Stock-Based Compensation

Stock-based compensation expense is included in the following line items in the accompanying condensed consolidated statements of operations (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Sales and marketing	$	65	$	151	$	178	$	292
General and administrative	755		236		1,324		463
Research and development	1,095		555		1,726		1,039
Total stock-based compensation expense	$	1,915	$	942	$	3,228	$	1,794

The following table summarizes the components of non-cash stock-based compensation expense (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Stock options and assumed options	$	1,083	$	923	$	2,066	$	1,757
Restricted stock units	805		—		1,093		—
Restricted stock awards	—		—		19		—
Employee stock purchase plan	27		19		50		37
Total stock-based compensation expense	$	1,915	$	942	$	3,228	$	1,794
Tax benefit from stock-based awards	$	4,369	$	165	$	5,586	$	459

2015 Equity Incentive Plan

We issue stock options pursuant to our 2015 Equity Incentive Plan, or the 2015 Plan. The 2015 Plan allows for the grant of incentive stock options to employees and for the grant of nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, or RSUs, performance-based stock awards, and other forms of equity compensation to our employees, directors and non-employee directors and consultants.

In June 2015, our board of directors adopted and our stockholders approved our 2015 Plan pursuant to which we initially reserved a total of 4,700,000 shares of common stock for issuance under the 2015 Plan, which included shares of our common stock previously reserved for issuance under our Amended and Restated 2009 Stock Incentive Plan, or the 2009 Plan. The number of shares of common stock reserved for issuance under the 2015 Plan will automatically increase on January 1^st each year, for a period of not more than ten years, commencing on January 1, 2016 through January 1, 2024, by 5% of the total number of shares of common stock outstanding on December 31^st of the preceding calendar year, or a lesser number of shares as may be determined by our board of directors. As a result of the adoption of the 2015 Plan, no further grants may be made under the 2009 Plan. As of June 30, 2017, 8,141,878 shares remained available for future grant under the 2015 Plan.

Stock Options

Stock options under the 2015 Plan have been granted at exercise prices based on the closing price of our common stock on the date of grant. Stock options under the 2009 Plan were granted at exercise prices as determined by our board of directors to be the fair market value of our common stock. Our stock options generally vest over a five-year period and each option, if not exercised or forfeited, expires on the tenth anniversary of the grant date.

Certain stock options granted under the 2015 Plan and previously granted under the 2009 Plan may be exercised before the options have vested. Unvested shares issued as a result of early exercise are subject to repurchase by us upon termination of employment or services at the original exercise price. The proceeds from the early exercise of stock options are initially recorded as a current liability and are reclassified to common stock and additional paid-in capital as the awards vest and our repurchase right lapses. There were 21,317 and 29,835 unvested shares of common stock outstanding subject to our right of repurchase as of June 30, 2017 and December 31, 2016. We repurchased 575 unvested shares of common stock related to early exercised stock options in connection with employee terminations during the three and six months ended June 30, 2017, as compared to 1,924 unvested shares repurchased during the three and six months ended June 30, 2016. As of June 30, 2017 and December 31, 2016, we recorded $0.1 million and $0.2 million in accounts payable, accrued expenses and other current liabilities on our condensed consolidated balance sheets for the proceeds from the early exercise of the unvested stock options.

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 actual forfeitures, in which compensation cost for each vesting tranche in an award is recognized ratably from the service inception date to the vesting date for that tranche.

We value our stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the risk-free interest rate, expected term, expected stock price volatility and dividend yield. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistent with the expected term of our stock options. The expected term represents the period of time the stock options are expected to be outstanding and is based on the “simplified method.” Under the “simplified method,” the expected term of an option is presumed to be the mid-point between the vesting date and the end of the contractual term. We use the “simplified method” due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected term of the stock options. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected term of the stock options.

There were 237,550 and 576,300 stock options granted during the six months ended June 30, 2017 and 2016. We declared and paid dividends in June 2015 in anticipation of our IPO, which we closed on July 1, 2015. We do not expect to declare or pay dividends on a recurring basis. As such, we assume that the dividend rate is zero.

