What changed in this filing

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Item 1A. Risk Factors

2021-11-04 compared with 2021-08-05 · 49 added, 52 removed, 886 unchanged (10% of the section changed)

33 unchanged sentences

These emergency measures remain in place to varying degrees.

While vaccines have been approved for use in the United States and in many other countries, and vaccination efforts are underway, it remains difficult to assess or predict the ultimate duration and economic impact of the COVID-19 pandemic.

To date, the COVID-19 pandemic has, and it may continue to, disrupt our hardware supply chain, including limited inventory availability, increased lead times, and shipping delays, as well as cause disruptions to and restrictions on our service providers’ ability to travel and to meet with residential and commercial property owners who use our solutions, cancellations or postponement of certain events, or temporary closures of our facilities or the facilities of our service providers or suppliers.

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However, if the economy fails to fully recover or there are additional shutdowns of non-essential businesses due to a resurgence of COVID-19 and the emergence and severity of COVID-19 variants, our SaaS and license revenue growth rate may be lower in future periods, with a corresponding reduction in hardware revenue, if some consumers or small businesses defer or cancel previously anticipated purchases.

The ultimate impact to our results will depend to a large extent on currently unknowable developments, including the length of time the disruption and uncertainty caused by COVID-19 will continue, which will, in turn, depend on, among other things, the actions taken by authorities and other entities to effect a widespread roll-out of the available vaccines or otherwise contain COVID-19 or treat its impact, including the impact of any re-opening plans, additional closures and spikes or surges in COVID-19 infection, the emergence and severity of COVID-19 variants and individuals’ and companies’ risk tolerance regarding health

matters going forward, all of which are beyond our control.

Accordingly, these potential impacts, while uncertain, could harm our business and adversely affect our operating results.

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Accordingly, any guidance with respect to our projected financial performance is necessarily only an estimate of what management believes is realizable as of the date the guidance is given.

Actual results will vary from the guidance and the variations may be material.

Actual results will vary from the guidance and the

variations may be material.

Investors should also recognize that the reliability of any forecasted financial data will diminish the farther in the future that the data is forecasted.

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These precautionary measures could negatively impact our business.

In particular, we have enabled substantially all of our employees to work remotely in compliance with relevant government advice, have suspended all non-essential travel for our employees, are canceling or postponing company-sponsored events, employee attendance at industry events and in-person work-related meetings.

In particular, we have enabled substantially all of our employees to work remotely in compliance with relevant government advice, have suspended all non-essential travel for our employees, are canceling, postponing or limiting company-sponsored events, employee attendance at industry events and in-person work-related meetings.

Although we continue to monitor the situation and may adjust our current policies as more information and guidance become available, temporarily suspending travel and shifting non-essential function employees to work-from-home could negatively impact our marketing efforts, slow down our recruiting efforts, or create operational or other challenges, including decreased productivity, any of which could harm our business.

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Due to the foregoing factors and the other risks discussed in this Quarterly Report, 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.

You should not consider our recent revenue growth and changes in Adjusted EBITDA or results of one quarter as indicative of our future performance.

See the Non-GAAP Measures section of Item 2.

"Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures," for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measurement, for the three and six months ended June 30, 2021 and 2020.

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

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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 provider partners will file for bankruptcy protection, which may harm our reputation, revenue, profitability and results of operations.

In addition, there is an increased risk during these periods that an increased percentage of our service provider partners 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.

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Our platforms and solutions may contain undetected defects in the software, infrastructure, third-party components or processes.

In addition, due to the COVID-19 pandemic, we have enabled substantially all of our employees to work remotely which may make us more vulnerable to cyber-attacks and may create operational or other challenges, any of which could harm our systems or our business.

our systems or our business.

Although we have taken precautionary measures to prepare for these threats and challenges, there is no guarantee that our precautions will fully protect our systems.

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A significant natural disaster, such as an earthquake, hurricane, fire, flood, or a public health pandemic, such as COVID-19, or a significant power outage could harm our business, financial condition, cash flows and results of operations.

