intellectual property rights in some countries.

Operating in international markets also requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.

Our software contains encryption technologies, certain types of which are subject to U.S. and foreign export control regulations and, in some foreign countries, restrictions on importation and/or use. Any failure on our part to comply with encryption or other applicable export control requirements could result in financial penalties or other sanctions under the U.S. export regulations, including restrictions on future export activities, which could harm our business and operating results. Regulatory restrictions could impair our access to technologies needed to improve our platform and solutions and may also limit or reduce the demand for our platform and solutions outside of the United States.

Risks Related to Our Intellectual Property

If we fail to protect our intellectual property and proprietary rights adequately, our business could be harmed.

We believe that our proprietary technology is essential to establishing and maintaining our leadership position. We seek to protect our intellectual property through trade secrets, copyrights, confidentiality, non-compete and nondisclosure agreements, patents, trademarks, domain names and other measures, some of which afford only limited protection. We also rely on patent, trademark, trade secret and copyright laws to protect our intellectual property. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our technology or to obtain and use information that we regard as proprietary. Our means of protecting our proprietary rights may not be adequate or our competitors may independently develop similar or superior technology, or design around our intellectual property. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States. Intellectual property protections may also be unavailable, limited or difficult to enforce in some countries, which could make it easier for competitors to capture market share. Our failure or inability to adequately protect our intellectual property and proprietary rights could harm our business, financial condition and results of operations.

 

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To prevent substantial unauthorized use of our intellectual property rights, it may be necessary to prosecute actions for infringement and/or misappropriation of our proprietary rights against third parties. Any such action could result in significant costs and diversion of our resources and management's attention, and we cannot assure you that we will be successful in such action. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

An assertion by a third party that we are infringing its intellectual property could subject us to costly and time-consuming litigation or expensive licenses that could harm our business and results of operations.

The industries in which we compete are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets, and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We have been involved with patent litigation suits in the past and we may be involved with and subject to similar litigation in the future to defend our intellectual property position. Given that our platform and solutions integrate with all aspects of the home, the risk that our platform and solutions may be subject to these allegations is exacerbated. As we seek to extend our platform and solutions, we could be constrained by the intellectual property rights of others. In addition, our service provider contracts may require us to indemnify them against certain liabilities they may incur as a result of our infringement of any third-party intellectual property.

We might not prevail in any intellectual property infringement litigation given the complex technical issues and inherent uncertainties in such litigation. Defending such claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause development delays or require us to enter into royalty or licensing agreements. For example, in 2013, we incurred $11.2 million in legal fees associated with intellectual property litigation that we asserted against a third party and the related counterclaims and in 2014, we incurred $1.4 million of costs related to intellectual property claims. In addition, we currently have a limited portfolio of issued patents compared to our larger competitors, and therefore may not be able to effectively utilize our intellectual property portfolio to assert defenses or counterclaims in response to patent infringement claims or litigation brought against us by third parties. Further, litigation may involve patent holding companies or other adverse patent owners who have no relevant products or revenues and against which our potential patents provide no deterrence, and many other potential litigants have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. If our platform and solutions exceed the scope of in-bound licenses or violate any third-party proprietary rights, we could be required to withdraw those solutions from the market, re-develop those solutions or seek to obtain licenses from third parties, which might not be available on reasonable terms or at all. Any efforts to re-develop our platform and solutions, obtain licenses from third parties on favorable terms or license a substitute technology might not be successful and, in any case, might substantially increase our costs and harm our business, financial condition and results of operations. If we were compelled to withdraw any of our platform and solutions from the market, our business, financial condition and results of operations could be harmed.

We have indemnity obligations to certain of our service providers for certain expenses and liabilities resulting from intellectual property infringement claims regarding our platform and solutions, which could force us to incur substantial costs.

We have indemnity obligations to certain of our service providers for intellectual property infringement claims regarding our platform and solutions. As a result, in the case of infringement claims

 

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against these service providers, we could be required to indemnify them for losses resulting from such claims or to refund amounts they have paid to us. We expect that some of our service providers may seek indemnification from us in connection with infringement claims brought against them. In addition, we may elect to indemnify service providers where we have no contractual obligation to indemnify them and we will evaluate each such request on a case-by-case basis. If a service provider elects to invest resources in enforcing a claim for indemnification against us, we could incur significant costs disputing it. If we do not succeed in disputing it, we could face substantial liability.

The use of open source software in our platform and solutions may expose us to additional risks and harm our intellectual property.

Some of our platform and solutions use or incorporate software that is subject to one or more open source licenses and we may incorporate open source software in the future. Open source software is typically freely accessible, usable and modifiable. Certain open source software licenses require a user who intends to distribute the open source software as a component of the user's software to disclose publicly part or all of the source code to the user's software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on potentially unfavorable terms or at no cost.

The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and accordingly there is a risk that those licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our platform and solutions. In that event, we could be required to seek licenses from third parties in order to continue offering our platform and solutions, to re-develop our platform and solutions, to discontinue sales of our platform and solutions or to release our proprietary software code under the terms of an open source license, any of which could harm our business. Further, given the nature of open source software, it may be more likely that third parties might assert copyright and other intellectual property infringement claims against us based on our use of these open source software programs. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote additional research and development resources to change our solutions.

Although we are not aware of any use of open source software in our platform and solutions that would require us to disclose all or a portion of the source code underlying our core solutions, it is possible that such use may have inadvertently occurred in deploying our platform and solutions. Additionally, if a third-party software provider has incorporated certain types of open source software into software we license from such third party for our platform and solutions without our knowledge, we could, under certain circumstances, be required to disclose the source code to our platform and solutions. This could harm our intellectual property position and our business, results of operations and financial condition.

Risks Related to Owning Our Common Stock and this Offering

Our share price may be volatile, and you may lose some or all of your investment.

The initial public offering price for the shares of our common stock will be determined by negotiations between us and the representative of the underwriters and may not be indicative of the market price of our common stock following this offering. The market price of our common stock may be highly volatile and may fluctuate substantially as a result of a variety of factors, some of which are related in complex ways, including:

 

    actual or anticipated fluctuations in our financial condition and operating results;

 

    variance in our financial performance from expectations of securities analysts;

 

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    changes in the prices of our platform and solutions;

 

    changes in our projected operating and financial results;

 

    changes in laws or regulations applicable to our platform and solutions or marketing techniques;

 

    announcements by us or our competitors of significant business developments, acquisitions or new solutions;

 

    our involvement in any litigation;

 

    our sale of our common stock or other securities in the future;

 

    changes in senior management or key personnel;

 

    trading volume of our common stock;

 

    changes in the anticipated future size and growth rate of our market; and

 

    general economic, regulatory and market conditions.

Recently, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our common stock. If the market price of our common stock after this offering does not exceed the initial public offering price, you may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management’s attention.

No public market for our common stock currently exists, and an active public trading market may not develop or be sustained following this offering.

No public market for our common stock currently exists. An active public trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration. We cannot predict the prices at which our common stock will trade. It is possible that in one or more future periods our results of operations may be below the expectations of public market analysts and investors and, as a result of these and other factors, the price of our common stock may fall.

We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding an

 

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annual non-binding advisory vote on executive compensation and non-binding stockholder approval of any golden parachute payments not previously approved. If we choose not to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, our auditors will not be required to attest to the effectiveness of our internal control over financial reporting. As a result, investors may become less comfortable with the effectiveness of our internal controls and the risk that material weaknesses or other deficiencies in our internal controls go undetected may increase. If we choose to provide reduced disclosures in our periodic reports and proxy statements while we are an emerging growth company, investors would have access to less information and analysis about our executive compensation, which may make it difficult for investors to evaluate our executive compensation practices. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions and provide reduced disclosure. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be harmed. We will remain an “emerging growth company” for up to five years or such earlier time that we are no longer an emerging growth company. We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; or the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

As a result of becoming a public company, we will be obligated to develop and maintain a system of effective internal controls over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may harm investor confidence in our company and, as a result, the value of our common stock.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting in the second annual report we file with the U.S. Securities and Exchange Commission, or SEC. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. However, our auditors will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until we are no longer an “emerging growth company” as defined in the JOBS Act if we take advantage of the exemptions available to us through the JOBS Act.

We are in the very early stages of the costly and challenging process of compiling the system and process documentation necessary to perform the evaluation needed to comply with Section 404. In this regard, we will need to continue to dedicate internal resources, engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. As we transition to the requirements of reporting as a public

 

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company, we may need to add additional finance staff. We may not be able to remediate any future material weaknesses, or to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls when they are required to issue such opinion, investors could lose confidence in the accuracy and completeness of our financial reports, which could harm our stock price.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

We will incur increased costs as a result of being a public company.

As a public company, we will incur increased legal, accounting and other costs not incurred as a private company. The Sarbanes-Oxley Act and related rules and regulations of the SEC regulate the corporate governance practices of public companies. We expect that compliance with these requirements will increase our expenses and make some activities more time-consuming than they have been in the past when we were a private company. Such additional costs going forward could negatively affect our financial results.

We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

Our future depends in part on the interests and influence of key stockholders.

Following this offering, our directors, executive officers and holders of more than 5% of our common stock, all of whom are represented on our board of directors, together with their affiliates will beneficially own             % of the voting power of our outstanding capital stock. As a result, these stockholders will, immediately following this offering, be able to determine the outcome of matters submitted to our stockholders for approval. This ownership could affect the value of your shares of common stock by, for example, these stockholders electing to delay, defer or prevent a change in corporate control, merger, consolidation, takeover or other business combination. This concentration of ownership may also adversely affect the market price of our common stock.

 

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We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

A portion of the net proceeds from this offering may be used for general corporate purposes, including working capital. We may also use a portion of the net proceeds to acquire complementary businesses, products, services or technologies. However, we do not have any agreements or commitments for any acquisitions at this time. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be invested with a view towards long-term benefits for our stockholders and this may not increase our operating results or market value. The failure by our management to apply these funds effectively may adversely affect the return on your investment.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our certificate of incorporation and bylaws, as amended and restated in connection with this offering, may have the effect of delaying or preventing a change in control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws will include provisions that:

 

    authorize our board of directors to issue preferred stock, without further stockholder action and with voting liquidation, dividend and other rights superior to our common stock;

 

    require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent, and limit the ability of our stockholders to call special meetings;

 

    establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for director nominees;

 

    establish that our board of directors is divided into three classes, with directors in each class serving three-year staggered terms;

 

    require the approval of holders of two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action by written consent or call a special meeting;

 

    prohibit cumulative voting in the election of directors; and

 

    provide that vacancies on our board of directors may be filled only by the vote of a majority of directors then in office, even though less than a quorum.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of our common stock, and they could deter potential acquirers of our company, thereby reducing the likelihood that you would receive a premium for your common stock in an acquisition.

 

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Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Pursuant to our amended and restated certificate of incorporation, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws or (4) any action asserting a claim governed by the internal affairs doctrine. Our amended and restated certificate of incorporation will further provide that any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have notice of and consented to the foregoing provision. The forum selection clause in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Future sales of our common stock in the public market could cause our share price to decline.

After this offering, there will be                  shares of our common stock outstanding, assuming no exercise of the underwriters’ over-allotment option. Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Of our issued and outstanding shares of our common stock, all of the shares sold in this offering will be freely transferrable without restrictions or further registration under the Securities Act, except for any shares acquired by our affiliates, as defined in Rule 144 under the Securities Act. The remaining                  shares outstanding after this offering will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for 180 days after the date of this prospectus.

You will experience immediate and substantial dilution in the net tangible book value of the shares of common stock you purchase in this offering.