The following table summarizes the assumptions used for estimating the fair value of stock options granted :



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Volatility	44.5 - 46.3%		48.3 - 50.6%		44.5 - 47.2%		48.3 - 50.6%
Expected term	6.3 years		5.6 - 6.3 years		6.3 years		5.6 - 6.3 years
Risk-free interest rate	2.0 - 2.1%		1.3 - 1.4%		2.0 - 2.2%		1.3 - 1.4%
Dividend rate	—	%	—	%	—	%	—	%

The following table summarizes stock option activity for the six months ended June 30, 2017:



	Number of Options		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2016	3,547,528		$	6.91	6.4	$	74,267
Granted	237,550		31.06
Exercised	(518,421	)	2.29			15,547
Forfeited	(74,593	)	12.14
Expired	(862	)	11.23
Outstanding as of June 30, 2017	3,191,202		$	9.34	6.5	$	90,278
Vested and expected to vest as of June 30, 2017	3,212,169		$	9.31	6.5	$	90,959
Exercisable as of June 30, 2017	1,978,792		$	4.84	5.5	$	64,883

The weighted average grant date fair value for our stock options granted during the six months ended June 30, 2017 and 2016 was $14.54 and $8.08. The total fair value of stock options vested during the six months ended June 30, 2017 and 2016 was $1.9 million and $1.2 million. The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2017 and 2016 was $15.5 million and $1.5 million. As of June 30, 2017, the total compensation cost related to nonvested awards not yet recognized was $5.9 million, which will be recognized over a weighted average period of 2.3 years.

Stock Options Assumed from Acquisition

On March 8, 2017, we completed the Acquisition and assumed the Icontrol Networks, Inc. 2013 Equity Incentive Plan and the Icontrol Networks, Inc. 2003 Stock Plan, or collectively, the Icontrol Plans. The assumed unvested stock options are exercisable for 70,406 shares of Alarm.com common stock.

In accordance with the terms of the asset purchase agreement, we were obligated to assume the Icontrol Plans, and converted the 2,001,387 unvested employee stock options into 70,406 Alarm.com stock options using a stated conversion ratio to convert the original exercise price and number of options. The fair value of the unvested stock options on the acquisition date was $1.7 million calculated using a Black-Scholes model with a volatility and risk-free interest rate over the expected term of the options and the closing price of Alarm.com common stock on the date of acquisition. We applied our graded vesting accounting policy to the fair value of these assumed options and determined that $1.4 million of the fair value was attributed to pre-combination services that is included as a component of total purchase consideration. The remaining $0.3 million of the fair value was determined to be attributable to post-combination services and will be recognized over the remaining service periods of the stock options. We subsequently filed a Registration Statement on Form S-8 to cover the assumed unvested stock options under the Icontrol Plans, which are exercisable for an aggregate of 70,406 shares of Alarm.com common stock.

The following table summarizes the assumptions used for estimating the fair value of stock options assumed from the Connect business unit of Icontrol:



	Six Months Ended June 30, 2017
Volatility	42.7 - 44.4%
Expected term	2.5 - 5.0 years
Risk-free interest rate	1.4 - 2.0%
Dividend rate	—	%

The following table summarizes assumed stock option activity for the six months ended June 30, 2017:



	Number of Options		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2016	—		$	—	0.0	$	—
Options assumed from Connect	70,406		5.48			1,688
Exercised	(1,676	)	4.55
Forfeited	(7,275	)	$	5.00
Outstanding as of June 30, 2017	61,455		$	5.57	7.7	$	1,970
Vested and expected to vest as of June 30, 2017	61,455		$	5.57	7.7	$	1,970
Exercisable as of June 30, 2017	11,658		$	5.61	7.4	$	373

The weighted average grant date fair value for the assumed stock options during the six months ended June 30, 2017 was $4.78. The total fair value of assumed stock options vested during the six months ended June 30, 2017 was $0.1 million. The aggregate intrinsic value of the assumed stock options exercised during the six months ended June 30, 2017 was $0.1 million. As of June 30, 2017, the total compensation cost related to nonvested awards not yet recognized was $0.2 million, which will be recognized over a weighted average period of 1.3 years.

Restricted Stock Units

There was an aggregate of 327,200 and zero restricted stock units, or RSUs, granted to certain of our employees during the six months ended June 30, 2017 and 2016. Each of the RSUs vests over a five-year period from the vesting commencement date, which is generally the grant date. We account for RSUs based on the fair value of the award as of the grant date. We recognize stock-based compensation expense using the accelerated attribution method, net of actual forfeitures, in which compensation cost for each vesting tranche in an award is recognized ratably from the grant date to the vesting date for that tranche. The condition for vesting of the RSUs is based on continued employment. As of June 30, 2017, the total unrecognized compensation expense related to RSU awards granted amounted to $10.6 million, which is expected to be recognized over a weighted average period of 3.2 years.

The following table summarizes activity for the RSUs for the six months ended June 30, 2017:



	Number of RSUs		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2016	61,482		$	30.00	$	1,711
Granted	327,200		30.87		10,101
Vested	—		—
Forfeited	(3,060	)	29.26
Outstanding as of June 30, 2017	385,622		30.75		14,511
Vested and expected to vest after June 30, 2017	385,622		$	30.75	$	14,511

Restricted Stock Awards

In March 2017, we assumed 1,622 stock options from Connect upon completion of the Acquisition which had been early exercised according to the provisions of the Icontrol Plans for which the employees had not yet provided service for the vesting period. We canceled those stock options and issued restricted stock awards, or RSAs, with no exercise price at the fair value of Alarm.com common stock upon the closing of the Acquisition and recorded less than $0.1 million of compensation expense in the three and six months ended June 30, 2017. We expect these RSAs to vest over two years and we will recognize compensation expense for the fair value of the awards in stock-based compensation.

Employee Stock Purchase Plan

Our board of directors adopted our 2015 ESPP in June 2015. As of June 30, 2017, 1,616,342 shares have been reserved for future grant under the 2015 ESPP, with provisions established to increase the number of shares available on January 1^st of each subsequent year for nine years. The annual automatic increase in the number of shares available for issuance under the 2015 ESPP is the lesser of 1% of each class of common stock outstanding as of December 31^st of the preceding fiscal year, 1,500,000 shares of common stock, or such lesser number as determined by the board of directors. The 2015 ESPP allows eligible employees to purchase shares of our common stock at 90% of the fair market value, rounded up to the nearest cent, based on the closing price of our common stock on the purchase date. The maximum number of shares of our common stock that a participant may purchase during any calendar year shall not exceed such number of shares having a fair market value equal to the lesser of $15,000 or 10% of the participant's base compensation for that year.

The 2015 ESPP is considered compensatory for purposes of stock-based compensation expense due to the 10% discount on the fair market value of our common stock. For the six months ended June 30, 2017 and 2016, an aggregate of 13,584 shares and 18,705 shares were purchased by our employees. We recognized less than $0.1 million of compensation expense for the three and six months ended June 30, 2017 and 2016. Compensation expense is recognized for the amount of the discount, net of actual forfeitures and voluntary withdrawals, over the six-month purchase period.

Repurchase of Subsidiary Units

We have an agreement, as subsequently amended, with an employee, who is the founder and president of our subsidiary formed to offer professional residential property management and vacation rental management companies technology solutions for remote monitoring and control of properties, for the repurchase of subsidiary stock for cash. The vesting of the award is based upon the subsidiary meeting certain minimum financial targets from the date of commercial availability, which was determined to be June 1, 2013, until the fourth anniversary. In 2016, we amended the term of the award, extending the valuation date for the payment in cash to December 31, 2017, amending the financial targets and allowing for payments in cash from 2018 through 2020 based on collection of financed customer receivables that existed as of the valuation date. We established a liability for the future payment for the repurchase of subsidiary units under the terms of the agreement based on estimating revenue, working capital, EBITDA and EBITDA margin of the subsidiary units over the period of the award through the repurchase date. We estimated the fair value of the liability by using a Monte Carlo simulation model for determining each of the projected measures by using an expected distribution of potential outcomes. The fair value of the liability is calculated with thousands of projected outcomes, the results of which are averaged and then discounted to estimate the present value. At each reporting date until the respective payment dates, we remeasure this liability, using the same valuation approach and record any changes in the employee's compensation expense in general and administrative expense.

We recorded a liability of $2.6 million and $2.5 million in accounts payable, accrued expenses and other current liabilities, and $0.3 million and $0.3 million in other liabilities related to this commitment in our condensed consolidated balance sheet as of June 30, 2017 and December 31, 2016, respectively. For the three months ended June 30, 2017, we recorded a reduction of compensation expense of $0.1 million. For the three months ended June 30, 2016, we recorded $0.2 million of compensation expense related to this award. For the six months ended June 30, 2017 and 2016, we recorded $0.1 million and $0.3 million of compensation expense related to this award in general and administrative expense. As this award is payable in cash, the expense was not recorded in stock-based compensation for any of the periods.

Warrants

On March 30, 2015, we issued performance-based warrants to two employees, which give these individuals the right to purchase up to 54,694 shares of our common stock in the aggregate if certain performance targets are achieved. The performance-based warrants, each for 27,347 shares of our common stock, have an exercise price of $10.97 per share and we may elect to terminate the warrants in exchange for a one-time cash settlement in the event we have a change in control. If the warrants become exercisable, the number of shares that become exercisable, which cannot exceed 27,347 shares for each warrant, is based upon the achievement of certain minimum annual revenue targets. These warrants will expire upon the earlier of March 2025 or the date upon which the holder of the warrant is no longer our employee or an employee of an affiliate of ours. We believe that the achievement of the minimum annual revenue targets is probable, and we began recognizing expense related to these performance-based warrants as of April 1, 2015. These warrants were not exercisable as of June 30, 2017 and December 31, 2016 because the performance requirements had not been met. We recorded less than $0.1 million of expense associated with the performance-based warrants during the three and six months ended June 30, 2017 and 2016.