Acquisitions

Subsequent Events

Connect and Piper business units from Icontrol Networks

On March 8, 2017, in accordance with an asset purchase agreement we entered into on June 23, 2016, we acquired certain assets and assumed certain liabilities of the Connect line of business of Icontrol Networks, Inc., or Icontrol, and all of the outstanding equity interests of the two subsidiaries through which Icontrol conducts its Piper line of business. Connect provides an interactive security and home automation platform for ADT Pulse® and several other service providers. Piper, designs, produces and sells an all-in-one video and home automation hub. The addition of new technology infrastructure, talent, key relationships and hardware devices is expected to help accelerate our development of intelligent, data-driven smart home and business services. These two business units constituted a business. The cash consideration was $148.5 million, after the estimated working capital adjustment, of which $14.5 million was deposited in escrow in accordance with the asset purchase agreement for indemnifications obligations of Icontrol stockholders and the final determination of closing working capital. We used approximately $81.5 million of cash on hand and drew approximately $67.0 million under our senior line of credit with Silicon Valley Bank and a syndicate of lenders to fund the Acquisition. The purchase price allocation was not finalized as of the filing date of this Annual Report.

ObjectVideo

On January 1, 2017, in accordance with an asset purchase agreement, we acquired certain assets of ObjectVideo, Inc., or ObjectVideo, that constituted a business now called ObjectVideo Labs, LLC, or ObjectVideo Labs, including products, technology portfolio and engineering team. ObjectVideo is a pioneer in the fields of video analytics and computer vision with technology that extracts meaning and intelligence from video streams in real-time to enable object tracking, pattern recognition and activity identification. We anticipate that the ObjectVideo Labs engineering team's capabilities and expertise will accelerate our research and development of video services and video analytic applications. In addition, ObjectVideo Labs will continue to perform advanced research and engineering services for the federal government. The consideration included $6.0 million of cash paid at closing. The purchase price allocation was not finalized as of the filing date of this Annual Report.

SecurityTrax Acquisition

On March 13, 2015, in accordance with an asset purchase agreement, we completed our purchase of certain assets of HiValley Technology, Inc., or SecurityTrax, that constituted a business. SecurityTrax is a provider of SaaS-based, customer relationship management software tailored for security system dealers. The consideration included $5.6 million cash paid at closing, $0.4 million of cash not yet paid and established a contingent liability of $0.7 million for earn-out considerations to be paid to the former owners. The agreement also contains $2.0 million in potential payments associated with the continued employment of key employees through March 31, 2018 that will be accounted for as compensation expense over the period. We included the results of SecurityTrax’s operations since its acquisition date in the Alarm.com segment. During 2015, we paid $0.2 million of the cash not yet paid and the remaining $0.2 million balance was included in other current liabilities on our consolidated balance sheet as of December 31, 2015. During 2016, we paid the remaining $0.2 million of the cash not yet paid balance and there was no outstanding balance as of December 31, 2016.

The table below sets forth the consideration paid to SecurityTrax’s sellers and the estimated fair value of the tangible and intangible net assets acquired (in thousands):



	2015
Calculation of Consideration:
Cash paid, net of working capital adjustment	$	5,612
Cash not yet paid	400
Contingent consideration liability	700
Total consideration	$	6,712
Estimated Tangible and Intangible Net Assets:
Current assets	$	14
Customer relationships	1,699
Developed technology	1,407
Trade name	271
Current liabilities	(7		)
Goodwill	3,328
Total estimated tangible and intangible net assets	$	6,712

Goodwill of $3.3 million reflects the value of acquired workforce and expected synergies from pairing SecurityTrax's solutions to security service provider partners with our offerings. The goodwill will be deductible for tax purposes. We developed our estimate of the fair value of intangible net assets using a multi-period excess earnings method for customer relationships, the relief from royalty method for the developed technology, replacement cost method for the developed technology home page and the relief from royalty method for the trade name. The purchase price allocation presented above was finalized in 2015.