The initial public offering price of our common stock substantially exceeds the pro forma net tangible book value per share of our common stock as of March 31, 2015. Therefore, if you purchase shares of our common stock in this offering, you will suffer immediate dilution of $         per share, or $         if the underwriters exercise their option in full, in net tangible book value after giving effect to the sale of common stock in this offering at an assumed public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If outstanding options to purchase our common stock are exercised in the future, you will experience additional dilution.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections of this prospectus entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” or “would,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements include statements about:

 

    our ability to continue to increase revenue, maintain existing subscribers and sell new services to new and existing subscribers;

 

    our ability to add new service providers, maintain existing service provider relationships and increase the productivity of our service providers;

 

    the effects of increased competition as well as innovations by new and existing competitors in our market;

 

    our ability to adapt to technological change and effectively enhance, innovate and scale our solution;

 

    our ability to effectively manage or sustain our growth;

 

    potential acquisitions and integration of complementary business and technologies;

 

    our expected use of proceeds;

 

    our ability to maintain, or strengthen awareness of, our brand;

 

    perceived or actual security, integrity, reliability, quality or compatibility problems with our solutions, including related to security breaches in our subscribers’ systems, unscheduled downtime, or outages;

 

    statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and stock performance;

 

    our ability to attract and retain qualified employees and key personnel and further expand our overall headcount;

 

    our ability to develop relationships with service providers in order to expand internationally;

 

    our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally;

 

    our ability to maintain, protect and enhance our intellectual property;

 

    costs associated with defending intellectual property infringement and other claims; and

 

    the future trading prices of our common stock and the impact of securities analysts’ reports on these prices.

 

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We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should refer to the “Risk Factors” section of this prospectus for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act do not protect any forward-looking statements that we make in connection with this offering.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus contains market data and industry forecasts that were obtained from industry publications. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information. We believe the market position, market opportunity and market size information included in this prospectus is generally reliable.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of                  shares of our common stock in this offering will be approximately $         million, or approximately $         million if the underwriters exercise their over-allotment option in full, based upon an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of shares by the selling stockholders, although we will bear the costs, other than underwriting discounts and commissions, associated with those sales.

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions payable by us. We may also increase or decrease the number of shares we are offering. Each 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease the net proceeds to us from this offering by approximately $             million, assuming that the assumed initial price to the public remains the same, and after deducting underwriting discounts and commissions payable by us. We do not expect that a change in the initial price to the public or the number of shares by these amounts would have a material effect on uses of the proceeds from this offering, although it may accelerate the time at which we will need to seek additional capital.

The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock, and facilitate our future access to the capital markets. We also expect to use the net proceeds from this offering for working capital and other general corporate purposes. We may use a portion of the proceeds from this offering for acquisitions or strategic investments in complementary businesses or technologies, although we do not currently have any plans for any such acquisitions or investments. We have not allocated specific amounts of net proceeds for any of these purposes.

The expected use of net proceeds from this offering represents our intentions based upon our present plans and business conditions. We cannot predict with certainty all of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending their use, we intend to invest the net proceeds of this offering in a variety of capital-preservation investments, including short- and intermediate-term, interest-bearing, investment-grade securities.

 

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DIVIDEND POLICY

We declared dividends on our common and preferred stock in the amount of $0.3067 per share of common stock on an as-converted basis in October 2011 and $0.2944 per share of common stock on an as-converted basis in December 2011, totaling approximately $19.9 million. We also declared and paid dividends on our common and preferred stock in the amount of $0.2589 per share of common stock on an as-converted basis in June 2012, totaling approximately $8.6 million.

We cannot provide any assurance that we will declare or pay cash dividends on our common stock in the future. We currently anticipate that we will retain all of our future earnings, if any, for use in the operation and expansion of our business and we do not anticipate paying cash dividends in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions under the terms of the agreements governing our credit facility. Payment of future cash dividends, if any, will be at the discretion of the board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors the board of directors deems relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2015:

 

    on an actual basis; and

 

    on a pro forma as adjusted basis to reflect (1) the conversion of all outstanding shares of our preferred stock into 35,017,884 shares of common stock immediately prior to the completion of this offering, (2) our sale of                  shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (3) the filing of our amended and restated certificate of incorporation, which will become effective immediately prior to completion of this offering.

You should read this table together with the sections of this prospectus titled “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.

 

     As of March 31, 2015  
     Actual     Pro Forma as
adjusted(1)
 
    

(unaudited)

 
     (in thousands, except share
and per share data)
 

Cash and cash equivalents

   $ 39,189      $     
  

 

 

   

 

 

 

Debt

$ 6,700    $     

Redeemable convertible preferred stock, $0.001 par value; 6,991,090 shares authorized, 3,890,876 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma as adjusted

  202,456   

Stockholders’ (deficit) equity:

Preferred stock, $0.001 par value; no shares authorized, issued or outstanding, actual;                                               shares authorized, no shares issued or outstanding, pro forma as adjusted

  —     

Common stock, $0.01 par value; 100,000,000 shares authorized, 2,828,556 shares issued and outstanding, actual;                                               shares authorized,                      shares issued and outstanding, pro forma as adjusted

  27   

Additional paid-in capital

  7,715   

Treasury stock

  (42

Accumulated other comprehensive income

  —     

Accumulated deficit

  (125,955
  

 

 

   

 

 

 

Total stockholders’ (deficit) equity

  (118,255
  

 

 

   

 

 

 

Total capitalization

$ 90,901    $                            
  

 

 

   

 

 

 

 

  (1)

The pro forma as adjusted information set forth above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions payable by us. We may also increase or decrease the number of shares we are offering. Each 1,000,000

 

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  share increase or decrease in the number of shares offered by us would increase or decrease pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $             million, assuming that the assumed initial price to public remains the same, and after deducting underwriting discounts and commissions payable by us.

The number of shares of our common stock shown as issued and outstanding on a pro forma as adjusted basis in the table above is based on the number of shares of our common stock outstanding as of March 31, 2015 and excludes:

 

    3,337,968 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2015, at a weighted-average exercise price of $2.68 per share;

 

    482,276 shares of common stock issuable upon the exercise of options to purchase common stock that were granted on May 15, 2015 with an exercise price of $11.55 per share;

 

                         shares of our common stock reserved for future issuance pursuant to our 2015 Plan which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year (including 141,222 shares of common stock reserved for issuance under our previously existing 2009 Plan that will be added to the shares reserved under the 2015 Plan upon its effectiveness);

 

                         shares of our common stock reserved for future issuance under our 2015 Employee Stock Purchase Program, which will become effective in connection with this offering and contains provisions that automatically increase its share reserve each year, as more fully described in “Executive and Director Compensation—Equity Incentive Plans”; and

 

    173,575 shares of common stock issuable upon the exercise of common stock warrants that were outstanding as of March 31, 2015, at a weighted-average exercise price of approximately $4.28 per share.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after the completion of this offering. Net tangible book value per share represents our total tangible assets (total assets less intangible assets) less our total liabilities and redeemable convertible preferred stock, divided by the number of shares of outstanding common stock.

As of March 31, 2015, our net tangible book value was $(151.0) million, or $(53.37) per share of common stock. The pro forma net tangible book value of our common stock as of March 31, 2015 was $51.5 million, or $1.36 per share, based on 37,846,440 shares of common stock outstanding. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of shares of outstanding common stock, after giving effect to the conversion of all of our outstanding shares of preferred stock into 35,017,884 shares of common stock immediately prior to the completion of this offering.

After giving effect to the receipt of the net proceeds from our sale of                      shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2015 would have been $         million, or $         per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to our existing stockholders and an immediate dilution of $         per share to investors purchasing common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share

$                    

Pro forma net tangible book value per share as of March 31, 2015

$ 1.36   

Increase in pro forma net tangible book value per share attributed to new investors purchasing shares from us in this offering

  

 

 

    

Pro forma as adjusted net tangible book value per share after giving effect to this offering

     

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

$     
     

 

 

 

The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease the pro forma as adjusted net tangible book value per share by $         per share and the dilution per share to investors participating in this offering by $         per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions payable by us. We may also increase or decrease the number of shares we are offering. Each 1,000,000 share increase in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase the pro forma as adjusted net tangible book value per share by $         and decrease the dilution per share to investors participating in this offering by $        , assuming the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions payable by us. Each 1,000,000 share decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease the pro

 

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forma as adjusted net tangible book value per share after this offering by $         and increase the dilution per share to new investors participating in this offering by $        , assuming the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial price to public and other terms of this offering determined at pricing.

If the underwriters exercise their option in full to purchase an additional              shares of our common stock in this offering, the pro forma as adjusted net tangible book value would increase to $         per share, representing an immediate increase to existing stockholders of $         per share and an immediate dilution of $         per share to investors participating in this offering.

The following table summarizes as of March 31, 2015, on the pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (1) paid to us by our existing stockholders and (2) to be paid by investors purchasing our common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  Shares Purchased   Total Consideration   Weighted-
  Average Price  
Per Share
 
        Number             Percent               Amount               Percent        

Existing stockholders

  %    $        %    $     

New investors

  

 

  

 

 

    

 

 

    

 

 

    

 

 

 

Total

          100.0%    $                             100.0%    $                
  

 

  

 

 

    

 

 

    

 

 

    

 

 

 

The foregoing table does not reflect the sales by existing stockholders in connection with sales made by them in this offering. Sales by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to              shares, or     % of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to              shares, or     % of the total number of shares of our common stock outstanding after this offering.

The tables and calculations above are based on the number of shares of our common stock outstanding as of March 31, 2015 and exclude:

 

    3,337,968 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2015, at a weighted-average exercise price of $2.68 per share;

 

    482,276 shares of common stock issuable upon the exercise of options to purchase common stock that were granted on May 15, 2015 with an exercise price of $11.55 per share;

 

                 shares of our common stock reserved for future issuance pursuant to our 2015 Plan, which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year (including 141,222 shares of common stock reserved for issuance under our previously existing 2009 Plan that will be added to the shares reserved under the 2015 Plan upon its effectiveness);

 

                 shares of our common stock reserved for future issuance under our 2015 Employee Stock Purchase Program, which will become effective in connection with this offering and contains provisions that automatically increase its share reserve each year, as more fully described in “Executive and Director Compensation—Equity Incentive Plans”; and

 

    173,575 shares of common stock issuable upon the exercise of common stock warrants that were outstanding as of March 31, 2015, at a weighted-average exercise price of approximately $4.28 per share.

 

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To the extent that options or warrants are exercised, new options or other securities are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth our selected consolidated financial and other data. The following selected consolidated financial data for the years ended December 31, 2012, 2013 and 2014 and the selected consolidated balance sheet data as of December 31, 2013 and 2014 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated financial data for the years ended December 31, 2010 and 2011 and the selected consolidated balance sheet data as of December 31, 2010, 2011 and 2012 are derived from our audited consolidated financial statements not included in this prospectus. The selected consolidated financial data for the three months ended March 31, 2014 and 2015 and the selected consolidated balance sheet data as of March 31, 2015 are derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements on the same basis as the audited consolidated financial statements, and the unaudited consolidated financial data include, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of our financial position and results of operations for these periods. Our historical results are not necessarily indicative of the results to be expected in the future, and our operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2015.

 

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The data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in conjunction with the consolidated financial statements, related notes, and other financial information included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future.

