Acquisitions

3 Months Ended

Mar. 31, 2020

Acquisition of a Business - OpenEye

On October 21, 2019, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired 85% of the issued and outstanding capital stock of PC Open Incorporated, a Washington corporation, doing business as OpenEye. OpenEye provides cloud-managed video surveillance solutions for the enterprise commercial market. We believe the acquisition of OpenEye will provide a key element to our comprehensive suite of interactive cloud-based services spanning video, access control, intrusion and automation for domestic and international commercial enterprises.

In consideration for the purchase of 85% of the issued and outstanding capital stock of OpenEye, we paid $61.2 million in cash on October 21, 2019, after deducting $2.8 million related to an agreed holdback. Pursuant to the terms of the stock purchase agreement, following the preliminary determination of the working capital of OpenEye as of the closing date, the purchase price increased by $0.2 million. The working capital adjustment is expected to be finalized and paid to the stockholders of OpenEye in the second quarter of 2020 along with a portion of the holdback. The remaining amount of the holdback is expected to be paid to the stockholders of OpenEye by the fourth quarter of 2022, subject to offset for any indemnification obligations. An earn-out of up to an additional $11.0 million is payable if certain calendar 2020 revenue targets are met, of which contingent consideration of $2.8 million was recorded at October 21, 2019. The purchase price allocation, which is pending the final determination of the working capital and tax adjustments, was not finalized as of the filing date of this Quarterly Report on Form 10-Q.

The table below sets forth the purchase consideration and the preliminary allocation to estimate the fair value of the tangible and intangible net assets acquired (in thousands):



	October 21, 2019
Calculation of Purchase Consideration:
Cash paid, net of working capital adjustment	$	61,403
Holdback consideration	2,820
Contingent consideration	2,793
Total consideration	$	67,016
Estimated Tangible and Intangible Net Assets:
Cash	$	2,352
Accounts receivable	5,742
Inventory	4,687
Other current assets	216
Property and equipment	296
Customer relationships	19,805
Developed technology	16,583
Trade name	2,219
Accounts payable	(2,746		)
Accrued expenses	(1,017		)
Other current liabilities	(1,683		)
Deferred tax liability	(8,510		)
Deferred revenue	(889		)
Redeemable noncontrolling interest	(11,411		)
Goodwill	41,372
Total estimated tangible and intangible net assets	$	67,016

Goodwill of $41.4 million reflects the value of acquired workforce and synergies we expect to achieve from integrating OpenEye's cloud-managed video surveillance solutions into our existing comprehensive suite of interactive cloud-based services for domestic and international commercial enterprises. None of the goodwill recognized is expected to be deductible for income tax purposes in future periods. We allocate goodwill to reporting units based on expected benefit from synergies and have preliminarily allocated the goodwill to the Alarm.com segment.

Fair Value of Net Assets Acquired and Intangibles

In accordance with ASC 805, OpenEye constituted a business and the assets and liabilities were recorded at their respective fair values as of October 21, 2019. We developed our estimate of the fair value of intangible net assets using a multi-period excess earnings method for customer relationships, the relief from royalty method for the developed technology and the relief-from-royalty method for the trade name.

Customer Relationships

We recorded the customer relationships intangible separately from goodwill based on determination of the length, strength and contractual nature of the relationship that OpenEye shared with its customers. We valued the single group of customer relationships using the multi-period excess earnings method, an income approach. The significant assumptions used in the income approach include estimates about future expected cash flows from customer contracts, the attrition rate and the discount rate. We are amortizing the customer relationships, valued at $19.8 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of 13 years.

Developed Technology

Developed technology primarily consists of intellectual property of proprietary software that is marketed for sale. We valued the developed technology by applying the relief from royalty method, an income approach. The significant assumptions used in the relief from royalty method include estimates about future expected cash flows from the developed technology, the royalty rate, the obsolescence factor and the discount rate. We are amortizing the OpenEye developed technology, valued at $16.6 million, on an attribution method based on the discounted cash flows of the model over an estimated useful life of nine years.

Trade Name

We valued the trade names acquired using a relief from royalty method. The significant assumptions used in the income approach include future expected cash flows from the trade name, the royalty rate and the discount rate. We are amortizing the trade names, valued at $2.2 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of five years.

Redeemable Noncontrolling Interests

Our redeemable noncontrolling interest relates to our 85% equity ownership interest in OpenEye. The OpenEye stockholder agreement contains a put option that gives the minority OpenEye stockholders the right to sell their remaining 15% equity ownership interest to us based on the fair value of the shares. The OpenEye stockholder agreement also contains a call option that gives us the right to purchase the remaining OpenEye shares from the minority OpenEye stockholders based on the fair value of the shares. The put and call options can each be exercised beginning in the first quarter of 2023. The redeemable noncontrolling interest was recorded at fair value on October 21, 2019, by applying the income approach using unobservable inputs for projected cash flows, including projected financial results and a discount rate, which are considered Level 3 inputs. This redeemable noncontrolling interest is considered temporary equity and we report it between liabilities and stockholders’ equity in the condensed consolidated balance sheets. The redemption value of the noncontrolling interest was $11.4 million as of October 21, 2019, and decreased to $11.0 million as of March 31, 2020.

Contingent Consideration

We account for the contingent consideration related to the potential earn-out payment using fair value and establish a liability for the future earn-out payment based on an estimation of revenue attributable to perpetual licenses and subscription licenses over the 2020 calendar year. As of October 21, 2019, the fair value of the liability was $2.8 million. See Note 9 for details on the significant unobservable inputs used in the fair value estimate and post-acquisition accounting.

Asset Acquisitions

On March 12, 2020, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party. Substantially all of the acquired assets consisted of in-process research and development, or IPR&D. We believe the acquisition of the IPR&D will strengthen our smart intercom capability, including building access security and convenience within the multiple dwelling unit market for residents, guests and deliveries.

In consideration for the purchase of the IPR&D, we paid approximately $1.2 million in cash on March 12, 2020, with the remaining $0.3 million expected to be paid 18 months following the acquisition date, subject to offset for any indemnification obligations. The $1.5 million consideration related to IPR&D was expensed at the time of the asset acquisition, as the IPR&D had no alternative future use.

On March 31, 2020, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party. Substantially all of the acquired assets consisted of IPR&D. We believe the acquisition of the IPR&D will further our commitment to make significant investments in innovative research and development in the intelligently connected property market to broaden our suite of solutions.

In consideration for the purchase of the IPR&D, we paid $2.1 million in cash on March 31, 2020 and $0.1 million in December 2019, with the remaining $0.7 million expected to be paid the later of approximately 12 months following the acquisition date or upon resolution of any pending indemnification claims, subject to offset for any indemnification obligations. The $2.9 million consideration related to IPR&D was expensed at the time of the asset acquisition, as the IPR&D had no alternative future use.