Fair Value of Net Assets Acquired and Intangibles

In accordance with ASC 805, the assets and liabilities of SecurityTrax we acquired were recorded at their respective fair values as of March 13, 2015, the date of the acquisition.

Customer Relationships

We recorded the customer relationships intangible separately from goodwill based on determination of the length, strength and contractual nature of the relationship that SecurityTrax shared with its customers. We valued two groups of customer relationships using the multi-period excess earnings method, an income approach. We used several assumptions in the income approach, including revenue growth, operating expenses, charge for contributory assets, and a 22.5% discount rate used to calculate the present value of the cash flows. For the second group of customer relationships, we used the same assumptions in addition to a customer retention rate of 90%. We are amortizing the customer relationships, valued at $1.7 million, on a straight-line basis over a weighted-average estimated useful life of seven years.

Developed Technology

Developed technology recorded separately from goodwill consists of intellectual property such as proprietary software used internally for revenue producing activities. SecurityTrax’s proprietary software is offered for sale on a SaaS hosted basis to customers. We valued the developed technology by applying the relief from royalty method, an income approach. We used several assumptions in the relief from royalty method, which included revenue growth, a market royalty rate of 25% and a 22.5% discount rate used to the calculate the present value of the cash flows. An additional component of the developed technology which we refer to as the "home page" organized customer data and functioned as the billing and administration tool. We valued the home page component by applying the replacement cost model, a cost approach. We used several assumptions in the replacement cost approach, which included analyzing costs that a company would expect to incur to recreate an asset of equivalent utility. In addition, we made an adjustment for developer’s profit of 30.4% which brought the asset to fair value on an exit-price basis. We are amortizing the developed technology, valued at $1.4 million, on a straight-line basis over a weighted-average estimated useful life of eight years.

Contingent Consideration Liability

The amount of contingent consideration liability to be paid, up to a maximum of $2.0 million, to the former owners will be determined based on revenue and EBITDA of the acquired business for the year ended December 31, 2017. We estimated the fair value of the contingent consideration liability by using a Monte Carlo simulation model for determining projected revenue by using an expected distribution of potential outcomes. The fair value of contingent consideration liability is calculated with thousands of projected revenue outcomes, the results of which are averaged and then discounted to estimate the present value. We used several assumptions including an 8.45% discount rate and a 7.5% revenue risk adjustment. We recorded the contingent consideration, valued at $0.7 million, as a contingent consideration liability in other liabilities in our consolidated balance sheet. At each reporting date, we remeasure the liability and record any changes in general and administrative expense, until we pay the contingent consideration, if any, in the first quarter of 2018. The discount rate is based on the composite B rated yield as of the valuation date and has not changed, except for the additional discount rate for the difference between composite B rated yield and the CCC credit rating, which has increased from 3.8% to 9.19% in 2015. As of December 31, 2016, we adjusted the fair value of the contingent consideration liability to zero using the same method and an updated forecast with a 8.85% discount rate and a 0.9% revenue risk adjustment, which resulted in $0.2 million of income for the year ended December 31, 2016.

Secure-i Acquisition

On December 8, 2014, in accordance with an asset purchase agreement, we completed our purchase of certain assets of Secure-i, Inc., or Secure-i, that constituted a business. Secure-i is a provider of internet based remote video hosting services including off-site storage, viewing and management from web-based browsers and mobile applications. Total consideration included $2.6 million in cash and $0.3 million in cash not yet paid. We recorded $0.7 million of intangibles and $2.2 million of goodwill in connection with the acquisition. During the second quarter of 2015, we finalized the working capital adjustment and recorded an additional $20,000 of goodwill. We included the results of Secure-i’s operations since its acquisition date in the Alarm.com segment. During 2015, we paid $145,000 of the cash not yet paid and the remaining $145,000 balance as of December 31, 2015 was included in other current liabilities on our consolidated balance sheet. During 2016, we paid the remaining $145,000 of the cash not yet paid balance and there was no outstanding balance as of December 31, 2016.