 

    Year Ended
December 31,
    Three Months Ended
March 31,
 
  2010     2011     2012(6)     2013     2014         2014             2015      
                                  (unaudited)  
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

             

Revenue:

             

SaaS and license revenue

    $ 17,085        $ 32,161        $ 55,655        $ 82,620        $ 111,515      $ 25,204      $ 31,955   

Hardware and other revenue

    20,135        32,898        40,820        47,602        55,797        11,647        14,056   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    37,220        65,059        96,475        130,222        167,312        36,851        46,011   

Cost of revenue:(1)

             

Cost of SaaS and license revenue

    4,970        8,051        12,681        16,476        23,007        5,008        6,033   

Cost of hardware and other revenue

    12,115        21,102        28,773        38,482        44,172        8,993        10,776   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

        17,085            29,153            41,454            54,958            67,179        14,001        16,809   

Operating expenses:

             

Sales and marketing(2)

    2,482        5,819        13,232        21,467        25,836        5,096        7,916   

General and administrative(2)

    6,045        6,817        14,099        29,928        26,113        5,220        7,070   

Research and development(2)

    3,266        5,613        8,944        13,085        23,193        4,610        7,752   

Amortization and depreciation

    1,779        1,988        2,230        3,360        3,991        806        1,338   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    13,572        20,237        38,505        67,840        79,133        15,732        24,076   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    6,563        15,669        16,516        7,424        21,000        7,118        5,126   

Interest expense

           (9     (312     (269     (196     (58     (42

Other income / (expense), net

    15        10        5        57        (485     10        7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    6,578        15,670        16,209        7,212        20,319        7,070        5,091   

Provision for income taxes

    2,506        6,015        7,280        2,688        6,817        2,797        2,050   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    4,072        9,655        8,929        4,524        13,502        4,273        3,041   

Dividends paid on redeemable convertible preferred stock

           (18,998     (8,182                            

Cumulative dividend on redeemable convertible preferred stock

    (3,081     (3,317     (1,855                            

Deemed dividend to redeemable convertible preferred stock upon recapitalization

                  (138,727                            

Income allocated to participating securities

    (990                   (4,402     (12,939     (4,125     (2,895
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income / (loss) attributable to common stockholders

  $ 1      $ (12,660   $ (139,835   $ 122      $ 563      $ 148      $ 146   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Year Ended December 31,     Three Months Ended
March 31,
 
  2010     2011     2012(6)     2013     2014     2014     2015  
                                  (unaudited)  
    (in thousands, except share and per share data)  

Per share information attributable to common stockholders:

             

Net income (loss) per share:

             

Basic

    $ 0.03        $ (19.76)        $ (108.55)        $ 0.08        $ 0.25        $ 0.08        $ 0.06   

Diluted

    $        $ (19.76)        $ (108.55)        $ 0.04        $ 0.14        $ 0.04        $ 0.04   

Pro forma (unaudited):(3)

             

Basic

            $ 0.36          $ 0.08   

Diluted

            $ 0.34          $ 0.08   

Weighted average common shares outstanding:

             

Basic

    9,585        640,850        1,288,162        1,443,469        2,276,694        1,869,370        2,636,813   

Diluted

    218,664        640,850        1,288,162        2,795,345        3,890,121        3,467,288        4,172,787   

Pro forma (unaudited):(3)

             

Basic

            37,294,578          37,654,697   

Diluted

            38,908,005          39,190,671   

Other Financial and Operating Data:

             

SaaS and license revenue renewal rate(4)

    92%        94%        94%        93%        93%        92%        92%   

Adjusted EBITDA(5)

    $ 8,626        $ 17,839        $ 20,505        $ 28,259        $ 28,321        $ 8,775        $ 7,025   

 

     As of December 31,     As of
March 31,
 
     2010      2011     2012     2013     2014     2015  
                                    (unaudited)  
     (in thousands, except per share data)  

Consolidated Balance Sheet Data:

             

Cash and cash equivalents

   $ 14,474       $ 16,817      $ 41,920      $ 33,583      $ 42,572      $ 39,189   

Working capital, excluding deferred revenue

     14,398         15,747        40,739        33,821        50,795        48,992   

Total assets

       48,980           58,507          87,545          99,487        120,932        126,731   

Redeemable convertible preferred stock

     35,117         35,117        202,456        202,456        202,456        202,456   

Total long-term obligations

     2,884         14,377        15,352        14,923        17,572        19,027   

Total stockholders’ equity (deficit)

     6,015         (3,188     (147,051     (140,690     (121,844     (118,255

Cash dividends per common share

             0.60        0.26                        

 

  (1) Excludes amortization and depreciation.

 

  (2) Includes stock-based compensation expense as follows:

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2010     2011     2012     2013     2014     2014     2015  
   

(in thousands)

 

Sales and marketing

    $ 16        $ 39        $ 196        $ 102        $ 338        $ 77        $ 60   

General and administrative

    181        89        418        495        1,862        480        294   

Research and development

    87        54        1,145        244        1,067        231        207   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

    $         284        $         182        $         1,759        $         841        $         3,267        $         788        $         561   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (3) Pro forma basic and diluted net income per share represents net income divided by the pro forma weighted-average shares of common stock outstanding. Pro forma weighted-average shares outstanding reflects the conversion of preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the first day of the relevant period.

 

  (4)

We measure our SaaS and license revenue renewal rate on a trailing 12-month basis by dividing (a) the total SaaS and license revenue recognized during the trailing 12-month period from subscribers 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

 

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  subscribers assuming no terminations, or service level upgrades or downgrades. Our SaaS and license revenue renewal rate is expressed as an annualized percentage.

 

  (5) We define Adjusted EBITDA as our net income before interest and other expense / (income), income tax expense, amortization and depreciation expense, stock-based compensation expense, goodwill and intangible impairment charges, changes in fair value of acquisition-related contingent liabilities and legal costs incurred in connection with certain historical intellectual property litigation. We do not consider these items to be indicative of our core operating performance. The non-cash items include amortization and depreciation expense, stock-based compensation expense, goodwill and intangible impairment charges and gain from the release of an acquisition-related contingent liability.

 

     We have included Adjusted EBITDA in this prospectus because it is a key measure used by our management to understand and evaluate our core operating performance and trends and generate future operating plans, make strategic decisions regarding the allocation of capital, and investments in initiatives that are focused on cultivating new markets for our solutions. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of acquisition-related adjustments and historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

 

     Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

 

     Because of these and other limitations, you should consider Adjusted EBITDA alongside our other GAAP-based financial performance measures, net income and our other GAAP financial results. The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, for each of the periods indicated.

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2010     2011     2012     2013     2014     2014     2015  
    (in thousands)  

Net income

    $       4,072        $ 9,655        $ 8,929        $ 4,524        $         13,502        $ 4,273        $ 3,041   

Adjustments:

             

Other expense / (income)

    (15     (1     307        212        681        48        35   

Income tax expense

            2,506        6,015        7,280        2,688        6,817        2,797        2,050   

Amortization and depreciation expense

    1,779        1,988        2,230        3,360        3,991        806        1,338   

Stock-based compensation expense

    284        182        1,759        841        3,267        788        561   

Goodwill and intangible asset impairment

                         11,266                        

Release of acquisition related contingent liability

                         (5,820                     

Litigation expense

                         11,188        63        63          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

    4,554        8,184        11,576        23,735        14,819        4,502        3,984   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    $ 8,626        $         17,839        $         20,505        $         28,259        $ 28,321        $         8,775        $         7,025   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (6) We conducted a recapitalization in July 2012. Please see Note 17 to our consolidated financial statements for additional information regarding this transaction.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are the leading platform solution for the connected home. Through our cloud-based services, Alarm.com makes 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 58%, 63% and 67% of our revenue in 2012, 2013 and 2014, and 68% and 69% of our revenue in the first quarters of 2014 and 2015. 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 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 42%, 37% and 33% of our revenue in 2012, 2013 and 2014, and 32% and 31% of our revenue in the first quarters of 2014 and 2015. 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,

 

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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 utilize 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 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 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 make occasional 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.

We have experienced significant revenue growth over the past three years. Our revenue increased from $96.5 million in 2012 to $130.2 million in 2013 and to $167.3 million in 2014. Our revenue increased from $36.9 million in the first quarter of 2014 to $46.0 million in the first quarter of 2015. Our SaaS and license revenue increased from $55.7 million in 2012 to $82.6 million in 2013 and to $111.5 million in 2014. Our SaaS and license revenue increased from $25.2 million in the first quarter of 2014 to $32.0 million in the first quarter of 2015. Our subscriber base increased from 0.9 million subscribers in 2011 to 2.3 million in 2014, representing a compound annual growth rate of 39%. We generated net income of $8.9 million in 2012, $4.5 million in 2013 and $13.5 million in 2014, and Adjusted EBITDA, a non-GAAP measurement of operating performance, of $20.5 million in 2012, $28.3 million in 2013 and $28.3 million in 2014. We generated net income of $4.3 million and Adjusted EBITDA, a non-GAAP measurement of operating performance, of $8.8 million in the first quarter of 2014. We generated net income of $3.0 million and Adjusted EBITDA, a non-GAAP measurement of operating performance, of $7.0 million in the first quarter of 2015. Please see footnote 5 to the table in the section of this prospectus titled “Selected Consolidated Financial and Other Data” for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measurement, for 2012, 2013 and 2014, and the first quarters of 2014 and 2015.

Key Factors Affecting Our Performance

Our historical financial performance has been, and we expect our financial performance in the future to be, primarily driven by the following factors:

 

   

Service Provider Network. We have developed a network of over 5,000 service providers that sell, install and service our solutions. Our existing base of service providers includes large national providers, super-regional providers and local providers that enable us to fully address the North American market. Our network includes experienced security service providers who have led the sale, installation and adoption of connected

 

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home services over the last decade. In order for us to maintain our current revenue sources and grow our revenues, we must effectively manage and grow relationships with our service providers. Over the last decade, we have built an infrastructure that supports our service providers with sales and marketing tools, training, technical support, and access to aggregated data that helps service providers improve the performance of their business through targeting new customers, improving customer retention rates, and upselling new features. Recruiting and retaining qualified service providers and training them in our technology and solutions requires significant time and resources. We intend to continue to invest in these technologies, solutions and other resources that we believe will assist our service providers in growing their businesses by driving the creation of new subscribers as the overall connected home market expands. Additionally, we intend to leverage our sales and marketing efforts to grow the base of our service providers who deploy the Alarm.com solutions.

 

    Subscriber Growth. Our subscriber base is a key indicator of our market penetration, growth and future revenue. We believe that we are positioned for future growth and that we have an opportunity to continue expanding our subscriber base in the coming years. According to Parks Associates reports dated December 2013 and July 2014, there are approximately 124 million U.S. households, of which 95 million have broadband internet access, and 21% of U.S. households with broadband access, or approximately 20 million homes, have a professionally monitored home security system. However, according to April 2015 data from Parks Associates, smart home controller penetration was only at 7.8% of U.S. households in 2014. We believe there is an opportunity for penetration rates to significantly increase, largely driven by the mass market adoption of connected home solutions by households with no solution today. The number of new subscribers signed may vary period to period for several reasons, including the effects of seasonality on our business due to a subset of our service providers who use a summer sales business model where they substantially increase the size of their sales force and execute the majority of their sales over the summer months. Our ability to continue to grow our subscriber base is also dependent upon our ability to compete within the increasingly competitive markets in which we participate, where large technology companies, broadband and security service providers, and other managed service providers, are actively targeting the connected home, security monitoring, video and energy management markets. We intend to continue to invest in enhancing and expanding our platform and solutions for both consumers and service providers, as well as introducing new, innovative products and services to further differentiate our solutions from our competitors’ products and services. Please see the section of this prospectus titled “Business—Subscribers” for a discussion of how we define and calculate our number of subscribers.

 

    Adoption of Connected Home Solutions. We believe there is significant opportunity to increase the adoption rate of our intelligent home and business automation features. As of March 31, 2015, approximately one quarter of our subscribers have adopted two or more of our solutions, typically our interactive security solution combined with one of our other solutions. Our subscribers who have adopted these other solutions are more engaged, have lower churn rates and generate a higher lifetime value for our service providers and for us. We also expect to be able to develop new features for sale and cross-sale as more devices are connected through our platform and more data is captured by our platform.