The impact of climate change may increase these risks due to changes in weather patterns, such as increases in storm intensity, sea-level rise, melting of permafrost and temperature extremes in areas where we conduct our business.

The impact of climate change may increase these risks due to changes in weather patterns, such as increases in storm intensity and frequency, sea-level rise, melting of permafrost and temperature extremes in areas where we conduct our business.

Natural disasters could affect our hardware vendors, our wireless carriers or our network operations centers.

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Given our concentration of sales during the second and third quarters, any disruption in the business of our hardware vendors, service provider partners or subscribers that impacts sales during the second or third quarter of each year 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 provider partners and our suppliers prove to be inadequate.

All of the aforementioned risks may be augmented if the disaster recovery plans for us, our service provider partners 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 platforms and solutions, our business, financial condition, cash flows and results of operations would be harmed.

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We have experienced significant growth and also have substantially expanded our operations in a short period of time.

Our revenue increased from $338.9 million in 2017 to $618.0 million in 2020 and increased from $293.6 million for the six months ended June 30, 2020 to $361.4 million for the six months ended June 30, 2021.

Our revenue increased from $338.9 million in 2017 to $618.0 million in 2020 and increased from $452.4 million for the nine months ended September 30, 2020 to $553.7 million for the nine months ended September 30, 2021.

We do not expect to achieve similar growth rates in future periods.

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If we fail to manage the expansion of our operations and infrastructure 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 784 as of December 31, 2017 to 1,421 as of June 30, 2021.

We increased our number of full-time employees from 784 as of December 31, 2017 to 1,482 as of September 30, 2021.

Our growth has placed, and may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources.

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In the event a consumer decides to evaluate a new home automation, security monitoring, video monitoring, energy management, or wellness solution, the consumer may be more inclined to select one of our competitors whose product offerings are broader than those that we offer.

In addition, while the COVID-19 pandemic continues, consumers may prefer to purchase products that they can install themselves.

In addition, while the COVID-19 pandemic continues, consumers

may prefer to purchase products that they can install themselves.

If there are continuing restrictions on our service providers’ ability to meet with residential and commercial property owners in person, our ability to compete will depend on our ability to make our products available for remote installation or to make certain of our products easily installable by consumers rather than solely by our service providers.

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Therefore, we receive less revenue on a per customer basis from Vivint compared to our SaaS subscriber base, which may result in a lower revenue growth rate.

Similarly, we entered into a patent license agreement with ADT pursuant to which we granted a license to use certain Alarm.com intellectual property following the termination or expiration of the initial term of our master service

agreement with ADT.

Under the terms of the license, beginning in 2023, ADT will pay us a monthly royalty for each subscriber to its branded residential interactive security, automation and video service offerings that is covered by any of our licensed patents and not supported on our platforms.

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Historically, ADT has accounted for, and continues to account for, substantially all of the revenue of the Connect business unit.

In connection with the Acquisition we amended our master service agreement with ADT to cover

services provided with respect to the non-hosted software platform, or Software platform.

In connection with the Acquisition we amended our master service agreement with ADT to cover services provided with respect to the non-hosted software platform, or Software platform.

We cannot assure you that ADT will use the Software platform for its new customers or keep existing customers on the Software platform.

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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, or may discontinue or sunset older wireless networks as new technology evolves.

Our wireless carriers may suspend wireless service to expand, maintain or improve their networks, or may discontinue or sunset older wireless networks as new technology evolves.

For example, certain cellular carriers have announced their intention to shut down their 3G and CDMA wireless networks by the end of 2022 which may require our subscribers to upgrade to alternative and potentially more expensive technologies.

1 unchanged sentence

Further, wireless carriers from time to time suffer service outages which range from local to national in scale during which security control panels may be unable to transmit life safety signals to emergency responders.

Any such wireless carrier service disruptions could materially and adversely impact our ability to provide services to our service provider partners and subscribers and result in significant costs, which could materially and adversely impact our business, results of operations and reputation.

Any such wireless carrier service disruptions could materially and adversely impact our ability to provide services to our service provider partners and subscribers and result in significant costs,

which could materially and adversely impact our business, results of operations and reputation.