The table below sets forth the consideration paid to Secure-i’s sellers and the estimated fair value of the tangible and intangible net assets received in the acquisition (in thousands):



	2014
Calculation of Consideration:
Cash paid, net of working capital adjustment	$	2,610
Cash not yet paid	290
Total consideration	$	2,900

Estimated Tangible and Intangible Net Assets:
Current assets	$	16
Other long-term assets	43
Customer relationships	208
Developed technology	228
Other intangibles	262
Liabilities	(59		)
Goodwill	2,202
Total estimated tangible and intangible net assets	$	2,900

Goodwill of $2.2 million reflects the value of acquired workforce and expected synergies between Secure-i's commercial video services and our offerings. The goodwill will be deductible for tax purposes. Our estimate of the fair value of tangible and intangible net assets was developed using a multi-period excess earnings method for customer relationships and the replacement cost method for developed technology. Included in other intangibles is a vendor relationship valued using the relief from royalty method and best practices materials valued using replacement cost method and a trade name valued using the relief from royalty method.

Fair Value of Net Assets Acquired and Intangibles

In accordance with ASC 805, the assets and liabilities of Secure-i we acquired were recorded at their respective fair values as of December 8, 2014, the date of the acquisition.

Customer Relationships

The customer relationships intangible was recorded separate from goodwill based on determination of the length, strength and contractual nature of the relationship that Secure-i shared with its customers. We valued this customer relationship information using the multi-period excess earnings method, an income approach. We used several assumptions in the income approach, including revenue growth, a customer retention rate of 90%, operating expenses, charge for contributory assets, and a 20% discount rate used to calculate the present value of the cash flows. The customer relationships, valued at $0.2 million, are being amortized on a straight-line basis over the estimated useful life of 12 years.

Developed Technology

Horizon Analog Acquisition

On December 10, 2014, in accordance with an asset purchase agreement, we completed our purchase of certain assets of Horizon Analog, Inc., or Horizon Analog, that constituted a business. Horizon Analog is a producer of research that focuses on cost-effective collection and analysis of data relating to energy usage and consumer behavior and energy disaggregation. Total consideration included $0.6 million in cash and $0.1 million in cash not yet paid. We recorded less than $0.1 million of property and equipment and $0.7 million of goodwill in connection with the acquisition, which reflects the acquired workforce and synergies expected from combining our operations with those of Horizon Analog. The goodwill is deductible for tax purposes. We included the results of Horizon Analog’s operations since its acquisition date in the Alarm.com segment . During 2015, we paid $72,000 of the cash not yet paid and the remaining $72,000 balance as of December 31, 2015 was included in other current liabilities on our consolidated balance sheet. During 2016, we paid the remaining $72,000 of the cash not yet paid balance and there was no outstanding balance as of December 31, 2016.

Unaudited Pro Forma Information

The following pro forma data is presented as if (1) Secure-i and Horizon Analog were included in our historical consolidated statements of operations beginning January 1, 2013 and (2) SecurityTrax was included in our historical consolidated statements of operations beginning January 1, 2014. These pro forma results do not necessarily represent what would have occurred if all the business combinations had taken place on January 1, 2013 and 2014, as applicable, nor do they represent the results that may occur in the future.

This pro forma financial information includes our historical financial statements and those of our business combinations with the following adjustments: we adjusted the pro form adjustments for income taxes and we adjusted for amortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2013 and 2014, as applicable.

The pro forma adjustments were based on available information and upon assumptions that we believe are reasonable to reflect the impact of these acquisitions on our historical financial information on a supplemental pro forma basis, as follows (in thousands):



	Pro forma Year Ended December 31,
	2015		2014
Revenue	$	209,110	$	168,921
Net income	11,722		12,476

Business Combinations in Operations

The operations of each of the business combinations discussed above were included in the consolidated financial statements as of each of their respective acquisition dates. The following table presents the revenue and earnings of the business combinations in the year of acquisition as reported within the consolidated financial statements for the years ended December 31, 2015 for SecurityTrax and December 31, 2014 for Secure-i and Horizon Analog (in thousands):



	Year Ended December 31,
	2015			2014
Revenue	$	986		$	41
Net loss	(436		)	(140		)