 

   

Investing in Growth. We will continue to focus on long-term revenue growth. We believe that our market opportunity is large and underpenetrated and we will continue to invest

 

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significantly in sales and marketing to grow our service provider and subscriber base, drive additional revenue and grow internationally. We also expect to invest in research and development to enhance our platform and develop complementary solutions. To support our expected growth and our operation as a public company, we plan to invest in other operational and administrative functions. We expect to use some of the proceeds from this offering to fund these growth strategies.

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, our Saas and license revenue renewal rate, and Adjusted EBITDA. We believe these metrics are useful to understanding the underlying trends in our business. The following table summarizes our key operating metrics for 2012, 2013 and 2014, and for the first quarters of 2014 and 2015.

 

     Year Ended December 31,     Three Months Ended
March 31,
 
     2012     2013     2014     2014     2015  
     (dollars in thousands)  

SaaS and license revenue

   $ 55,655      $ 82,620      $ 111,515      $ 25,204      $ 31,955   

SaaS and license revenue renewal rate

     94     93     93     92     92

Adjusted EBITDA

   $ 20,505      $ 28,259      $ 28,321      $ 8,775      $ 7,025   

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 utilizing 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.

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. 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.

Adjusted EBITDA

Adjusted EBITDA represents our net income before interest and other expense / (income), income tax expense, amortization and depreciation expense, stock-based compensation expense, goodwill and intangible impairment charges, changes in fair value of acquisition-related contingent liabilities and legal costs incurred in connection with certain historical intellectual property litigation. We do not consider these items to be indicative of our core operating performance. The items which are non-cash include amortization and depreciation expense, stock-based compensation expense, goodwill and intangible impairment charges and gain from the release of an acquisition-related contingent liability.

 

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Adjusted EBITDA is a key measure used by management to understand and evaluate our core operating performance and trends and generate future operating plans, make strategic decisions regarding the allocation of capital, and investments in initiatives that are focused on cultivating new markets for our solutions. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis and, in the case of exclusion of acquisition-related adjustments and certain historical legal expenses, excludes items that we do not consider to be indicative of our core operating performance. Adjusted EBITDA is not a measure calculated in accordance with GAAP. Please see footnote 5 to the table in the section of this prospectus titled “Selected Consolidated Financial and Other Data” for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measurement, for 2012, 2013 and 2014, and for the first quarters of 2014 and 2015.

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 utilize 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 one of our largest service providers who represented at least 10% of our revenue in 2012, 2013 and 2014, and for the first quarter of 2014, pursuant to which we granted a license to use the intellectual property associated with our connected home solutions. This service provider began generating customers and began paying us license revenue in the second quarter of 2014. Pursuant to this arrangement, this service provider 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 this service provider 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

 

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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 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. We grew from 111 employees at January 1, 2012 to 437 employees at March 31, 2015, and we expect to continue to hire new employees to support future growth of our business.

 

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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 43 at January 1, 2012 to 179 at March 31, 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, as well as 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 20 at January 1, 2012 to 55 at March 31, 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 related to preparation to become and operate as a public company. Such 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.

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 48 at January 1, 2012 to 203 at March 31, 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

 

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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 Income / (Expense), Net

Other income / (expense), 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, and non-deductible meals and entertainment, non-taxable contingent consideration remeasurement gain 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 data:

 

  Year Ended December 31,     Three Months Ended
March 31,
 
  2012        2013        2014            2014            2015     
                                      (unaudited)  
     (in thousands)  
Consolidated Statements of Operations Data:        

Revenue:

                      

SaaS and license revenue

   $ 55,655         $ 82,620         $ 111,515         $ 25,204         $ 31,955   

Hardware and other revenue

     40,820           47,602           55,797           11,647           14,056   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total revenue

  96,475      130,222      167,312      36,851      46,011   

Cost of revenue:(1)

Cost of SaaS and license revenue

  12,681      16,476      23,007      5,008      6,033   

Cost of hardware and other revenue

  28,773      38,482      44,172      8,993      10,776   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total cost of revenue

  41,454      54,958      67,179      14,001      16,809   

Operating expenses:

Sales and marketing(2)

  13,232      21,467      25,836      5,096      7,916   

General and administrative(2)

  14,099      29,928      26,113      5,220      7,070   

Research and development(2)

  8,944      13,085      23,193      4,610      7,752   

Amortization and depreciation

  2,230      3,360      3,991      806      1,338   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total operating expenses

  38,505      67,840      79,133      15,732      24,076   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Operating income

  16,516      7,424      21,000      7,118      5,126   

Interest expense

  (312   (269   (196   (58   (42

Other income / (expense), net

  5      57      (485   10      7   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Income before income taxes

  16,209      7,212      20,319      7,070      5,091   

Provision for income taxes

  7,280      2,688      6,817      2,797      2,050   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Net income

$ 8,929    $ 4,524    $ 13,502    $ 4,273    $ 3,041   
  

 

 

   

 

  

 

 

   

 

  

 

 

      

 

 

      

 

 

 

 

(1) Excludes amortization and depreciation.

 

(2) Operating expenses include stock-based compensation expense as follows:

 

     Year Ended December 31,          Three Months Ended
March 31,
 
     2012             2013             2014             2014             2015     
     (in thousands)  

Stock-based compensation expense data:

                      

Sales and marketing

   $ 196         $ 102         $ 338         $ 77         $ 60   

General and administrative

     418           495           1,862           480           294   

Research and development

     1,145           244           1,067           231           207   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total stock-based compensation expense

   $     1,759         $         841         $ 3,267         $ 788         $ 561   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

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The following table sets forth our selected consolidated statements of operations data expressed as a percentage of total revenue:

 

  Year Ended December 31,     Three Months Ended
March 31,
 
2012        2013        2014        2014        2015     
Consolidated Statements of Operations Data
(as a percentage of total revenue):
   

Revenue:

SaaS and license revenue

  58   63   67   68   69

Hardware and other revenue

  42      37      33      32      31   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total revenue

  100      100      100      100      100   

Cost of revenue:(1)

Cost of SaaS and license revenue

  13      13      14      14      13   

Cost of hardware and other revenue

  30      30      26      24      23   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total cost of revenue

  43      42      40      38      37   

Operating expenses:

Sales and marketing

  14      16      15      14      17   

General and administrative

  15      23      16      14      15   

Research and development

  9      10      14      13      17   

Amortization and depreciation

  2      3      2      2      3   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total operating expenses

      40          52          47      43      52   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Operating Income

  17      6      13      19      11   

Interest expense

                        

Other income / (expense), net

                        
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Income before provision for income taxes

  17      6      12      19      11   

Provision for income taxes

  8      2      4      8      4   
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Net income

  9   3   8   12   7
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

(1) Excludes amortization and depreciation.

The following table sets forth the components of cost of revenue as a percentage of revenue:

 

  Year Ended December 31,   Three Months Ended
March 31,
  2012      2013      2014      2014      2015   

Cost of SaaS and license revenue as a percentage of SaaS and license revenue

23% 20% 21% 20% 19%

Cost of hardware and other revenue as a percentage of hardware and other revenue

70% 81% 79% 77% 77%

Total cost of revenue as a percentage of total revenue

43% 42% 40% 38% 37%

 

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Comparison of Three Months Ended March 31, 2015 to March 31, 2014

Revenue

 

     Three Months Ended
March 31,
         % Change  
     2014         2015         
     (in thousands)       

Revenue

           

SaaS and license revenue

   $     25,204        $     31,955           27

Hardware and other revenue

     11,647          14,056           21
  

 

 

     

 

 

      

 

 

 

Total revenue

$ 36,851    $ 46,011      25

The increase in total revenue for the first quarter of 2015 compared to the first quarter of 2014 was the result of a $6.8 million, or 27%, increase in our SaaS and license revenue and a $2.4 million, or 21%, increase in our hardware and other revenue. The increase in our SaaS and license revenue was primarily attributable to growth in our subscriber base, including the revenue impact from subscribers we added in 2014 as we increased our subscriber base from 2.0 million subscribers on March 31, 2014 to 2.4 million subscribers on March 31, 2015. Hardware and other revenue increased $0.4 million from a 25% increase in the volume of video cameras sold, $0.4 million from a 118% increase in the volume of image sensors sold and $0.6 million from an increase in the volume of peripherals sold, including our new thermostat, compared to the same period in the prior year. Our Other segment contributed $1.0 million of the increase in hardware and other revenue from sale of hardware for our solutions.

Cost of Revenue

 

  Three Months Ended
March 31,
    % Change  
  2014     2015    
     (in thousands)       

Cost of revenue(1)

            

Cost of SaaS and license revenue

   $ 5,008         $ 6,033           20

Cost of hardware and other revenue

     8,993           10,776           20
  

 

 

      

 

 

      

 

 

 

Total cost of revenue

$     14,001    $     16,809      20

 

(1)  Excludes amortization and depreciation.

The increase in cost of revenue for the first quarter of 2015 compared to the first quarter of 2014 was the result of a $1.0 million, or 20%, increase in SaaS and license costs and a $1.8 million, or 20%, increase in hardware costs. The increase in SaaS and license costs related primarily to the growth in our subscribers driving an increase in the costs to make our SaaS platform available to our service providers and subscribers. The increase in hardware and other costs related primarily to our higher hardware and other revenue.

Sales and Marketing Expense

 

  Three Months Ended
March 31,
    % Change  
        2014                  2015             
    (in thousands)             

Sales and marketing

    5,096           7,916           55

% of total revenue

    14        17     

 

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The increase in sales and marketing expense for the first quarter of 2015 compared to the first quarter of 2014 was due to an increase in our sales force and our marketing team. Our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $1.5 million compared to the same period in the prior year. Our consulting fees increased $0.3 million to support our sales and marketing teams and for international expansion. Marketing and advertising expenses increased $0.3 million in the first quarter of 2015. Sales and marketing expense for 2015 also increased by $0.6 million primarily due to personnel and related expense for our Other segment. The number of employees in our sales and marketing teams increased from 111 at March 31, 2014 to 179 at March 31, 2015.

General and Administrative Expense

 

     Three Months Ended
March 31,
         % Change  
         2014                  2015             
     (in thousands)             

General and administrative

     5,220           7,070           35

% of total revenue

     14        15     

The increase in general and administrative expense for the first quarter of 2015 compared to the first quarter of 2014 was primarily due an increase in facilities and consultants to support our growth. Our rent expense increased $0.7 million in 2015 compared to 2014 due to new facilities. Professional services fees including accounting and audit services increased by $0.6 million. Our personnel and related costs for our Alarm.com segment, including salary, benefits and travel expenses, increased by $0.3 million compared to the same period in the prior year. These increases were partially offset by a $0.2 million decrease in stock-based compensation. General and administrative expense from our Other segment decreased by $0.1 million compared to the same period in the prior year as a result of a decrease in personnel and related costs and professional services fees. The number of employees in general and administrative functions increased from 38 at March 31, 2014 to 55 at March 31, 2015.

Research and Development Expense

 

     Three Months Ended
March 31,
    %
Change
 
        2014           2015       
     (in thousands)        

Research and development

     4,610        7,752        68

% of total revenue

     13     17  

The increase in research and development expense for the first quarter of 2015 compared to the first quarter of 2014 was due to an increase in employees in research and development functions. Our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $2.0 million compared to the same period in the prior year. In addition, research and development expenses including those performed by external consultants increased by $0.4 million compared to the first quarter of 2014. Research and development expense also increased by $0.7 million primarily due to personnel and related expense for our Other segment. The number of employees in research and development functions increased from 130 at March 31, 2014 to 203 at March 31, 2015.

 

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Amortization and Depreciation

 

     Three Months Ended
March 31,
    %
Change
 
        2014           2015       
     (in thousands)        

Amortization and depreciation

     806        1,338        66

% of total revenue

     2     3  

The increase in amortization and depreciation for the first quarter of 2015 compared to the first quarter of 2014 was due to an increase in depreciation for additional computer equipment and from the expansion of our headquarters to accommodate our growth in headcount, as well as the purchase of equipment for our network operations centers.

Interest Expense

 

     Three Months Ended
March 31,
    %
Change
 
        2014           2015       
     (in thousands)        

Interest expense

     (58     (42     NM %(1) 

% of total revenue

          

 

(1) Not meaningful.

The decrease in interest expense was due to lower average borrowings outstanding and a more favorable interest rate on our 2014 Facility than on our prior debt facility, which was replaced by our 2014 Facility in May 2014.

Other Income / (Expense), Net

 

    Three Months Ended
March 31,
   %
Change
 
       2014               2015            
    (in thousands)             

Other income / (expense), net

    10          7           NM %(1) 

% of total revenue

              

 

(1) Not meaningful.

Included in other income / (expense), net is interest income earned on notes receivable partially offset by losses of an equity method investment that is in the start-up phase of its operations. We expect that this investment will continue to incur losses in the near term.

Provision for Income Taxes

 

     Three Months Ended
March 31,
   

 

   %
Change
 
        2014                2015            
     (in thousands)             

Provision for income taxes

     2,797           2,050           (27 )% 

% of total revenue

     8        4     

Our effective tax rate increased from 39.6% in the first quarter of 2014 to 40.3% in the first quarter of 2015, primarily due to an increase in state income taxes.

 

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Comparison of Years Ended December 31, 2014 to December 31, 2013 and December 31, 2013 to December 31, 2012

Revenue

 

  Year Ended December 31,     % Change  
  2012     2013     2014     2013 vs.
    2012    
    2014 vs.
    2013    
 
     (in thousands)                        

Revenue

                     

SaaS and license revenue

   $     55,655         $ 82,620        $ 111,515           48        35

Hardware and other revenue

     40,820           47,602          55,797           17        17
  

 

 

      

 

 

     

 

 

      

 

 

      

 

 

 

Total revenue

$ 96,475    $     130,222    $     167,312      35   28

2014 Compared to 2013

The increase in total revenue from 2013 to 2014 was the result of a $28.9 million, or 35%, increase in our SaaS and license revenue and an $8.2 million, or 17%, increase in our hardware and other revenue. The increase in our SaaS and license revenue from 2013 to 2014 was primarily attributable to growth in our subscriber base, including the full year revenue impact from subscribers we added in 2013, as well as the increase of our subscriber base from 1.9 million subscribers on December 31, 2013 to 2.3 million subscribers on December 31, 2014. The increase in hardware and other revenue from 2013 to 2014 was primarily attributable to a $3.6 million increase in revenue from sales of our video cameras as a result of a 36% increase in the volume of video cameras sold and a $1.9 million increase in revenue from sales of our cellular radio modules as a result of an increase in volume.

2013 Compared to 2012

The increase in total revenue from 2012 to 2013 was primarily the result of a $27.0 million, or 48%, increase in our SaaS and license revenue and a $6.8 million, or 17%, increase in our hardware and other revenue. The increase in our SaaS and license revenue from 2012 to 2013 was primarily attributable to growth in our subscriber base, including the full year revenue impact from subscribers we added in 2012, as well as the increase of our subscriber base from 1.3 million subscribers on December 31, 2012 to 1.9 million subscribers on December 31, 2013. The increase in our hardware and other revenue from 2012 to 2013 was primarily attributable to a $4.6 million increase in revenue from sales of video cameras which resulted from a 48% increase in the volume of video cameras sold as well as an increase in the average price paid per video camera and to a lesser extent, an increase in the volume of sales of our cellular radio modules.

Cost of Revenue

 

  Year Ended December 31,     % Change  
  2012        2013        2014        2013 vs.
2012
    2014 vs.
2013
 
  (in thousands)              

Cost of revenue(1)

Cost of SaaS and license revenue

$ 12,681    $ 16,476    $ 23,007      30   40

Cost of hardware and other revenue

    28,773        38,482        44,172      34   15
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total cost of revenue

$ 41,454    $ 54,958    $ 67,179      33   22

 

(1)  Excludes amortization and depreciation.

 

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2014 Compared to 2013

The increase in cost of revenue from 2013 to 2014 was the result of a $6.5 million, or 40%, increase in SaaS and license costs and a $5.7 million, or 15%, increase in hardware costs. The increase in SaaS and license costs from 2013 to 2014 related primarily to the growth in our subscribers driving an increase in the costs to make our SaaS platform available to our service providers and subscribers. The increase in hardware and other costs from 2013 to 2014 related primarily to our higher hardware and other revenue.

2013 Compared to 2012

The increase in cost of revenue from 2012 to 2013 was primarily the result of a $9.7 million, or 34%, increase in hardware costs and a $3.8 million, or 30%, increase in SaaS and license costs. The increase in SaaS and license costs from 2012 to 2013 related primarily to the growth in our subscribers driving an increase in the costs to make our SaaS platform available to our service providers and subscribers, partially offset by lower average carrier costs per subscriber. The increase in hardware and other costs from 2012 to 2013 related primarily to our higher hardware and other revenue as well as slightly higher average cost per unit for our cellular radio modules due to our release of our 3G enabled cellular radios.

Sales and Marketing Expense

 

    Year Ended December 31,          % Change  
        2012                  2013                  2014              2013 vs.
      2012      
         2014 vs.
      2013      
 
    (in thousands)                        

Sales and marketing

  $ 13,232         $ 21,467         $ 25,836           62        20

% of total revenue

    14%           16%           15%             

2014 Compared to 2013

The increase in sales and marketing expense from 2013 to 2014 was due to an increase in our sales force and our marketing team, partially offset by a $1.7 million decrease in marketing and advertising expenses. Our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $3.5 million compared to the same period in the prior year. Sales and marketing expense for 2014 also increased by $2.0 million primarily due to personnel and related expense for our Other segment. The number of employees in our sales and marketing teams increased from 102 at December 31, 2013 to 159 at December 31, 2014.

2013 Compared to 2012

The increase in sales and marketing expense from 2012 to 2013 was primarily due to a $4.6 million increase in advertising and marketing costs from increased consumer marketing activities and additional agency fees, as well as additional sales and marketing efforts to support our service providers, including costs associated with industry conferences. In addition, due to an increase in the number of employees in our sales force, service provider and sales support and marketing teams from 67 at December 31, 2012 to 102 at December 31, 2013 to support these initiatives, our personnel and related costs, including salary, benefits, stock-based compensation and employee travel expense, increased $4.2 million over the same period. Sales and marketing expense in 2013 also increased by $0.5 million primarily due to personnel and related expense for our Other segment.

 

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General and Administrative Expense

 

  Year Ended December 31,     % Change  
      2012             2013             2014         2013 vs.
      2012      
    2014 vs.
      2013      
 
  (in thousands)              

General and administrative

$     14,099    $     29,928    $ 26,113      112   (13 )% 

% of total revenue

  15   23   16

2014 Compared to 2013

The decrease in general and administrative expense from 2013 to 2014 was primarily due to a decrease in legal expenses of $7.8 million compared to the prior year due to intellectual property litigation we initiated in 2013 and settled in early 2014. This decrease was partially offset by an increase in employees and consultants to support our growth. Our personnel and related costs for our Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $3.0 million compared to the same period in the prior year. Professional services fees including accounting and audit services increased by $1.4 million. Our rent expense increased $1.4 million in 2014 compared to 2013 due to new facilities to support our growth. General and administrative expense from our Other segment decreased by $3.2 million compared to the same period in the prior year as a result of a decrease in acquisition-related charges, offset by a $2.3 million increase in personnel and related costs. During the third quarter of 2013, we recorded a $11.3 million loss on goodwill and intangible asset impairment related to our EnergyHub acquisition, partially offset by a $5.8 million gain on the release of an acquisition related contingent liability. The number of employees in general and administrative functions increased from 34 at December 31, 2013 to 54 at December 31, 2014.

2013 Compared to 2012

The increase in general and administrative expense from 2012 to 2013 was primarily due to $11.2 million of legal expenses related to intellectual property litigation we initiated in 2013 and settled in early 2014 and a $11.3 million loss on goodwill and intangible asset impairment related to our EnergyHub acquisition, partially offset by a $5.8 million gain on the release of a contingent earn-out liability related to the acquisition. Exclusive of these amounts, general and administrative expense decreased by $0.8 million, from $14.1 million in 2012 to $13.3 million in 2013, primarily from decreases in fees to professionals to support our administrative functions and decreases in discretionary compensation. General and administrative expense in 2013 also increased by $1.9 million primarily due to personnel and related expense for our Other segment.

Research and Development Expense

 

  Year Ended December 31,     % Change  
  2012         2013     2014        2013 vs. 
2012   
    2014 vs. 
2013   
 
  (in thousands)              

Research and

development

$     8,944    $     13,085    $ 23,193      46   77

% of total revenue

  9   10   14

2014 Compared to 2013

The increase in research and development expense from 2013 to 2014 was primarily due to an increase in employees in research and development functions. Our personnel and related costs for our

 

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Alarm.com segment, including salary, benefits, stock-based compensation and travel expenses, increased by $5.7 million compared to the prior year. In addition, research and development performed by external consultants increased by $1.4 million compared to 2013. Research and development expense for 2014 also increased by $2.7 million primarily due to personnel and related expense for our Other segment. The number of employees in research and development functions increased from 117 at December 31, 2013 to 187 at December 31, 2014.

2013 Compared to 2012

The increase in research and development expense from 2012 to 2013 was primarily due to a $2.9 million increase in salary and related costs due to growth in the number of employees in research and development functions, which increased from 78 at December 31, 2012 to 117 at December 31, 2013. Research and development expense in 2013 also increased by $1.1 million primarily related to personnel and related expense for our Other segment.

Amortization and Depreciation Expense

 

    Year Ended December 31,         % Change  
        2012                 2013                 2014             2013 vs.
      2012      
        2014 vs.
      2013      
 
    (in thousands)                      
Amortization and depreciation   $     2,230        $     3,360        $     3,991          51       19

% of total revenue

    2%          3%          2%           

2014 Compared to 2013

The increase in amortization and depreciation expense from 2013 to 2014 was primarily due to a $1.1 million increase in depreciation expense primarily due to additional computer equipment and from the expansion of our headquarters to accommodate our growth in headcount, as well as the purchase of equipment for our network operations centers. This increase was partially offset by a $0.5 million decrease in amortization of intangibles.

2013 Compared to 2012

The increase in amortization and depreciation expense from 2012 to 2013 was primarily due to a $0.6 million increase in amortization expense related to customer related intangibles, developed technology and trade name intangibles arising from the acquisition of EnergyHub in May 2013, and a $0.4 million increase in leasehold improvement and computer depreciation from the expansion of our headquarters to accommodate our growth in headcount, as well as the purchase of equipment for our network operations centers.

Interest Expense

 

     Year Ended December 31,         % Change  
     2012          2013          2014         2013 vs.
      2012      
        2014 vs.
      2013      
 
     (in thousands)                      

Interest Expense

   $       (312)         $       (269      $       (196)          (14)%          (27 )% 

% of total revenue

                                   

 

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2014 Compared to 2013

The decrease in interest expense was due to lower average borrowings outstanding and a more favorable interest rate on our 2014 Facility.

2013 Compared to 2012

The decrease in interest expense was due to lower average borrowings outstanding during 2013.