In addition, product changes by wireless carriers, price increases or changes to existing contract terms or termination of our agreements could also have a material and adverse impact on our business, financial condition, cash flows and results of operations.

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We are working with our suppliers to secure components and materials to account for longer lead times and limited availability, but we cannot assure you that our efforts will be successful or that demand for our hardware products will continue at the same level.

In addition, global transportation disruptions have led to slower shipping times generally, while reductions in passenger air travel have also led to reduced capacity and increased costs for air freight shipments, which may continue to

adversely affect the timing and cost of delivery of components, materials and products.

Any of these disruptions to our inventory and supply chain could have a material adverse effect on our business, financial condition, cash flows and results of operations.

We have several large hardware suppliers from which we procure hardware on a purchase order basis, including one supplier that supplied products and components which generated 16% of our hardware and other revenue for the six months ended June 30, 2021.

We have several large hardware suppliers from which we procure hardware on a purchase order basis, including one supplier that supplied products and components which generated 15% of our hardware and other revenue for the nine months ended September 30, 2021.

From time to time we provide advance payments or loans to our vendors to, for example, secure procurement of long lead time parts or to provide bridge financing to ensure continuity of operations.

If these suppliers are unable to continue to provide a timely and reliable supply, we could experience interruptions in delivery of our platforms and solutions to our service provider partners, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.

If these suppliers are unable to continue to provide a timely and reliable supply, we could experience interruptions in delivery of our platforms and solutions to

our service provider partners, which could have a material adverse effect on our business, financial condition, cash flows 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, cash flows and results of operations.

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Risks of liability from our operations are significant.

The nature of the solutions we provide, including our interactive security solutions, and new technologies we may acquire, such as in our recent acquisition of Shooter Detection Systems, LLC, potentially exposes us to greater risks of liability for data privacy and security, employee acts or omissions, or technology or system failure than may be inherent in other businesses.

The nature of the solutions we provide, including our interactive security solutions, and new technologies we may acquire, such as in our acquisition of Shooter Detection Systems, LLC, potentially exposes us to greater risks of liability for data privacy and security, employee acts or omissions, or technology or system failure than may be inherent in other businesses.

Substantially all of our service provider partner agreements contain provisions limiting our liability to service provider partners and our subscribers in an attempt to reduce this risk.

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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, subject us to additional federal state, and local laws and regulations, materially and adversely affect our business, financial condition, cash flows or results of operations.

Among other negative effects, our pursuit of such business opportunities could reduce operating margins and require more working capital, subject us to additional federal state, and local laws and regulations, materially and adversely affect our business, financial condition, cash flows or results of operations.

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.

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Privacy Shield to be covered under SCCs.

In June 2021, the European Commission adopted a new version of the SCCs, which we must begin using by September 27, 2021.

In June 2021, the European Commission adopted a new version of the SCCs, which we began using on September 27, 2021.

We have until December 27, 2022 to implement the new SCCs with all of our EEA customers and vendors who are sub-processors and receive access to personal data from our EEA customers.

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The inability to import personal data from the EEA, UK or Switzerland may require us to increase our data processing capabilities in those jurisdictions at significant expense.

Various other non-EU jurisdictions may also choose to impose data localization laws limiting the transfer of personal data out of their respective jurisdictions, or our EEA, UK or Swiss service provider partners may require similar contractual restrictions regarding data localization.

Various other non-EU jurisdictions may also choose to impose data localization laws limiting the transfer of personal data out of their

respective jurisdictions, or our EEA, UK or Swiss service provider partners may require similar contractual restrictions regarding data localization.

Such laws or contractual restrictions may increase our costs for compliance, and harm our business, financial condition, cash flows and results of operations.

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Certain of our service provider partner 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 provider partners or suffer extended periods of service unavailability, we are or may be contractually obligated to provide these service provider partners with credits for future services, provide services at no cost or pay other penalties, which could adversely impact our revenue.

If we are unable to meet the stated service level commitments for these service provider partners or suffer extended periods of service unavailability, we are or may be contractually obligated to provide these service provider partners with credits for future services, provide services at no cost or pay other penalties, which could adversely impact our revenue.