Other Income / (Expense), Net

 

     Year Ended December 31,         % Change  
     2012          2013          2014         2013 vs.
      2012      
        2014 vs.
      2013      
 
     (in thousands)                      

Other Income / (Expense), Net

   $       5         $        57       $       (485)          NM %(1)        NM %(1) 

% of total revenue

                                   

 

  (1)  Not meaningful.

2014 Compared to 2013

The change in other income / (expense), net was due to $0.5 million in losses of an equity method investment that is in the start-up phase of its operations. We expect that this investment will continue to incur losses in the near term. We also recorded a $0.2 million impairment loss on a cost method investment and a $0.1 million loss on a derivative, which was offset by $0.3 million of interest income earned on note receivables.

2013 Compared to 2012

The increase in other income / (expense) was due to a minority investment by us in another business that is in the start-up phase of its operations. We expect that this investment will continue to incur losses. We did not have any such investments in 2012. In addition, we earned interest income of $0.1 million on notes receivable outstanding during 2013.

Provision for Income Taxes

 

    Year Ended December 31,         % Change  
        2012                 2013                 2014             2013 vs.
      2012      
        2014 vs.
      2013      
 
    (in thousands)                      

Provision for income taxes

  $     7,280        $     2,688        $     6,817          (63 )%        154

% of total revenue

    8%          2%          4%           

2014 Compared to 2013

Our effective tax rate decreased from 37% in 2013 to 34% in 2014, primarily due to the impact of research and development tax credits claimed for the current and prior years recorded in 2014. These decreases were partially offset by the non-recurring benefit provided by the net of the non-deductible goodwill impairment and the non-taxable gain on the release of an acquisition liability which were recorded in 2013.

 

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2013 Compared to 2012

Our effective tax rate decreased from 45% in 2012 to 37% in 2013, primarily due to non-deductible transaction costs incurred during 2012, accounting for approximately 6% of the 2012 effective tax rate. Items unfavorably impacting the 2013 rate included non-deductible goodwill impairment and non-deductible meals and entertainment, which were fully offset by a non-taxable gain on the release of an acquisition-related contingent liability.

Quarterly Results of Operations

The following tables show unaudited quarterly consolidated statement of operations data for each of our eight most recently completed quarters, as well as the percentage of revenue for each line item. In the opinion of management, the information for each of these quarters has been prepared on the same basis as our audited financial statements and include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair statement of financial information in accordance with generally accepted accounting principles. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of results that may be achieved in future periods, and operating results for quarterly periods are not necessarily indicative of operating results for a full year.

 

  Three Months Ended  
    June 30,  
2013
    September 30,  
2013
    December 31,  
2013
    March 31,  
2014
    June 30,  
2014
    September 30,  
2014
    December 31,  
2014
    March 31,  
2015
 
   

(in thousands)

(unaudited)

 

Revenue:

               

SaaS and license revenue

  $     19,442        $     21,863        $     23,736        $     25,204        $     26,975        $     28,473        $     30,863        $ 31,955    

Hardware and other revenue

    13,096          13,755          10,301          11,647          15,103          14,359          14,688          14,056    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    32,538          35,618          34,037          36,851          42,078          42,832          45,551          46,011    

Cost of revenue:

               

Cost of SaaS and license revenue

    3,851          4,595          4,340          5,008          5,669          6,002          6,328          6,033    

Cost of hardware and other revenue

    10,278          12,610          8,026          8,993          12,354          11,546          11,279          10,776    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    14,129          17,205          12,366          14,001          18,023          17,548          17,607          16,809    

Operating expenses:

               

Sales and marketing

    6,100          6,256          5,473          5,096          6,670          8,107          5,963          7,916    

General and administrative

    3,806          11,786          11,978          5,220          7,209          6,746          6,938          7,070    

Research and development

    2,928          3,615          3,867          4,610          5,764          6,094          6,725          7,752    

Amortization and depreciation

    885          1,064          783          806          850          1,058          1,277          1,338    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    13,719          22,721          22,101          15,732          20,493          22,005          20,903          24,076    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    4,690          (4,308)         (430)         7,118          3,562          3,279          7,041          5,126    

Interest expense

    (69)         (66)         (63)         (58)         (55)         (40)         (43)         (42)   

Other income / (expense), net

    2          74          (20)         10          —          (80)         (415)           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    4,623          (4,300)         (513)         7,070          3,507          3,159          6,583          5,091    

Provision for income taxes

    2,018          (2,170)         (210)         2,797          1,431          492          2,097          2,050    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 2,605        $ (2,130)       $ (303)       $ 4,273        $ 2,076        $ 2,667        $ 4,486        $ 3,041    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
  Three Months Ended  
  June 30,
2013
  September 30,
2013
  December 31,
2013
  March 31,
2014
  June 30,
2014
  September 30,
2014
  December 31,
2014
  March 31,
2015
 
 

(as a percentage of revenue)

(unaudited)

 

Revenue:

SaaS and license revenue

    60%        61%         70%         68%        64%        66%         68%         69%    

Hardware and other revenue

    40            39            30            32            36            34            32            31       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

        100                100                100                100                100                100            100            100       

Cost of revenue:

               

Cost of SaaS and license revenue

    12            13            13            14            13            14            14            13       

Cost of hardware and other revenue

    32            35            24            24            29            27            25            23       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    43            48            36            38            43            41            39            37       

Operating expenses:

               

Sales and marketing

    19            18            16            14            16            19            13            17       

General and administrative

    12            33            35            14            17            16            15            15       

Research and development

    9            10            11            13            14            14            15            17       

Amortization and depreciation

    3            3            2            2            2            2            3            3       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    42            64            65            43            49            51            46            52       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    14            (12)            (1)            19            8            8            15            11       

Interest expense

    —            —            —            —            —            —            —            —       

Other income / (expense), net

    —            —            —            —            —            —            —            —       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    14            (12)            (2)            19            8            7            14            11       

Provision for income taxes

    6            (6)            (1)            8            3            1            5            4       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    8%        (6)%        (1)%        12%        5%        6%         10%         7%    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Trends

Our quarterly SaaS and license revenue has increased sequentially for all periods presented driven by the effectiveness of our service providers’ ability to resell our services. We have historically experienced seasonality in our hardware and other revenue in the second and third quarters as a result of a small number of our largest service providers that use a summer sales business model where they substantially increase the size of their sales force and sell the majority of our services over the summer months.

The cost of hardware and other revenue relative to the cost of SaaS and license revenue is significantly higher and as a result total cost of revenue is higher during the second and third quarters due to higher sales volume in those quarters.

Our most significant operating expenses are employee-related costs of salaries, benefits and stock-based compensation which have historically increased over time as our headcount increases in line with growth in our core operations, our business acquisitions and our start-up initiatives. Total operating expenses have fluctuated over time and have been negatively impacted by $11.2 million of legal expenses related to intellectual property litigation we initiated in 2013 and settled in early 2014 and a $11.3 million impairment charge on goodwill and intangible assets related to our EnergyHub acquisition, partially offset by a $5.8 million gain on the release of an acquisition related contingent liability. These discrete items are included in general and administrative expenses and were incurred primarily in the third and fourth quarters of 2013. In addition, general and administrative expenses have increased and will continue to increase as we prepare for this offering and to be a public company. Our marketing expenses can also fluctuate as we contract with outside marketing firms and direct consumer marketing efforts from time to time. Our research and development expenses have increased over time and are primarily driven by employee-related costs as we continue to increase our headcount to support our innovation and our platform solutions.

 

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Segment Information

We have two reportable segments: Alarm.com and Other, as determined by the information that our chief executive officer, who is our chief operating decision maker, uses to make strategic goals and operating decisions. Our Alarm.com segment represents our cloud-based platform for the connected home and related connected home 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 99% of our revenue in each of 2012, 2013 and 2014 and the first quarter of 2014 and 96% of our revenue in the first quarter of 2015. Our Other segment is focused on researching and developing home and commercial automation and energy management products and services in adjacent markets. See Note 19 to our consolidated financial statements for additional information with respect to our reportable operating segments. The consolidated subsidiaries that make up our Other segment are in the investment stage and have incurred significant operating expenses relative to their revenue. Included in our Other segment in 2013 is an $11.3 million impairment of EnergyHub’s goodwill and intangible assets partially offset by a $5.8 million gain on the release of an acquisition-related contingent liability. Our Other segment grew from 9 employees at January 1, 2012 to 80 employees at March 31, 2015.

 

    Year Ended December 31,  
Segment
Information
  2012     2013     2014  

(in thousands)

    Alarm.com         Other             Total           Alarm.com           Other             Total             Alarm.com           Other             Total          

Revenue

  $96,372     $103        $96,475        $129,014        $1,208        $130,222      $ 164,957      $ 2,355      $ 167,312   

Operating expenses

  35,529     2,976        38,505        55,340        12,500        67,840        65,566        13,567        79,133   

 

  Three Months Ended March 31,   

Segment

Information

  2014        2015   

(in thousands)

    Alarm.com           Other           
 
  Intersegment  
Alarm.com
  
  
        Total              Alarm.com              Other           
 
  Intersegment  
Alarm.com
  
  
   
 
  Intersegment  
Alarm.com
  
  
        Total           

Revenue

  $36,527     $458        $(134)        $36,851        $44,865        $2,061        $(390)        $(525)        $46,011   

Operating expenses

  12,778     2,954        —          15,732        19,941        4,135        —          —          24,076   

Liquidity and Capital Resources

Working Capital, Excluding Deferred Revenue

The following table summarizes our cash, cash equivalents, accounts receivable and working capital, which we define as current assets minus current liabilities excluding deferred revenue, for the periods indicated:

 

    As of December 31,    

 

  As of March 31,  
    2013         2014         2015  
   

(in thousands)

 

Cash and cash equivalents

  $     33,583        $     42,572        $     39,189   

Accounts receivable, net

    16,579          17,259          16,790   

Working capital, excluding deferred revenue

    33,821          50,795          48,992   

Our cash and cash equivalents as of March 31, 2015 are available for working capital purposes. We do not enter into investments for trading purposes, and our investment policy is to invest any excess cash in short term, highly liquid investments that limit the risk of principal loss; therefore, our cash and cash equivalents are held in demand deposit accounts that generate very low returns.

 

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Working Capital and Capital Expenditure Requirements

We believe our existing cash and cash equivalents and our future cash flows from operating activities will be sufficient to meet our anticipated cash needs for at least the next 12 months. Over the next twelve months, we expect our capital expenditure requirements to be approximately $10 million to $12 million, including approximately $6 million to $8 million anticipated for leasehold improvements related to the relocation of our corporate headquarters. Our future working capital and capital expenditure requirements will depend on many factors, including the rate of our revenue growth, the amount and timing of our investments in human resources and capital equipment, future acquisitions and investments, and the timing and extent of our introduction of new solutions and platform and solution enhancements. To the extent our cash and cash equivalents and cash flows from operating activities are insufficient to fund our future activities, we may need to borrow additional funds through our bank credit arrangements or raise funds from public or private equity or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would likely have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing would be dilutive to our stockholders.

Sources of Liquidity

As of March 31, 2015, we had $39.2 million in cash and cash equivalents. We consider all highly liquid instruments purchased with an original maturity from the date of purchase of three months or less to be cash equivalents.

To date, we have principally financed our operations through cash generated by operating activities and, to a lesser extent, from the sale of capital stock. We have raised $27.9 million in net cash primarily from the sale of preferred stock and, to a lesser extent, from the proceeds of sales of common stock and stock option exercises.

In May 2014, we entered into a $50 million revolving credit facility, or the 2014 facility, with SVB, as administrative agent, and a syndicate of lenders to finance working capital and certain permitted acquisitions and investments. As of March 31, 2015, $6.7 million was outstanding, letters of credit in the amount of $2.0 million were utilized and $41.3 million remained available for borrowing under the 2014 facility. The 2014 facility contains various financial and other covenants that require us to maintain a maximum consolidated coverage ratio and a fixed charge coverage ratio, and limit our capacity to incur other indebtedness, liens, make certain payments including dividends, and enter into other transactions. The 2014 facility is secured by substantially all of our assets, including our intellectual property. As of March 31, 2015, we were in compliance with all covenants under the 2014 facility. The 2014 facility is discussed in more detail below under “—Debt Obligations.”

Historical Cash Flows

The following table sets forth our cash flows for 2012, 2013 and 2014, and the first quarters of 2014 and 2015:

 

    Year Ended December 31,         Three Months Ended
March 31,
 
    2012         2013         2014         2014         2015  
    (in thousands)  

Cash flows from operating activities

  $     16,123        $ 10,654        $     15,635        $ 5,936        $ 3,463   

Cash flows (used in) investing activities

    (2,808       (18,431       (6,288       (726       (6,736

Cash flows from / (used in) financing activities

    11,788          (560       (358       2,070          (110

 

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Operating Activities

Cash flows from operating activities have typically been generated from our net income and by changes in our operating assets and liabilities, particularly from accounts receivable and accounts payable, accrued expenses and other current liabilities, adjusted for non-cash expense items such as amortization of intangibles, and a reserve for hardware product returns.

For the first quarter of 2015, cash flows from operating activities were $3.5 million, a decrease of $2.5 million from the first quarter of 2014, as the result of a $1.2 million decrease in net income and a $1.1 million decrease in cash from operating assets and liabilities. Our inventory balance increased due to an increase in the quantity of video cameras needed to meet our fulfillment requirements and our other asset balance increased due to an increase in deposits for inventory and software licenses. The cash flows from operating activities consisted of cash generated by our $3.0 million of net income and $1.8 million of adjustments for non-cash items offset by $1.4 million of changes in operating assets and liabilities. Adjustments for non-cash items in the first quarter of 2015 included $1.3 million for amortization and depreciation, $0.9 million expense for deferred income taxes, $0.6 million for stock-based compensation, $0.4 million for reserve for product returns, and $0.3 million for provision for doubtful accounts. Adjustments for non-cash items in the first quarter of 2014 included $0.8 million for amortization and depreciation, $0.8 million for stock-based compensation, and $0.4 million for reserve for product returns.

For 2014, cash flows from operating activities were $15.6 million, an increase of $5.0 million from 2013, and resulted primarily from an increase in net income as adjusted for non-cash items. Our inventory balance increased due to an increase in the quantity of video cameras needed to meet our fulfillment requirements. As our revenue increased in 2014, our accounts receivable balance increased but to a lesser extent than accounts receivable balances grew in the prior period. The cash flows from operating activities consisted of cash generated by our $13.5 million of net income and $9.9 million of adjustments for non-cash items offset by $7.7 million of changes in operating assets and liabilities. Adjustments for non-cash items in 2014 included $4.0 million for amortization and depreciation, $1.9 million for reserve for product returns, $1.7 million benefit for deferred income taxes, $1.4 million for provision for doubtful accounts and $3.3 million for stock-based compensation.

For 2013, cash flows from operating activities were $10.7 million, a decrease of $5.5 million from 2012, and resulted primarily from cash generated by our $4.5 million of net income and $10.5 million of adjustments for non-cash items. This decrease in cash flows from operating assets and liabilities was primarily the result of increases in accounts receivable due to an increase in sales and higher balances of inventory and other long-term assets at year end. Adjustments for non-cash items included $3.4 million for amortization and depreciation, $1.8 million for reserve for product returns and $11.3 million impairment for goodwill and intangible assets from our EnergyHub acquisition, partially offset by a $5.8 million gain from the release of the contingent liability from the EnergyHub acquisition related earn-out in 2013.

For 2012, cash flows from operating activities were $16.1 million, an increase of $2.5 million compared to 2011, and resulted primarily from cash generated by our $8.9 million net income and $3.7 million of adjustments for non-cash items. Adjustments for non-cash items primarily consisted of $2.2 million for amortization and depreciation, $1.5 million of reserve for product returns and $1.8 million for stock-based compensation. Included in stock-based compensation in 2012 was a $1.4 million charge for the repurchase of common shares held by employees for amounts in excess of fair value as part of the Series B preferred stock transaction and related tender offer where we offered to repurchase a certain number of shares owned by stockholders, including employees who owned shares as a result of option exercises. The increase in cash from operating assets and liabilities was primarily from the increase in cash provided by working capital as the result of an increase in cash collections from service provider receivables and lower balance of inventory at year end.

 

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Investing Activities

Our investing activities include acquisitions, capital expenditures, minority equity investments in companies, notes receivable issued to companies with offerings complementary to ours, and payments made to license intellectual property. Our capital expenditures have primarily been for general business use, including leasehold improvements as we have expanded our office space to accommodate our growth in headcount, computer equipment used internally, and expansion of our network operations centers.

During the first quarter of 2015, our cash used in investing activities was $6.7 million primarily from the purchase of certain assets of HiValley Technology, Inc. for $5.6 million. Capital expenditures increased by $0.4 million, to $1.0 million in the first quarter of 2015 compared to the first quarter of 2014. We advanced $0.1 million for a loan to a service provider in each of the first quarters of 2014 and 2015 to provide capital to finance the creation of subscriber accounts.

During 2014, our cash used in investing activities totaled $6.3 million. Of that amount, we paid $6.9 million for capital expenditures and advanced $0.8 million in loans to a service provider and an installation partner to finance the creation of new subscriber accounts. We purchased certain assets of two businesses in 2014, Secure-i, Inc. and Horizon Analog, Inc., for $3.2 million. We also received a $2.0 million repayment of a note receivable from a platform partner and a $2.5 million distribution representing a partial return of a cost method investment.

During 2013, our cash used in investing activities totaled $18.4 million. Of that amount, we paid $8.1 million, net of cash received, to acquire EnergyHub. Additionally, we invested in companies that are complementary, consisting of $4.5 million in investments and $1.5 million in loans. We made these investments to create solutions that will leverage our cloud platform in adjacent markets, to invest in the development of devices that may connect to our cloud based platform, or in a service provider to finance the creation of new subscriber accounts. We also paid $2.3 million for capital expenditures.

During 2012, our cash used in investing activities totaled $2.8 million. Of that amount, we paid $1.3 million for capital expenditures, invested $0.3 million in a minority position in a company, used $0.3 million to advance a short-term loan to a company with offerings complementary to ours, net of repayments, and paid $1.0 million to acquire patent licenses.

Financing Activities

Cash generated by financing activities include proceeds from the sale of preferred stock and common stock, borrowings under credit facilities, and proceeds from the issuance of common stock from employee option exercises. Cash used in financing activities includes repurchases of preferred stock and common stock, dividends paid on our preferred stock and common stock, and repayments of debt under our credit facilities.

During the first quarter of 2015, our cash used in financing activities was $0.1 million. In connection with our preparation for our initial public offering, we paid $0.1 million of deferred offering costs, primarily for legal and accounting fees. During the first quarter of 2014, we received $1.5 million of proceeds from the early exercise of employee stock-based awards, received $0.4 million in proceeds from the exercise of vested employee stock options, recorded $0.7 million tax benefit from stock-based awards and repaid $0.5 million of borrowings under our term loan.

During 2014, our cash used in financing activities totaled $0.4 million. We utilized borrowings of $6.7 million under our new 2014 Facility to extinguish and repay $7.5 million of debt outstanding and paid $0.3 million of related debt issuance costs. In connection with our preparation for our initial public

 

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offering, we paid $2.4 million of deferred offering costs, primarily for legal and accounting fees. These payments were partially offset by $1.5 million of proceeds from the early exercise of employee stock-based awards. These proceeds are recorded as liabilities until the underlying equity award is vested as we have the ability to buy back unvested equity awards from employees that terminate service. We also received $0.6 million in proceeds from the exercise of vested employee stock options and recorded a $1.1 million tax windfall benefit from stock-based awards.

During 2013, net cash used in financing activities totaled $0.6 million, primarily consisting of $1.5 million in repayments on our prior credit facility, partially offset by $0.8 million in aggregate proceeds from sales of common stock and stock option exercises.

During 2012, net cash provided by financing activities totaled $11.8 million. We generated $136.5 million from the sale of Series B preferred stock. $113.7 million of the proceeds were used to repurchase preferred shares from existing stockholders, $2.2 million of the proceeds were used to repurchase common shares from existing stockholders, $2.6 million was used to pay transaction expenses and $18.0 million was used for general corporate purposes. Additional uses of cash for financing activities in 2012 principally included $8.6 million in dividends paid to holders of preferred stock and common stock, and $1.0 million for repayments on our prior credit facility, partially offset by $0.3 million in aggregate proceeds from sales of common stock and stock option exercises.

Debt Obligations

Prior Facility

In February 2010, we entered into a working line of credit through a loan and security agreement with SVB. The loan agreement was first amended in April 2011, and amended a second time in December 2011, which we refer to as the amended loan agreement. Under the terms of the amended loan agreement, we could borrow the lesser of 80% of the face value of our eligible accounts receivable plus 50% of our unrestricted cash and cash equivalents, or $10.0 million. The line of credit accrued interest at a rate equal to SVB’s prime rate when our fixed charge coverage ratio was equal to or greater than 2.50 to 1.00, or SVB’s prime rate plus 0.50% when our fixed charge coverage ratio was less than 2.50 to 1.00. The amended loan agreement required us to maintain a minimum liquidity ratio of 1.00:1.00, as well as a fixed charge coverage ratio of not less than 1.50:1.00. We have made no borrowing against the line of credit and we were in compliance with each of these covenants as of December 31, 2013 and March 31, 2014. This facility was extinguished and repaid in May 2014.

In December 2011, when we entered into the amended loan agreement with SVB, we also put a term loan facility in place and borrowed $10.0 million under the term loan facility that is being repaid in 60 monthly installments of principal and accrued interest. The outstanding principal balance on the term loan accrued interest at a rate equal to either SVB’s prime rate when our fixed charge coverage ratio was equal to or greater than 2.50 to 1.00, or SVB’s prime rate plus 0.75% when our fixed charge coverage ratio was less than 2.50 to 1.00. The term loan facility had a maturity date of December 1, 2016. As of December 31, 2013, the outstanding balance under the term loan facility was $7.5 million. This facility was extinguished and repaid in May 2014.

The amended loan agreement required us to comply with certain financial and non-financial covenants, including a requirement to maintain a minimum liquidity ratio of 1.00:1.00, as well as a fixed charge coverage ratio of not less than 1.50:1.00, and we were in compliance with each of these covenants as of December 31, 2013 and March 31, 2014. Our line of credit and term loan facility with SVB was secured by substantially all of our assets, including intellectual property. This facility was extinguished and repaid in May 2014.

 

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2014 Facility

On May 8, 2014, we repaid all of the outstanding principal and interest under the amended loan agreement and replaced this facility with a $50.0 million revolving credit facility, or the 2014 Facility, with SVB, as administrative agent, and a syndicate of lenders. We utilized $6.7 million under this facility to repay in full our indebtedness under the prior facility. The 2014 Facility includes an option to increase the borrowing capacity 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 intellectual property. The 2014 Facility matures in May 2017.

The outstanding principal balance on the 2014 Facility accrues interest at a rate equal to either (1) the Eurodollar Base Rate, or LIBOR, plus an applicable margin based on 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. During the first quarter of 2015, the effective interest rate on the 2014 Facility was 2.47%.

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. As of March 31, 2015, we were in compliance with all covenants under the 2014 Facility.

Contractual Obligations

The following table discloses aggregate information about our material contractual obligations and periods in which payments were due as of December 31, 2014. Future events could cause actual payments to differ from these estimates.

 

Contractual Obligations

Total   Less Than
1 Year
  1 to 3 Years   3 to 5 Years   More Than
5 Years
 
Debt:   (in thousands)  

Principal payments

      $   6,700              $   —              $   6,700              $   —              $   —       

Interest payments

    391            166            225            —            —       

Unused line fee payments

    204            87            117            —            —       

Operating lease commitments

    33,511            2,220            6,313            5,863            19,115       

Other long-term liabilities

    577            —            508            69            —       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

    $   41,383            $   2,473            $   13,863            $   5,932            $   19,115       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty.

 

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As of May 22, 2015, we issued letters of credit under our 2014 Facility to our manufacturing partners in the amount of $2.8 million.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Seasonality

We have historically experienced seasonality in our revenue as a result of a subset of our service providers who use a summer sales business model where they substantially increase the size of their sales force and sell the majority of our connected home solutions over the summer months. Because a small number of our largest service providers have utilized a summer business model in the past, our revenue has generally been higher in the second and third quarters of the year. As we continue to expand our service provider base and add new service providers who do not rely heavily on a summer business model, we generally expect these seasonal trends to decline and become less prominent in the future.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. Our most critical accounting policies are summarized below. See Note 2 to our consolidated financial statements for a description of our other significant accounting policies.

Revenue Recognition and Deferred Revenue

We derive our revenue from two primary sources: the sale of software-as-a-service, or SaaS, cloud-based connected home platform and the sale of hardware products that enable our solutions. We sell our hardware and platform solutions to service providers that resell our hardware and solutions to home and business owners, whom we refer to as our subscribers. We also sell our hardware to distributors who resell the hardware to service providers. We enter into contracts with our service providers that establish pricing for access to our connected home platform solutions and for the sale of hardware. These contracts typically have an initial term of one year, with subsequent renewal terms of one year. Our service providers typically enter into underlying contracts with our subscribers, which our service providers have indicated range from three to five years in length.

Our hardware includes cellular radio modules that enable access to our cloud-based platform, as well as video cameras, image sensors and other peripherals. Our service providers purchase our hardware in anticipation of installing the hardware in a home or business when they create a new subscriber account, or for use in an existing subscriber’s property. The purchase of hardware occurs in a transaction that is separate and typically in advance of the purchase of our platform services. Service

 

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providers transact with us to purchase our platform solutions and resell our solutions to a new subscriber, or to upgrade or downgrade the solutions of an existing subscriber, at which time the subscriber’s access to our platform solutions is enabled and the delivery of the services commences.

We recognize revenue with respect to our solutions when all of the following conditions are met:

 

    Persuasive evidence of an arrangement exists;

 

    Delivery to the customer, which may be either a service provider, distributor or a subscriber; has occurred or service has been rendered;

 

    Fees are fixed or determinable; and

 

    Collection of the fees is reasonably assured.

We consider a signed contract with a service provider to be persuasive evidence that an agreement exists, and the fees to be fixed and determinable if the fees are contractually agreed to with our service providers. Collectability is evaluated based on a number of factors, including a credit review of new service providers, and the payment history of existing service providers. If collectability is not reasonably assured, revenue is deferred until collection becomes reasonably assured, which is generally upon the receipt of payment.

SaaS and License Revenue

We generate the majority of our SaaS and license revenue primarily from monthly fees charged to our service providers sold on a per subscriber basis for access to our cloud-based connected home platform and the related solutions. Our fees per subscriber vary based upon the service plan and features utilized. 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 renewal terms of one year.

Under negotiated terms in our contractual arrangements with our service providers, we are entitled to, and recognize revenue based on a monthly fee that is billed in advance of the month of service. We have demonstrated that we can sell our SaaS offering on a stand-alone basis, as it can be sold separately from hardware and activation services. As there is no minimum required initial service term nor is there a stated renewal term in our contractual arrangements, we recognize revenue over the period of service, which is monthly. Our service providers typically incur and pay the same monthly fee per subscriber account for the entire period a subscriber account is active.

We offer multiple service level packages for our solutions, including a range of solutions and a range of a la carte add-ons for additional features. The fee paid by our 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 utilize tiered pricing plans where our service providers may receive prospective pricing discounts driven by volume.

We also generate SaaS and license revenue from the fees paid to us when we license our intellectual property to service providers on a per customer basis for use of our patents. In addition, in some markets, our EnergyHub subsidiary sells its demand response software with an annual service fee, with pricing based on the number of subscribers or amount of aggregate electricity demand made available for a utility’s or market’s control.

 

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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 and, to a lesser extent, the sale of other devices, including video cameras, image sensors and peripherals. We recognize hardware and other revenue when the hardware is received by our service provider or distributor, net of a reserve for estimated returns. Our terms for hardware sales to our service providers and distributors typically allow for returns for up to one year. We apply our estimate as a percentage of sales monthly as a reserve against revenue and currently reserve approximately 3–4% of sales to account for this provision. We established this reserve estimate based on our historical data for actual hardware returns. We evaluate our hardware reserve on a quarterly basis or if there is an indication of a significant changes in the pattern of returns. Historically, our returns of hardware have not significantly differed from our estimated reserve.

Hardware and other revenue also includes activation fees charged to service providers for activation of a new subscriber account on our platform. Our service providers use services on our platform to assist in the installation of our solutions in a subscriber’s property. This installation marks the beginning of the service period on our platform and on occasion, we earn activation revenue for fees charged for this service. The activation fee is non-refundable, separately negotiated and specified in our contractual arrangements with our service providers and is charged to the service provider for each subscriber activated on our platform under such arrangement. Activation fees are not offered on a stand-alone basis separate from our SaaS offering and are billed and received at the beginning of the arrangement. We record activation fees initially as deferred revenue and we recognize these fees ratably over the expected term of the subscribers’ account which we estimate is ten years based on our annual attrition rate. The portion of these activation fees included in current and long-term deferred revenue as of our balance sheet date represents the amounts that will be recognized ratably as revenue over the following twelve months, or longer as appropriate, until the ten-year expected term is complete. Hardware and other revenue also includes fees paid by service providers for our marketing services.

Stock-Based Compensation

Stock options awarded to employees, directors and non-employee third parties are measured at fair value at each grant date. We consider what we believe to be comparable publicly traded companies, discounted free cash flows, and an analysis of our enterprise value in estimating the fair value of our common stock. 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. Options subject to service-based vesting generally vest 20% one year from the date of the grant, and monthly thereafter, over a period of five years.

Stock-based compensation cost is measured on the grant date, based on the estimated fair value of the award using a Black-Scholes pricing model and recognized as an expense over the employee’s requisite service period on an accelerated attribution basis. We recorded stock-based compensation expense of $1.8 million, $0.8 million and $3.3 million for 2012, 2013 and 2014. We recorded stock-based compensation expense of $0.8 and $0.6 million for the first quarters of 2014 and 2015. At December 31, 2014, we had $3.1 million of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to stock option grants that will be recognized over a weighted-average period of 2.2 years. At March 31, 2015, we had $2.6 million of total unrecognized stock-based compensation expense, net of estimated forfeitures, related to stock option grants that will be recognized over a weighted-average period of 2.1 years. We expect to continue to grant stock options in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

 

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We account for stock-based compensation arrangements with non-employees using a fair value approach. The fair value of these options is measured using the Black-Scholes option pricing model reflecting the same assumptions as applied to employee options in each of the reported periods, other than the expected life, which is assumed to be the remaining contractual life of the option. The compensation costs of these arrangements are subject to remeasurement over the vesting terms as earned.

Key Assumptions

Our Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected volatility of the price of our common stock, the expected term of the option, risk-free interest rates and the expected dividend yield of our common stock. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

In determining the fair value of stock options granted, the following assumptions were used in the Black-Scholes option pricing model for awards granted in the periods indicated. There were no stock options granted during the first quarter of 2015.

 

  Year Ended
December 31,
  Three Months Ended
March 31,
 
          2012                   2013                   2014           2014   2015  

Volatility

  53.2 – 54.7   44.1 – 47.6   47.2 – 49.6   49.6  

Expected term (years)

  6.3      3.3 – 6.3      4.0 – 5.7      5.6        

Risk-free interest rate

  0.8 – 0.9 %   0.9 – 1.9   1.4 – 1.9   1.7  

Dividend rate

                        

Common Stock Valuations

The fair value of our common stock underlying stock options has historically been determined by our board of directors, with assistance from management, based upon information available at the time of grant. Given the absence of a public trading market for our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid, our board of directors has exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock at each grant date. These factors included:

 

    contemporaneous third-party valuations of our company and our securities;

 

    our results of operations and other financial metrics;

 

    our stage of development and business strategy;

 

    the financial condition and operating results of publicly-owned companies with similar lines of business and their historical volatility;

 

    the prices of shares of our preferred stock sold to investors in arm’s length transactions, and the rights, preferences and privileges of our preferred stock relative to our common stock;

 

    external market conditions, both in the United States and globally, that could affect companies in the technology sector;

 

    the likelihood of a liquidity event such as an initial public offering, a merger or the sale of our company; and

 

    the current lack of marketability of our common stock as a private company.

 

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The per share estimated fair value of our common stock in the table below represents the determination by our board of directors of the fair value of our common stock as of the date of grant, taking into consideration the various objective and subjective factors described above, including the conclusions, if applicable, of valuations of our common stock. There are significant judgments and estimates inherent in these valuations. If we had made different assumptions than those described below, the fair value of the underlying common stock and amount of our stock-based compensation expense could have differed. Following the closing of this initial public offering, the fair value per share of our common stock for purposes of determining stock-based compensation will be the closing price of our common stock as reported on the applicable grant date.

Based on an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, the intrinsic value of stock options outstanding at March 31, 2015 was $         million, of which $         million and $         million related to stock options that were vested and unvested, respectively, at that date.

The following table summarizes stock options granted from January 1, 2013 through the date of this prospectus:

 

Grant Date Number of
Shares of
Common Stock
Underlying
Options
Granted
  Exercise
Price
Per
Share of
Common
Stock
  Estimated
Fair
Value Per
Share of
Common
Stock (1)
 

May 15, 2015

  482,276    $ 11.55    $ 11.55   

December 3, 2014

  37,200      10.71      10.71   

August 27, 2014

  83,750      9.91      9.91   

August 27, 2014

  5,000      4.00      9.91   

April 22, 2014

  102,000      8.08      8.08   

February 26, 2014

  38,850      4.00      8.08   

December 30, 2013

  380,000      4.00      7.18   

December 23, 2013

  664,450      4.00      7.18   

May 22, 2013

  270,000      2.95      4.35   

 

  (1)  In the spring of 2014, we undertook retrospective valuations of the fair value of our common stock as of the grant dates and the values reflected in this column represent our estimated fair value per share of common stock in accordance with such retrospective valuations.

Contemporaneous Valuation Approaches

In valuing our common stock, our board of directors determined the equity value of our business by utilizing a combination of two valuation approaches, an income approach and a market approach.

The income approach estimates the fair value of a company based on the present value of the company’s future estimated cash flows and the value of the company beyond the forecast period. These future values are discounted to their present values to reflect the risks inherent in the company achieving these estimated cash flows. Significant inputs of the income approach (in addition to our estimated future cash flows themselves) include the discount rate, the long-term growth rate assumed in the terminal value and the normalized long-term operating margin. To estimate the value of cash flows after the defined projection period, a terminal value, which represents the value of the estimated perpetual cash flows, was also calculated. The horizon value is based upon a perpetuity growth model whereby it is assumed that free cash flows grow into perpetuity at varying declining rates over a set period before stabilizing at a long-term growth rate.

The market approach estimates the fair value of a company by applying market multiples of comparable publicly traded companies in the same industry or similar lines of bus