We have incurred such penalties in the past, which have reduced our revenue.

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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 June 30, 2021, we had $207.6 million of goodwill and identifiable intangible assets.

As of September 30, 2021, we had $203.4 million of goodwill and identifiable intangible assets.

Goodwill and other identifiable intangible assets are recorded at fair value on the date of acquisition.

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Comprehensive tax reform bills could adversely affect our business and financial condition.

government enacted the Tax Cuts and Jobs Act, or the Tax Act, into law on December 22, 2017.

The 2017 Tax Act included significant changes to the taxation of business entities.

These changes included, among others, (i) a permanent reduction to the corporate income tax rate, (ii) a partial limitation on the deductibility of business interest expense, (iii) a shift of the U.S.

taxation of multinational corporations from a tax on worldwide income to a territorial system (along with certain rules designed to prevent erosion of the U.S.

income tax base) and (iv) a base erosion and anti-abuse tax on base erosion payments if the federal group has sufficient gross receipts.

Future changes in tax laws, including as a result of changes proposed by the new Presidential administration, or tax rulings could also materially affect our effective tax rate.

In particular, the reduction in the corporate income tax rate resulting from the 2017 Tax Act could be reduced or rescinded by future tax law changes.

The overall impact of any potential tax reform is uncertain, and our business and financial condition could be adversely affected.

Proposed legislative changes in the U.S.

and other countries could increase our tax liability and adversely affect our after-tax profitability.

For example, the Biden administration and certain congressional leaders have proposed increases to the U.S.

corporate income tax rate from 21%.

Additionally, there are proposals to increase U.S.

taxation of our international business operations.

The Group of Seven countries have proposed a global minimum tax of 15%, which is supported by leadership within the U.S.

Additionally, there is a continued interest within the European Union, Canada and other jurisdictions to apply new taxes on companies participating in the digital economy.

Such tax rule changes could materially and adversely affect our cash flows, deferred tax assets and financial results.

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

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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.

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.

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Even though we take precautions to prevent our platforms and solutions from being shipped or provided to U.S.

sanctions targets, our platforms and solutions could be shipped to those targets or provided by third-parties despite such precautions.

sanctions targets, our

platforms 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.

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We anticipate that our efforts to operate and continue to expand our business internationally will entail additional costs and risks as we establish our international offerings and develop relationships with service provider partners to market, sell, install, and support our platforms, solutions and brand in other countries.

Revenue in countries outside of North America accounted for 4% and 2% of our total revenue for the six months ended June 30, 2021 and 2020, respectively.

Revenue in countries outside of North America accounted for 3% of our total revenue for each of the nine months ended September 30, 2021 and 2020.

We have limited experience in selling our platforms and solutions in international markets outside of North America 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.

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Many of these policies are highly complex and involve many assumptions, estimates and judgments.

A change in accounting standards or practices, in particular with respect to revenue recognition, could harm our operating results and may even affect our reporting

of transactions completed before the change is effective.

A change in accounting standards or practices, in particular with respect to revenue recognition, could harm our operating results and may even affect our reporting of transactions completed before the change is effective.

GAAP rules are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and other various bodies formed to promulgate and interpret appropriate accounting principles.

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EcoFactor is seeking permanent injunctions, enhanced damages and attorneys' fees.

See the section of this Quarterly Report titled "Legal Proceedings" for additional information on each of these matters.

See the section of this Quarterly Report titled "Legal

Proceedings" for additional information on each of these matters.

Should EcoFactor prevail in either of its district court lawsuits we could be required to pay damages in the amount of EcoFactor’s lost profits and/or a reasonable royalty for sales of our solution, we could be enjoined from making, using and selling our solution if a license or other right to continue selling such elements is not made available to us or we are unable to design around such patents, and we could be required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us.

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If a service provider partner 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.

If we do not succeed in disputing it, we could face substantial liability.

See the section of this Quarterly Report titled "Legal Proceedings" for additional information regarding this matter and the other legal proceedings we are involved in.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors