What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-02-25 compared with 2020-02-26 · 766 added, 604 removed, 1075 unchanged (56% of the section changed)

33 unchanged sentences

We believe that our audits provide a reasonable basis for our opinions.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded PC Open Incorporated, a Washington corporation, doing business as OpenEye ("OpenEye"), from its assessment of internal control over financial reporting as of December 31, 2019 because it was acquired by the Company in a purchase business combination during 2019.

We have also excluded OpenEye from our audit of internal control over financial reporting.

OpenEye is an 85% owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent 1% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Shooter Detection Systems, LLC from its assessment of internal control over financial reporting as of December 31, 2020 because it was acquired by the Company in a purchase business combination during 2020.

We have also excluded Shooter Detection Systems, LLC from our audit of internal control over financial reporting.

Shooter Detection Systems, LLC is a wholly owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent less than 1% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2020.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and

dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

company are being made only in accordance with authorizations of management and directors of the company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

4 unchanged sentences

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Acquisition of OpenEye - Valuation of Acquired Customer Relationships and Developed Technology Intangible Assets

As described in Notes 2 and 7 to the consolidated financial statements, the Company acquired 85% of the issued and outstanding capital stock of OpenEye for total consideration of $67.0 million on October 21, 2019, which resulted in $38.6 million of intangible assets being recorded.

Intangible assets recorded by the Company primarily included customer relationships of $19.8 million and developed technology of $16.6 million.

Management valued the single group of customer relationships using the multi-period excess earnings method and valued the developed technology by applying the relief from royalty method.

As disclosed by management, this valuation requires management to apply significant judgment in estimating the fair value of intangible assets acquired, which involves the use of significant estimates and assumptions.

Significant estimates and assumptions in valuing intangible assets include future expected cash flows, discount rates, attrition rates related to acquired customer relationships and royalty rates and obsolescence factors related to acquired developed technology.

The principal considerations for our determination that performing procedures relating to the valuation of acquired customer relationships and developed technology intangible assets recorded with the acquisition of OpenEye is a critical audit matter are there was significant judgment by management in estimating the fair value of the acquired customer relationships and developed technology intangible assets.

This in turn led to significant auditor judgment, subjectivity, and effort in performing procedures and evaluating the significant assumptions relating to management’s estimates, including future expected cash flows, discount rates, attrition rate, royalty rate, and obsolescence factors.

In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.

Acquisition of Shooter Detection Systems - Valuation of Acquired Developed Technology Intangible Asset

As described in Notes 2 and 7 to the consolidated financial statements, the Company acquired Shooter Detection Systems (“SDS”) for total consideration of $26.5 million on December 14, 2020, which resulted in $16.4 million of intangible assets being recorded.

Intangible assets recorded by the Company in connection with the SDS acquisition primarily included developed technology of $13.5 million.

Management valued the developed technology by applying the multi-period excess earnings method.

This valuation requires management to apply significant judgment in estimating the fair value of intangible assets acquired, which involves the use of significant estimates and assumptions.

Significant assumptions in valuing these acquired developed technology intangible assets include estimates about future expected cash flows from the developed technology, the obsolescence factor, and the discount rate.

The principal considerations for our determination that performing procedures relating to the valuation of the acquired developed technology intangible asset recorded in the acquisition of SDS is a critical audit matter are the significant judgment by management in estimating the fair value of the acquired developed technology intangible asset.

This in turn led to significant auditor judgment, subjectivity, and effort in performing procedures and evaluating the significant assumptions relating to management’s estimate, such as future expected cash flows from the developed technology, the obsolescence factor, and the discount rate.

In addition, the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the acquired customer relationships and developed technology intangible assets and controls over development of the significant assumptions related to the valuation of the acquired customer relationships and developed technology intangible assets, including future expected cash flows, discount rates, attrition rate, royalty rate, and obsolescence factors.

These procedures also included, among others, (i) reading the purchase agreement;

(ii) testing management’s process for estimating the fair value of the acquired customer relationships and developed technology intangible assets;

and (iii) testing management’s significant assumptions relating to future expected cash flows, discount rates, attrition rate, royalty rate, and obsolescence factors used to estimate the fair value of the acquired customer relationships and developed technology intangible assets.

Testing management’s process included evaluating the appropriateness of the valuation methods, testing the completeness and accuracy of underlying data used in the valuation, and the reasonableness of significant assumptions, including the future expected cash flows, discount rates, attrition rate, royalty rate, and obsolescence factors.

Evaluating the reasonableness of the future expected cash flows and customer attrition rate involved considering the past performance of the acquired businesses and, for future expected cash flows, economic and industry forecasts.

Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of management’s valuation methods and significant assumptions, including discount rates, royalty rate, and obsolescence factors.

These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the acquired developed technology intangible asset and controls over development of the future expected cash flows from the developed technology, the obsolescence factor, and the discount rate assumptions utilized in the valuation of the acquired developed technology intangible asset.

These procedures also included, among others (i) reading the purchase agreement and (ii) testing management’s process for estimating the fair value of the acquired developed technology intangible asset.

Testing management’s process included evaluating the appropriateness of the valuation method, testing the completeness and accuracy of data provided by management used in the valuation, and evaluating the reasonableness of significant assumptions related to the future expected cash flows from the developed technology, the obsolescence factor, and the discount rate.

Evaluating the reasonableness of the future expected cash flows from the developed technology involved considering the past performance of the acquired business, as well as economic and industry forecasts.

Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of management’s valuation method and the obsolescence factor and discount rate assumptions.

/s/ PricewaterhouseCoopers LLP

6 unchanged sentences

Year Ended December 31,

2020 2019 2018

SaaS and license revenue $ 393,257 $ 337,375 $ 291,072

16 unchanged sentences

Income before income taxes 80,160 58,896 11,699

Provision for / (benefit f rom) income taxes

Provision for / (benefit from) income taxes 3,500 5,566 ( 9,825 )

Net income 76,660 53,330 21,524

Net loss attributable to redeemable noncontrolling interest 1,193 201 —

3 unchanged sentences

Net income per share:

Basic $ 1.59 $ 1.11 $ 0.45

Diluted $ 1.53 $ 1.06 $ 0.43

Weighted average common shares outstanding:

Basic 48,950,328 48,427,446 47,633,739

Diluted 50,963,190 50,273,889 49,692,184

_______________

6 unchanged sentences

Cash and cash equivalents $ 253,459 $ 119,629

Accounts receivable, net

Inventory, net

Other current assets

Accounts receivable, net of allowance for credit losses of $ 4,696 and $ 2,584 , respectively, and net of allowance for product returns of $ 1,480 and $ 1,075 , respectively

83,326 76,373

Inventory 44,281 34,168

Other current assets, net of allowance for credit losses of $ 17 and $ 16 , respectively

16,348 13,504

Total current assets 397,414 243,674

1 unchanged sentence

Intangible assets, net 103,259 103,438

Goodwill 112,838 104,963

Deferred tax assets 21,692 19,137

Operating lease right-of-use assets 33,455 30,523

Other assets, net of allowance for credit losses of $ 72 and $ 0 , respectively

18,233 17,516

Total assets $ 731,687 $ 557,799

Liabilities, redeemable noncontrolling interest and stockholders’ equity

14 unchanged sentences

Preferred stock, $ 0.001 par value, 10,000,000 shares authorized;

no shares issued and outstanding as of December 31, 2019 and December 31, 2018.

no shares issued and outstanding as of December 31, 2020 and 2019

Common stock, $ 0.01 par value, 300,000,000 shares authorized;

49,630,773 and 48,700,963 shares issued;

and 48,700,713 and 48,102,081 shares outstanding as of December 31, 2019 and December 31, 2018, respectively.

and 49,483,620 and 48,700,713 shares outstanding as of December 31, 2020 and 2019, respectively

Additional paid-in capital 405,831 365,627

Accumulated deficit

Treasury stock, at cost;

147,153 and 0 shares as of December 31, 2020 and 2019, respectively

Retained earnings / (accumulated deficit) 66,574 ( 10,463 )

Total stockholders’ equity 467,752 355,651

6 unchanged sentences

Cash flows from operating activities:

2020 2019 2018

Net income $ 76,660 $ 53,330 $ 21,524

Adjustments to reconcile net income to net cash from operating activities:

Provision for doubtful accounts

Provision for credit losses on accounts receivable 2,162 1,170 149

Reserve for product returns 1,795 ( 123 ) 273

Provision for notes receivable

(Recovery of) / provision for credit losses on notes receivable ( 359 ) ( 3,272 ) 3,319

Provision for excess and obsolete inventory 1,451 485 —

Amortization on patents and tooling 882 700 900

4 unchanged sentences

Change in fair value of contingent liability ( 2,595 ) ( 198 ) —

Undistributed losses from equity investees

Stock-based compensation 29,176 20,603 13,429

1 unchanged sentence

Acquired in-process research and development 3,297 850 —

Impairment of investment

Gain on sale of investment ( 24,737 ) — —

(Gain on) / impairment of investment ( 676 ) 605 —

Disposal of property and equipment — — 1,410

1 unchanged sentence

Accounts receivable ( 10,098 ) ( 22,273 ) ( 9,298 )

Inventory ( 10,647 ) ( 6,976 ) ( 8,813 )

Other current and non-current assets ( 2,683 ) ( 2,887 ) 115

8 unchanged sentences

Purchases of in-process research and development ( 3,297 ) ( 850 ) —

Investment in cost and equity method investees

Issuances or purchases of notes receivable ( 1,200 ) ( 26,103 ) ( 1,287 )

Receipt of payment on notes receivable

Receipt of payments on notes receivable 2,026 31,696 —

Proceeds from sale of investment 25,687 — —

Purchases of patents and patent licenses ( 1,050 ) — ( 1,075 )

Cash flows used in investing activities ( 20,274 ) ( 73,414 ) ( 13,377 )

Cash flows (used in) / from financing activities:

Cash flows from / (used in) financing activities:

Proceeds from credit facility 50,000 — —

Repayments of credit facility ( 3,000 ) ( 4,000 ) ( 4,000 )

Payments of debt issuance costs

Repurchases of common stock

Payments of deferred consideration for business acquisitions ( 1,538 ) — —

Purchases of treasury stock and repurchases of common stock ( 5,149 ) — ( 1 )

Issuances of common stock from equity-based plans 11,711 3,870 6,400

Cash flows (used in) / from financing activities

Net (decrease) / increase in cash and cash equivalents

Cash flows from / (used in) financing activities 52,024 ( 130 ) 2,399

Net increase / (decrease) in cash and cash equivalents 133,830 ( 26,432 ) 49,732

Cash and cash equivalents at beginning of the period 119,629 146,061 96,329

5 unchanged sentences

Year Ended December 31,

2020 2019 2018

Supplemental disclosures:

2 unchanged sentences

Noncash investing and financing activities:

Assumed options from business acquisition

Cash not yet paid for capital expenditures 2,020 837 1,857

5 unchanged sentences

(in thousands)

Redeemable Noncontrolling Interest

Preferred Stock

Redeemable Noncontrolling Interest Preferred Stock Common Stock Additional

Capital Treasury Stock Retained Earnings / (Accumulated Deficit) Total

Stockholders’

Balance as of December 31, 2016

Adoption of accounting standard on employee share-based payments

Common stock issued in connection w ith equity-based plans

Vesting of common stock subject to repurchase

Stock-based compensation e xpense

Stock options assumed from acquisition

Shares Amount Shares Amount Shares Amount

Balance as of December 31, 2017 $ — — $ — 47,202 $ 472 $ 321,032 — $ — $ ( 88,677 ) $ 232,827

3 unchanged sentences

Stock-based compensation expense — — — — — 13,661 — — — 13,661

Net income — — — — — — — — 21,524 21,524

Balance as of December 31, 2018 $ — — $ — 48,102 $ 481 $ 341,139 — $ — $ ( 64,031 ) $ 277,589

4 unchanged sentences

Noncontrolling interest assumed through acquisition 11,411 — — — — — — — — —

Net income attributable to common stockholders

Net income / (loss) attributable to common stockholders ( 201 ) — — — — — — — 53,531 53,531

Balance as of December 31, 2019 $ 11,210 — $ — 48,701 $ 487 $ 365,627 — $ — $ ( 10,463 ) $ 355,651

Adoption of accounting standard on credit losses — — — — — — — — ( 816 ) ( 816 )

Common stock issued in connection with equity-based plans — — — 930 9 11,702 — — — 11,711

Purchases of treasury stock — — — — — — 147 ( 5,149 ) — ( 5,149 )

Stock-based compensation expense — — — — — 29,176 — — — 29,176

Accretion adjustments of redeemable noncontrolling interest to redemption value 674 — — — — ( 674 ) — — — ( 674 )

Net income / (loss) attributable to common stockholders ( 1,193 ) — — — — — — — 77,853 77,853

Balance as of December 31, 2020 $ 10,691 — $ — 49,631 $ 496 $ 405,831 147 $ ( 5,149 ) $ 66,574 $ 467,752

See accompanying notes to the consolidated financial statements.

25 unchanged sentences

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

Our estimates, judgments and assumptions are continually evaluated based on available information and experience.

Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

Estimates are used when accounting for revenue recognition, allowances for doubtful accounts, allowance for hardware returns, estimates of obsolete inventory, long-term incentive compensation, stock-based compensation, income taxes, legal reserves, contingent consideration and goodwill and intangible assets.

As of the date of issuance of these financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, assumptions and judgments or revise the carrying value of our assets or liabilities.

However, our estimates, judgments and assumptions are continually evaluated based on available information and experience and may change as new events occur and additional information is obtained.

Because of the use of estimates inherent in the financial reporting process and in light of the continuing uncertainty arising from the COVID-19 pandemic, actual results could differ from those estimates and any such differences may be material.

Estimates are used when accounting for revenue recognition, allowances for credit losses, allowance for hardware returns, estimates of obsolete inventory, long-term incentive compensation, the lease term and incremental borrowing rate for leases, stock-based compensation, income taxes, legal reserves, contingent consideration and goodwill and intangible assets.

Reclassifications

Certain previously reported amounts in the consolidated statements of operations for the years ended December 31, 2018 and 2017 have been reclassified to conform to our current presentation to reflect interest income as a separate line item, which was previously included in other income, net .

Certain previously reported amounts in the consolidated statements of cash flows for the years ended December 31, 2019 have been reclassified to conform to our current presentation, including the addition of a provision for excess and obsolete inventory separate line item, which was previously included in inventory.

Cash and Cash Equivalents

2 unchanged sentences

We consider these money market funds to be Level 1 financial instruments (see Note 10).

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

Accounts Receivable

2 unchanged sentences

Revenue in countries outside of North America accounted for 3 %, 3 % and 2 % of our total revenue for the years ended December 31, 2020, 2019 and 2018, respectively.

Accounts receivable balances

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

related to service providers partners outside of North America were 7 % and 4 % as of December 31, 2019 and 2018 , respectively.

Accounts receivable balances related to service providers partners outside of North America were 7 % as of December 31, 2020 and 2019.

Our accounts receivable are stated at estimated realizable value.

We utilize the allowance method to provide for doubtful accounts based on management’s evaluation of the collectibility of the amounts due.

Our estimate is based on historical collection experience and a review of the current status of accounts receivable.

Each of our service provider partners is evaluated for creditworthiness through a credit review process at the inception of the arrangement or if risk indicators arise during our arrangement at such other time.

Our terms for hardware sales to our service provider partners and distributors typically allow for returns for up to one year .

We apply our estimate as a percentage of sales monthly, based on historical data, as a reserve against revenue to account for our provision for returns.

We have not experienced write-offs for uncollectible accounts or sales returns that have differed significantly from our estimates.

Notes Receivable

Notes receivable are presented net of an allowance for uncollectibility, if any.

Notes receivable are presented net of an allowance for uncollectability, if any.

We accrue interest on notes receivable based on the contractual terms of the note.

3 unchanged sentences

Factors considered in determining impairment include payment status, collateral value and the probability of collecting payments when due.

We do not accrue interest on notes receivable that are considered impaired or are greater than 90 days past due based on their contractual payment terms.

See Note 9 for further details on loans provided to one of our distribution partners, suppliers and service provider partners.

Credit Losses

The allowance for credit losses is a valuation account that is deducted from the accounts receivable and notes receivable amortized cost basis to present the net amount expected to be collected.

We estimate the allowance balance by applying the loss-rate method using relevant available information from internal and external sources, including historical write-off activity, current conditions and reasonable and supportable forecasts.

Historical credit loss experience provides the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for changes in economic conditions, such as changes in unemployment rates.

We use projected economic conditions over a period no more than twelve months based on data from external sources.

For periods beyond the twelve-month reasonable and supportable forecast period, we revert to historical loss information immediately.

The allowance for credit losses is measured on a pooled basis when similar risk characteristics exist.

When assessing whether to measure certain financial assets on a pooled basis, we considered various risk characteristics, including the financial asset type, size and the historical or expected credit loss pattern.

These risk characteristics are relevant to accounts receivable and notes receivable.

We identified the following two portfolio segments for our accounts receivable:

(i) outstanding accounts receivable balances within Alarm.com and certain subsidiaries and (ii) outstanding accounts receivable balances within all other subsidiaries.

We identified the following two portfolio segments for our notes receivable:

(i) loan receivables and (ii) hardware financing receivables.

There were no changes to our portfolio segments since the adoption of Accounting Standards Update, or ASU, 2016-13, " Financial Instruments - Credit Losses (Topic 326)," or Topic 326, and no changes to our policies or practices involving the issuance of notes receivable, customer acquisitions or any other factors that influenced our estimate of expected credit losses.

Additionally, there were no significant changes in the amount of write-offs during the year ended December 31, 2020 as compared to historical periods.

There were no purchases or sales of financial assets during the years ended December 31, 2020 and 2018.

See Note 9 for further details on our purchase of a secured promissory note in March 2019 that was originally executed by one of our hardware suppliers in favor of another third-party secured creditor.

Expected credit losses are estimated over the contractual term of the financial assets and we adjust the term for expected prepayments when appropriate.

For the years ended December 31, 2020 and 2018, we recorded credit loss expense of $ 1.7 million and $ 3.5 million in general and administrative expense in our consolidated statements of operations, respectively.

For the year ended December 31, 2019, we recorded a reduction of credit loss expense of $ 2.1 million in general and administrative expense in our consolidated statements of operations, primarily due to improvements in collections and improvements in the economic conditions used in the calculation of credit losses.

The contractual term excludes expected extensions, renewals and modifications because extension and renewal options are unconditionally cancelable by us.

Write-offs of the amortized cost basis are recorded to the allowance for credit losses.

Any subsequent recoveries of previously written off balances are recorded as a reduction to credit loss expense.

We do not accrue interest on notes receivable that are considered impaired or are 90 days or greater past due based on their contractual payment terms.

Notes receivable that are 90 days or greater past due are placed on nonaccrual status.

Notes receivable may be placed on nonaccrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain.

After a note receivable has been placed in nonaccrual status, interest will be recognized when cash is received.

After a note receivable has been placed on nonaccrual status, interest will be recognized when cash is received.

A note receivable may be returned to accrual status after all of the customer’s delinquent balances of principal and interest have been settled, and collection of all remaining contractual amounts due is reasonably assured.

See Note 9 for further details on loans provided to one of our distribution partners and one of our suppliers.

Our inventory, which is comprised of raw materials and finished goods, includes materials used to produce our wireless communications network enabled radios, video cameras, video recorders, home automation system parts and peripherals, is stated at the lower of cost or net realizable value, and is charged to cost of sales on a first in, first out, or FIFO, basis when the inventory is shipped from our manufacturer and received by our service provider partners.

We have elected not to measure an allowance for credit losses for accrued interest receivables .

We write-off any accrued interest on notes receivable that are considered impaired or are 90 days or greater past due based on their contractual payment terms by reversing interest income.

The accrued interest receivable as of December 31, 2020 and 2019 was less than $ 0.1 million and is reflected in other current assets within our consolidated balance sheets and excluded from the amortized cost basis of the notes receivable .

We did not write-off any accrued interest receivable during the years ended December 31, 2020, 2019 and 2018.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

Our inventory, which is comprised of raw materials and finished goods, includes materials used to produce our wireless communications network enabled radios, video cameras, video recorders, gunshot detection sensors, home automation system parts and peripherals, is stated at the lower of cost or net realizable value, and is charged to cost of sales primarily on a first in, first out, or FIFO, basis when the inventory is shipped from our manufacturer and received by our service provider partners.

We periodically evaluate our inventory quantities for obsolescence based on criteria such as customer demand and changing technology and record an obsolescence write-off when necessary.

We determine if an arrangement contains a lease at the inception of the arrangement.

On January 1, 2019, we adopted ASU 2016-02, “ Leases (Topic 842) .” We determine if an arrangement contains a lease at the inception of the arrangement.

As part of the lease determination process, we assess several factors, including, but not limited to, whether we have the right to control and direct the use of the asset and whether the other party has a substantive substitution right.

14 unchanged sentences

We did no t have any finance leases or subleases as of December 31, 2020 and 2019.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

Lease expense is recognized on a straight-line basis over the term of the lease and is recorded in general and administrative expense.

3 unchanged sentences

Expenses associated with short-term leases are recognized on a straight-line basis over the term of the lease and are recorded in general and administrative expense.

Short-term lease costs were immaterial for the year ended December 31, 2019 .

Short-term lease costs were immaterial for the years ended December 31, 2020 and 2019.

Redeemable Noncontrolling Interests

6 unchanged sentences

The amount of the net income or loss attributable to redeemable noncontrolling interests is recorded in the consolidated statements of operations and the accretion of the redemption value is recorded as an adjustment to additional paid-in capital.

The redemption value of the of the noncontrolling interest was $ 11.2 million as of December 31, 2019 .

The redemption value of the of the noncontrolling interest was $ 10.7 million and $ 11.2 million as of December 31, 2020 and 2019.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

Internal-Use Software

14 unchanged sentences

Agile development results in a short duration between completion of the detailed program design and beta release.

Accordingly, as of December 31, 2019 , we do not have any capitalized external software due to the shorter development cycle associated with agile development.

Accordingly, as of December 31, 2020 and 2019, we did not have any capitalized external software due to the shorter development cycle associated with agile development.

Revenue Recognition

We derive our revenue from three primary sources:

On January 1, 2018, we adopted ASU 2014-09, " Revenue from Contracts with Customers (Topic 606) ." We derive our revenue from three primary sources:

the sale of cloud-based SaaS services on our integrated Alarm.com platform, the sale of licenses and services on our non-hosted software platform, or Software platform, and the sale of hardware products.

5 unchanged sentences

Our service provider partners typically enter into contracts with our subscribers, which our service provider partners have indicated range from three to five years in length.

Our hardware includes cellular radio modules that enable access to our cloud-based platforms, as well as video cameras, video recorders, image sensors and other peripherals.

Our hardware includes cellular radio modules that enable access to our cloud-based platforms, as well as video cameras, video recorders, image sensors, gunshot detection sensors and other peripherals.

Our service provider partners may purchase our hardware in anticipation of installing the hardware in a residential or commercial property when they create a new subscriber account, or for use in existing subscriber properties.

The purchase of hardware occurs in a transaction that is separate and typically in advance of the

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

purchase of our platform services.

The purchase of hardware occurs in a transaction that is separate and typically in advance of the purchase of our platform services.

The performance obligation is primarily satisfied when the hardware is received by our service provider partner or distributor.

5 unchanged sentences

Additionally, the consideration received from hardware sales corresponds directly with the stand-alone selling price of the hardware.

As a result, we have elected to use the practical expedient related to the amount of transaction price allocated to the unsatisfied performance obligations and therefore, we have not disclosed the total remaining revenue expected to be recognized on all contracts or the expected period over which the remaining revenue would be recognized for the current period or any prior period.

To determine the transaction price, we analyze all of the performance obligations included in the contract.

1 unchanged sentence

We have variable consideration in the form of retrospective volume discounts, rebate incentives, restocking fees and assurance-type warranties.

The significant inputs related to variable consideration include the volume and amount of products and services sold historically and expected to be sold in the future, the availability and performance of our services and the historical and expected number of returns.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

the historical and expected number of returns.

Depending on the type of variable consideration and its predictability, we may apply an "expected value" approach or a "most likely amount" approach.

18 unchanged sentences

Our service provider partners typically incur and pay the same monthly fee per subscriber account for the entire period a subscriber account is active.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

We offer multiple service level packages for our platform solutions including a range of solutions and a range of a la carte add-ons for additional features.

12 unchanged sentences

We apply the usage-based royalty exception to recognize license revenue associated with software hosted by our customers because the predominant item to which the royalty relates is the license of intellectual property.

Under the usage-based royalty exception, we recognize revenue on a monthly basis over the period during which the services are expected to be performed.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

usage-based royalty exception, we recognize revenue on a monthly basis over the period during which the services are expected to be performed.

Under the terms of our contractual arrangements with our service provider partners, we are entitled to payment of a monthly fee that is billed per subscriber for the month of service.

1 unchanged sentence

Hardware and Other Revenue

We generate hardware and other revenue primarily from the sale of video cameras, video recorders and cellular radio modules that provide access to our cloud-based platforms and, to a lesser extent, the sale of other devices, including image sensors and peripherals.

We primarily transfer hardware to our customers upon delivery to the customer, which corresponds with the time at which the customer obtains control of the hardware.

10 unchanged sentences

Historically, our returns of hardware have not significantly differed from our estimated reserve.

Additionally, we provide assurance-type warranties related to the intended functionality of the products and services provided and those warranties typically allow for the return of hardware up to one year past the date of sale.

These warranties were not identified as separate performance obligations.

Additionally, we provide warranties related to the intended functionality of the products and services provided and those warranties typically allow for the return of hardware up to one year past the date of sale.

We determined that these warranties are not separate performance obligations as they cannot be purchased separately and do not provide a service in addition to an assurance the hardware will function as expected.

Our hardware and other revenue also includes our revenue from the sale of perpetual licenses that provide our customers in the commercial market the right to use our OpenEye video surveillance software for an indefinite period of time in exchange for a one-time license fee, which is generally paid at contract inception.

Our perpetual licenses provide a right to use intellectual property that is functional in nature and has significant stand-alone functionality.

Accordingly, for perpetual licenses of functional intellectual property, revenue is recognized at the point-in-time when control has been transferred to the customer, which occurs once the software has been made available to the customer.

Our hardware and other revenue also includes our revenue from Shooter Detection Systems from the sale of licenses that provide our customers the right to use our indoor gunshot detection solution in exchange for license fees, which are generally paid at contract inception.

Our perpetual licenses and licenses to our indoor gunshot detection solution provide a right to use intellectual property that is functional in nature and has significant stand-alone functionality.

Accordingly, for licenses of functional intellectual property, revenue is recognized at the point-in-time when control has been transferred to the customer, which occurs once the software has been made available to the customer.

Hardware and other revenue may also include activation fees charged to some of our service provider partners for activation of a new subscriber account on our platforms, as well as fees paid by service provider partners for our marketing services.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

service provider partners use services on our platforms, such as support tools and applications, to assist in the installation of our solutions in subscriber properties.

Our service provider partners use services on our platforms, such as support tools and applications, to assist in the installation of our solutions in subscriber properties.

This installation marks the beginning of the service period on our platforms and, on occasion, we earn activation revenue for fees charged for this service.

5 unchanged sentences

The balance of deferred revenue for activation fees was $ 7.0 million and $ 8.1 million as of December 31, 2020 and 2019, respectively, which combines current and long-term balances.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

Cost of Revenue

2 unchanged sentences

Our cost of software license revenue during the years ended December 31, 2020, 2019 and 2018 was $ 1.3 million, $ 1.3 million and $ 1.7 million, respectively.

Our cost of hardware and other revenue primarily includes cost of raw materials, tooling 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 and video recorders, which we purchase from an original equipment manufacturer, and other devices.

Our cost of hardware and other revenue primarily includes cost of raw materials, tooling 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, video recorders and gunshot detection sensors, which we purchase from an original equipment manufacturer, and other devices.

Our cost of hardware and other revenue also includes royalty costs in connection with technology licensed from third-party providers.

22 unchanged sentences

Changes in deferred revenue are due to our performance under the contract as well as to cash received from new contracts for which services have not been provided.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

Research and Development

1 unchanged sentence

Our research and development of new products and services is a multidisciplinary effort across our product management, program management, software engineering, device engineering, quality engineering, configuration management and network operations teams.

Also included are non-personnel costs, such as consulting and professional fees paid to third-party development resources.

Also included are non-personnel costs, such as consulting and professional fees paid to third-party development resources as well as acquisition costs of in-process research and development with no alternative future use.

We invest substantial resources in research and development to enhance our platforms and applications, support our technology infrastructure, develop new capabilities and conduct quality assurance testing.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

Fair Value Measurements

8 unchanged sentences

The carrying amount of financial assets, including cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the short maturity and liquidity of those instruments.

Assets and Liabilities Measured at Fair Value on a Recurring Basis - in 2019 , 2018 and 2017 , we recorded liabilities for subsidiary unit awards and a contingent consideration liability related to acquisitions at fair value on a recurring basis.

Assets and Liabilities Measured at Fair Value on a Recurring Basis - In 2020, 2019 and 2018, we recorded assets for our money market accounts.

During parts of 2020 and 2019, we recorded liabilities for a contingent consideration liability related to acquisitions at fair value on a recurring basis.

Assets Measured at Fair Value on a Nonrecurring Basis - We measure certain assets, including property and equipment, goodwill and intangible and long-lived assets at fair value on a nonrecurring basis.

8 unchanged sentences

The majority of our accounts receivable balance is due from our service provider partners in North America.

We assess the concentrations of credit risk with respect to accounts receivables based on one industry and geographic region and believe that our reserve for uncollectible accounts is appropriate based on our history and this concentration.

We assess the concentrations of credit risk with respect to accounts receivables based on one industry and one geographic region and believe that our reserve for uncollectable accounts is appropriate based on our history and this concentration.

Stock-Based Compensation

We compensate our executive officers, board of directors, employees and consultants with stock-based compensation plans under our 2015 Equity Incentive Plan, or 2015 Plan.

We record stock-based compensation expense based upon the award’s grant date fair value and use an 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 record stock-based compensation expense related to time-based restricted stock units based upon the award’s grant date fair value and use an 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 record stock-based compensation expense related to performance-based restricted stock units based on management’s determination of the probable outcome of the performance conditions and we record a cumulative adjustment in periods in which there is a change in the estimated number of shares expected to vest.

Our equity awards generally vest over five years and are settled in shares of our common stock.

2 unchanged sentences

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.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

Our Employee Stock Purchase Plan, or 2015 ESPP, allows eligible employees to purchase shares of our common stock at 90 % of the fair market value of the closing price on the purchase date.

2 unchanged sentences

Compensation expense is recognized for the amount of the discount, net of actual forfeitures, over the six-month purchase period.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

401(k) Defined Contribution Plan

1 unchanged sentence

All of our employees are eligible to participate in the Plan.

For the years ended December 31, 2019 and 2018 , our discretionary match was 100 % of employee contributions up to 10 % of salary and up to a $ 4,000 maximum match.

For the year ended December 31, 2020, our discretionary match was 100 % of employee contributions up to 10 % of salary and up to a $ 5,000 maximum match.

For the years ended December 31, 2019 and 2018, our discretionary match was 100 % of employee contributions up to 10 % of salary and up to a $ 4,000 maximum match.

We recognized compensation expense of $ 5.0 million, $ 3.2 million and $ 2.7 million for the years ended December 31, 2020, 2019 and 2018, respectively, related to our matching contributions.

5 unchanged sentences

This valuation requires management to apply significant judgment in estimating the fair value of long-lived and intangible assets acquired, which involves the use of significant estimates and assumptions.

Significant estimates and assumptions in valuing intangible assets include estimates about future expected cash flows, discount rates, attrition rates related to acquired customer relationships, royalty rates and obsolescence factors related to acquired developed technology and royalty rates relate to acquired trade names.

Significant estimates and assumptions in valuing intangible assets include estimates about future expected cash flows, discount rates, attrition rates related to certain acquired customer relationships, royalty rates and obsolescence factors related to acquired developed technology and royalty rates relate to acquired trade names.

During the measurement period, we may record adjustments to the assets acquired and liabilities assumed.

6 unchanged sentences

On October 21, 2019, we acquired 85 % of the issued and outstanding capital stock of OpenEye.

Certain stockholders of OpenEye have the right to receive an earn-out payment of up to an additional $ 11.0 million based upon satisfaction of certain calendar 2020 revenue targets.

As of December 31, 2019 , the estimated fair value of the contingent consideration related to the potential earn-out payment using a Monte Carlo simulation model was $ 2.6 million , and this amount is recorded in accrued compensation in the consolidated balance sheets.

Certain stockholders of OpenEye had the right to receive an earn-out payment of up to an additional $ 11.0 million based upon satisfaction of certain calendar 2020 revenue targets.

As of December 31, 2020, the 2020 revenue targets were not met and the fair value of the contingent consideration related to the potential earn-out payment was zero .

As of December 31, 2019, the estimated fair value of the contingent consideration related to the potential earn-out payment using a Monte Carlo simulation model was $ 2.6 million and this amount was recorded in accrued compensation in the consolidated balance sheets.

Goodwill, Intangible Assets and Long-lived Assets

7 unchanged sentences

The amount of goodwill impairment is calculated as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

For our 2020 annual impairment review, we performed a qualitative assessment for our Alarm.com reporting unit, our only reporting unit with a goodwill balance.

2 unchanged sentences

Our assessment was performed as of October 1, 2020, and we have determined there have been no triggering events from our assessment date through December 31, 2020.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

Intangible Assets and Long-lived Assets

4 unchanged sentences

If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

For the year ended December 31, 2019 , we determined there were no impairments of our intangible assets with definite lives or long-lived assets.

For the years ended December 31, 2020, 2019 and 2018, we determined there were no impairments of our intangible assets with definite lives or long-lived assets.

Advertising Costs

8 unchanged sentences

In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.

Due to the uncertainty of realization of certain deferred tax assets related to our Canadian net operating losses and research and development tax credits, we established a valuation allowance of $ 0.3 million during the second quarter of 2019, which remained at $ 0.3 million as of December 31, 2019 .

As of December 31, 2018 , based on our historical and expected future taxable earnings, we believed it was more likely than not that we would realize all of the benefit of the existing deferred tax assets.

Accordingly, we did no t record a valuation allowance as of December 31, 2018 .

During 2020, we established a valuation allowance on state research and development tax credits of $ 1.3 million.

We are subject to income taxes in the United States and foreign jurisdictions based upon our business operations in those jurisdictions.

2 unchanged sentences

We record interest and penalties as a component of our income tax provision.

Treasury Stock

We account for treasury stock under the cost method and present treasury stock, including any applicable commissions and fees, as a component of stockholders’ equity in the consolidated balance sheets and statements of equity.

Treasury stock held by us may be retired or reissued in the future.

Comprehensive Income

2 unchanged sentences

Our basic net income per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

Our diluted net income per share attributable to common stockholders is calculated by giving effect to all potentially dilutive common stock when determining the weighted-average number of common shares outstanding.

For purposes of the diluted net

ALARM.COM HOLDINGS, INC.

1 unchanged sentence

December 31, 2020, 2019 and 2018

For purposes of the diluted net income per share calculation, options to purchase common stock, restricted stock units and unvested shares issued upon the early exercise of options that are subject to repurchase are considered to be potential common stock.

income per share calculation, options to purchase common stock, restricted stock units and unvested shares issued upon the early exercise of options that are subject to repurchase are considered to be potential common stock.

We have issued securities other than common stock that participate in dividends ("participating securities"), and therefore utilize the two-class method to calculate net income per share.

2 unchanged sentences

We also have redeemable noncontrolling interest related to our 85 % equity ownership interest in OpenEye.

When calculating net income attributable to the common stockholders, net income attributable to redeemable noncontrolling interest should be excluded from net income.

As a result, net income attributable to the common stockholders is equal to the net income less (i) dividends paid on unvested shares with any remaining earnings allocated in accordance with the bylaws between the outstanding common and preferred stock and (ii) net income attributable to redeemable noncontrolling interest as of the end of each period.

When calculating net income attributable to the common stockholders, net loss attributable to redeemable noncontrolling interest should be excluded from net income.

As a result, net income attributable to the common stockholders is equal to the net income less (i) dividends paid on unvested shares with any remaining earnings allocated in accordance with the bylaws between the outstanding common and preferred stock and (ii) net loss attributable to redeemable noncontrolling interest as of the end of each period.

Recent Accounting Pronouncements

On February 25, 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-02, “ Leases (Topic 842) ” or Topic 842, which requires lessees to recognize operating and financing lease liabilities and corresponding ROU assets on the balance sheet.

The update also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases.

In July 2018, the FASB amended the update to allow entities to apply the transition requirements of Topic 842 at the adoption date rather than at the beginning of the earliest comparative period presented.

Accordingly, the amendments in Topic 842 were effective for us beginning January 1, 2019.

On January 1, 2019, we adopted Topic 842 by applying the modified retrospective approach to all of our leases in effect as of that date.

We used the optional transition method, which required us to record the initial effect of Topic 842 as a cumulative-effect adjustment to retained earnings on January 1, 2019.

Additionally, we elected to use the package of practical expedients for the adoption of Topic 842, which allowed us not to reassess:

(i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any existing leases qualify for capitalization under Topic 842.

We also used the hindsight practical expedient when determining the lease term and assessing impairment of ROU assets.

The adoption of Topic 842 resulted in the recording of the following amounts on our consolidated balance sheets (in thousands):

Balance Sheet Caption

As of January 1, 2019

Property and equipment, net

Operating lease right-of-use assets

Operating lease liabilities (current)

Operating lease liabilities (noncurrent)

Accounts payable, accrued expenses and other current liabilities

Other liabilities

Accumulated deficit

The adoption of Topic 842 did not materially impact our consolidated statements of operations, consolidated statement of equity or consolidated statements of cash flows.

Not Yet Adopted

On June 16, 2016, the FASB issued ASU 2016-13, " Financial Instruments - Credit Losses (Topic 326)," which provides guidance designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

On June 16, 2016, the Financial Accounting Standards Board, or FASB, issued Topic 326 which provides guidance designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

From November 2018 to February 2020, amendments to Topic 326 were issued to clarify numerous accounting topics.

When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The amendment is effective on a modified retrospective basis for fiscal years beginning after December 15, 2019, and interim periods within those

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

fiscal years.

Early adoption is permitted for fiscal years and interim periods beginning after December 15, 2018.

To date, we have assessed the manner in which we currently estimate the allowance for doubtful accounts on our trade receivables, the composition of our notes receivable and our historical credit loss activity.

We are currently assessing forecasted market conditions and the impact this pronouncement may have on our consolidated financial statements.

This pronouncement will require additional disclosures within our notes to the consolidated financial statements.

The amendment was effective for us beginning on January 1, 2020.

On January 1, 2020, we adopted Topic 326 by applying the modified retrospective approach to our trade receivables and our notes receivable that were outstanding as of that date, which required us to record the initial effect of Topic 326 as a cumulative-effect adjustment to retained earnings on January 1, 2020.

The adoption of Topic 326 resulted in the recording of the following amounts on our consolidated balance sheets (in thousands):

Balance Sheet Caption As of January 1, 2020

Accumulated deficit $ 816

Accounts receivable, net ( 367 )

Other current assets ( 83 )

Other assets ( 366 )

The adoption of Topic 326 did not materially impact our consolidated statements of operations, consolidated statement of equity or our consolidated statements of cash flows.

On August 28, 2018, the FASB issued ASU 2018-13, " Fair Value Measurement (Topic 820):

5 unchanged sentences

The update also modifies and clarifies several existing disclosure requirements.

The amendment in this update was effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

On January 1, 2020, we adopted Topic 820 and updated our fair value measurement disclosures (see Note 10).

This pronouncement did not have a material impact on our consolidated financial statements or disclosures.

On January 16, 2020, the FASB issued ASU 2020-1, " Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815):

Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 ," which provides guidance on the interaction between accounting standards related to equity securities, equity method investments and certain derivatives.

This amendment clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

the measurement alternative immediately before applying, or upon discontinuing, the equity method.

The amendment also clarifies that an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method or the fair value option in accordance with the financial instruments guidance.

The amendment in this update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

The additional disclosure requirements and one of the modifications to an existing disclosure requirement should be applied prospectively while all other disclosure changes should be applied retrospectively to all periods presented upon the effective date.

Early adoption is permitted.

We are currently assessing the impact this pronouncement may have on our fair value measurement disclosures;

however, this pronouncement is not expected to have a material impact on our consolidated financial statements.

On January 1, 2020, we adopted this amendment on a prospective basis and the adoption did not have a material impact on our consolidated financial statements.

Not Yet Adopted

On December 18, 2019, the FASB issued ASU 2019-12, " Income Taxes (Topic 740):

3 unchanged sentences

Early adoption is permitted.

We are currently assessing the impact this pronouncement may have on our consolidated financial statements.

On January 16, 2020, the FASB issued ASU 2020-1, " Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815):

This amendment clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative immediately before applying, or upon discontinuing, the equity method.

The amendment in this update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

Early adoption is permitted.

This pronouncement is not expected to have a material impact on our consolidated financial statements.

We are currently assessing the impact this pronouncement may have on our consolidated financial statements, but we do not believe the adoption will have a material impact on our consolidated financial statements or disclosures.

On March 12, 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued such as the Eurodollar Base Rate, or LIBOR.

The update allows entities to elect not to apply certain modification accounting requirements to contracts affected by the discontinuation of a reference rate if certain criteria are met.

The amendment was effective beginning March 12, 2020 and will continue to be effective through December 31, 2022.

We are currently assessing the timing of adoption as well as the impact this pronouncement may have on our consolidated financial statements.

On August 5, 2020, the FASB issued ASU 2020-06, " Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ," which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.

The new guidance eliminates two of the three models in Subtopic 470-20 that require separating embedded conversion features from convertible instruments.

The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation.

The amendment in this update is effective for fiscal years beginning after December 15, 2021.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

The guidance allows for either full retrospective adoption or modified retrospective adoption.

Although we do not have any financial instruments impacted by this guidance as of December 31, 2020, due to the January 20, 2021 issuance of $ 500.0 million aggregate principal amount of 0 % convertible senior notes due January 15, 2026 in a private placement to qualified institutional buyers, we are currently assessing the impact this pronouncement may have on our consolidated financial statements when we adopt the pronouncement on January 1, 2022.

See Note 22 for details on the subsequent event related to the convertible senior notes.

Revenue from Contracts with Customers

3 unchanged sentences

The non-current portion of capitalized commission costs and upfront payments made to customers are reflected in other assets within our consolidated balance sheets.

Our amortization of contract assets during the years ended December 31, 2019 and 2018 were $ 2.4 million and $ 2.0 million , respectively.

There were no amortized commission costs during the year ended December 31, 2017 .

Our amortization of contract assets during the years ended December 31, 2020, 2019 and 2018 was $ 3.5 million, $ 2.4 million and $ 2.0 million, respectively.

We review the capitalized costs for impairment at least annually.

6 unchanged sentences

Year Ended December 31,

2020 2019 2018

Beginning of period balance $ 4,578 $ 2,881 $ —

6 unchanged sentences

Year Ended December 31,

2020 2019 2018

Beginning of period balance $ 10,498 $ 11,176 $ 12,678

6 unchanged sentences

Accounts receivable $ 89,502 $ 80,032

Allowance for doubtful accounts

Allowance for credit losses ( 4,696 ) ( 2,584 )

Allowance for product returns ( 1,480 ) ( 1,075 )

Accounts receivable, net $ 83,326 $ 76,373

For the years ended December 31, 2019 , 2018 and 2017 , we recorded a provision for doubtful accounts of $ 1.2 million , $ 0.1 million and $ 0.5 million , respectively.

For the year ended December 31, 2019 , we recorded a reduction to the reserve for product returns of $ 0.1 million .

For the years ended December 31, 2020, 2019 and 2018, we recorded a provision for credit losses on our accounts receivable of $ 2.2 million, $ 1.2 million and $ 0.1 million, respectively.

For the years ended December 31, 2020 and 2018, we recorded a $ 1.8 million and $ 0.3 million reserve for product returns in our hardware and other revenue, respectively.

Historically, we have not experienced write-offs for uncollectible accounts or sales returns that have differed significantly from our estimates.

Inventory, Net

The components of inventory, net are as follows (in thousands):

Raw materials

Finished goods

Total inventory, net

For the year ended December 31, 2019, we recorded a reduction to the reserve for product returns of $ 0.1 million in our hardware and other revenue.

ALARM.COM HOLDINGS, INC.

1 unchanged sentence

December 31, 2020, 2019 and 2018

Allowance for Credit Losses - Accounts Receivable

The changes in our allowance for credit losses for accounts receivable are as follows (in thousands):

Year Ended December 31, 2020

Subsidiaries All Other

Beginning of period balance $ ( 2,500 ) $ ( 84 )

Impact of adopting Topic 326 ( 212 ) ( 155 )

Provision for expected credit losses ( 2,109 ) ( 53 )

Write-offs 379 38

End of period balance $ ( 4,442 ) $ ( 254 )

The components of inventory are as follows (in thousands):

Raw materials $ 9,475 $ 8,921

Finished goods 34,806 25,247

Total inventory $ 44,281 $ 34,168

Property and Equipment, Net

Furniture and fixtures, computer software and equipment, leasehold improvements and real property are recorded at cost and presented net of depreciation.

Furniture, fixtures and office equipment, computer software and hardware, leasehold improvements and real property and improvements are recorded at cost and presented net of depreciation.

We record land at historical cost.

3 unchanged sentences

Leasehold improvements are amortized on a straight-line basis over the shorter of the lease terms or the asset lives.

Real property is amortized on a straight-line basis over lives ranging from 15 to 39 years.

Real property is amortized on a straight-line basis over lives ranging from 15 to 39 years and the improvements related to real property are amortized on a straight-line basis over the shorter of the life of the underlying real property or the asset lives.

The components of property and equipment, net are as follows (in thousands):

4 unchanged sentences

Leasehold improvements 25,546 23,223

Real property

Real property and improvements 4,917 4,917

Land 1,398 1,398

Total property and equipment 80,203 66,090

3 unchanged sentences

Amortization expense related to internal-use software of $ 2.4 million, $ 1.9 million and $ 0.8 million was included in those expenses for the years ended December 31, 2020, 2019 and 2018, respectively.

We had no disposals and write-offs of property and equipment that impacted the consolidated statements of operations during the year ended December 31, 2019 .

Within the Alarm.com segment, we disposed of and wrote off $ 1.4 million and $ 0.8 million of capitalized costs to research and development expenses within the consolidated statements of operations primarily related to the design of internal-use software that no longer met the requirements for capitalization during the years ended December 31, 2018 and 2017 , respectively.

We had no disposals and write-offs of property and equipment that impacted the consolidated statements of operations during the years ended December 31, 2020 and 2019.

Within the Alarm.com segment, we disposed of and wrote off $ 1.4 million of

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

capitalized costs to research and development expenses within the consolidated statements of operations primarily related to the design of internal-use software that no longer met the requirements for capitalization during the year ended December 31, 2018.

In December 2019, we purchased land and a commercial building located in Liberty Lake, Washington for $ 5.1 million.

Once renovations are complete, this building will be used by OpenEye for sales and training, research and development, warehousing and administrative purposes.

Asset Acquisition

On September 18, 2019 , Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party.

This building will be used by OpenEye for sales and training, research and development, warehousing and administrative purposes.

Asset Acquisitions

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 in-process research and development, or 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 and was included in research and development expense in our consolidated statements of operations during 2020, as the IPR&D had no alternative future use.

On March 12, 2020, Alarm.com Incorporated, 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 $ 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 and was included in research and development expense in our consolidated statements of operations during 2020, as the IPR&D had no alternative future use.

On September 18, 2019, Alarm.com Incorporated 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 strengthen our comprehensive suite of cloud-based solutions.

1 unchanged sentence

The $ 1.0 million consideration related to IPR&D was expensed at the time of the asset acquisition and was included in research and development expense in our consolidated statements of operations during 2019, as the IPR&D had no alternative future use.

On October 21, 2019 , Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired 85 % of the issued and outstanding capital stock of 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.

Acquisition of a Business - Shooter Detection Systems

On December 14, 2020, Alarm.com Incorporated acquired 100 % of the issued and outstanding ownership interest units of Shooter Detection Systems, LLC, or SDS.

SDS provides an indoor gunshot detection solution through the Guardian Indoor Active Shooter Detection System, which uses a combination of acoustic and infrared sensors and proprietary algorithms to detect gunshots and communicate shooting incident details to building occupants and security teams.

The acquisition of SDS expands our commercial solutions and helps our partners outfit commercial and enterprise customers with the indoor gunshot detection solution.

In consideration for the purchase of 100 % of the issued and outstanding ownership interest units of SDS, we paid $ 26.6 million in cash on December 14, 2020.

Pursuant to the terms of the unit purchase agreem ent, following the preliminary determination of the working capital of SDS as of the closing date, the purchase price decreased by $ 0.1 million.

The working capital adjustment is expected to be finalized in the first half of 2021.

The purchase price allocation, which is pending the final determination of the working capital, wa s not finalized as of the filing date of this Annual Report on Form 10-K.

ALARM.COM HOLDINGS, INC.

1 unchanged sentence

December 31, 2020, 2019 and 2018

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):

December 14, 2020

Calculation of Purchase Consideration:

Cash paid, net of working capital adjustment $ 26,514

Total consideration $ 26,514

Estimated Tangible and Intangible Net Assets:

Accounts receivable 1,179

Inventory 917

Other current assets 240

Property and equipment 77

Operating lease right-of-use assets 384

Other assets 348

Customer relationships 2,362

Developed technology 13,522

Trade name 512

Accounts payable ( 19 )

Accrued expenses ( 111 )

Operating lease current liabilities ( 51 )

Operating lease liabilities ( 333 )

Goodwill 7,176

Total estimated tangible and intangible net assets $ 26,514

Goodwill of $ 7.2 million reflects the value of acquired workforce and synergies we expect to achieve from expanding our commercial solutions through SDS's indoor gunshot detection solution.

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, SDS constituted a business and the assets and liabilities were recorded at their respective fair values as of December 14, 2020.

We developed our estimate of the fair value of intangible net assets using the with-and-without method for customer relationships, the multi-period excess earnings 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 SDS shared with its customers.

We valued the single group of customer relationships using the with-and-without method, an income approach.

The significant assumptions used in the with-and-without method include estimates about future expected cash flows from customer contracts and the discount rate.

We are amortizing the customer relationships, valued at $ 2.4 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of six 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 multi-period excess earnings method, an income approach.

The significant assumptions used in the multi-period excess earnings method include estimates about future expected cash flows from the developed technology, the obsolescence factor and the discount rate.

We are amortizing the SDS developed technology, valued

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

at $ 13.5 million, on an attribution method based on the discounted cash flows of the model over an estimated useful life of seven years .

We valued the trade names acquired using a relief from royalty method.

The significant assumptions used in relief from royalty method include future expected cash flows from the trade name, the royalty rate and the discount rate.

We are amortizing the trade names, valued at $ 0.5 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of five years .

Acquisition of a Business - OpenEye

On October 21, 2019, Alarm.com Incorporated acquired 85 % of the issued and outstanding capital stock of OpenEye.

OpenEye provides cloud-managed video surveillance solutions for the enterprise commercial market.

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 first half of 2020 along with a portion of the holdback.

The working capital adjustment was 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 $ 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 Annual Report on Form 10-K.

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):

An earn-out of up to an additional $ 11.0 million was payable if certain calendar 2020 revenue targets were met, of which contingent consideration of $ 2.8 million was recorded as of October 21, 2019.

As of December 31, 2020, the 2020 revenue targets were not met and the fair value of the contingent consideration related to the potential earn-out payment decreased to zero .

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

October 21, 2019

4 unchanged sentences

Total consideration $ 67,016

Estimated Tangible and Intangible Net Assets:

Tangible and Intangible Net Assets:

Accounts receivable 5,742

Inventory 4,687

Other current assets 216

2 unchanged sentences

Developed technology 16,583

Trade name 2,219

Accounts payable ( 2,746 )

4 unchanged sentences

Redeemable noncontrolling interest ( 11,411 )

Total estimated tangible and intangible net assets

Goodwill 42,071

Total tangible and intangible net assets $ 67,016

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

Goodwill of $ 42.1 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.

We allocate goodwill to reporting units based on expected benefit from synergies and have allocated the goodwill to the Alarm.com segment.

The purchase price allocation for the purchase of 85 % of the issued and outstanding capital stock of OpenEye was finalized during the second quarter of 2020.

The final fair value of the assets and liabilities reflects an increase of $ 0.7 million in the deferred tax liability and an increase of $ 0.7 million in goodwill based on a measurement period adjustment determined upon filing of the pre-acquisition period tax return related to our purchase of 85 % of the issued and outstanding capital stock of OpenEye.

Fair Value of Net Assets Acquired and Intangibles

3 unchanged sentences

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

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

relationships using the multi-period excess earnings method, an income approach.

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.

15 unchanged sentences

This redeemable noncontrolling interest is considered temporary equity and we report it between liabilities and stockholders’ equity in the consolidated balance sheets.

The redemption value of the of the noncontrolling interest was $ 11.4 million as of October 21, 2019 , and decreased to $ 11.2 million as of December 31, 2019 .

The redemption value of the noncontrolling interest was $ 11.4 million as of October 21, 2019, and decreased to $ 10.7 million as of December 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.

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.

At October 21, 2019 , the fair value of the liability was $ 2.8 million .

See Note 10 for details on the unobservable inputs used in the fair value estimate.

Connect and Piper Business Units from Icontrol Networks, Inc.

On March 8, 2017 , in accordance with the asset purchase agreement we entered into with Icontrol Networks, Inc., or Icontrol, on June 23, 2016, we acquired certain assets and assumed certain liabilities of the Connect line of business and all of the outstanding equity interests of the two subsidiaries through which Icontrol conducted its Piper line of business, or the Acquisition.

Connect provides an interactive security and home automation platform for service providers.

Piper provides an all-in-one video and home automation hub.

We expect the addition of new technology infrastructure, talent, key relationships and hardware devices to help accelerate our development of intelligent, data-driven smart residential and commercial property services.

The cash consideration was $ 148.5 million , after the estimated working capital adjustment, of which $ 14.5 million was deposited in escrow and was released in accordance with the asset purchase agreement upon the finalization of indemnification obligations of Icontrol stockholders and the final determination of closing working capital.

We used $ 81.5 million of cash on hand and drew $ 67.0 million under our senior line of credit with Silicon Valley Bank, or SVB, and a syndicate of lenders to fund the Acquisition.

The Acquisition also included non-cash consideration.

In accordance with the terms of the asset purchase agreement, we were obligated to assume the Icontrol 2013 Equity Incentive Plan and Icontrol 2003 Stock Plan, or collectively, the Icontrol Plans, and converted the 2,001,387 unvested employee stock options into 70,406 Alarm.com stock options using a conversion ratio stated in the agreement to convert the original exercise price and number of options.

The fair value of the unvested stock options on the date of the Acquisition 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 the Alarm.com common stock on the date of acquisition.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

applied our graded vesting accounting policy to the fair value of these assumed options and determined $ 1.4 million of the fair value was attributable to pre-combination services and was 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 are being recognized over the remaining service periods of the stock options.

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

March 8, 2017

Calculation of Purchase Consideration:

Cash paid, net of working capital adjustment

Assumed stock options

Total consideration

Tangible and Intangible Net Assets:

Accounts receivable

Current assets

Long-term assets

Customer relationships

Developed technology

Current liabilities

Long-term liabilities

Total tangible and intangible net assets

Goodwill of $ 36.6 million reflects the value of acquired workforce and synergies we expect to achieve from integrating support for Connect's security service providers and for the Software platform.

The goodwill will be deductible for tax purposes.

We allocated goodwill to reporting units based on expected benefit from our synergies, and have allocated the goodwill to the Alarm.com segment.

The purchase price allocation for the Acquisition was finalized during the third quarter of 2017.

The final fair value of the assets and liabilities related to the Acquisition reflects an increase of $ 0.1 million in tangible assets, net and a decrease of $ 0.1 million in goodwill based on working capital adjustments identified by us.

Fair Value of Net Assets Acquired and Intangibles

In accordance with ASC 805, the business units acquired in the Acquisition constituted a business and the assets and liabilities were recorded at their respective fair values as of March 8, 2017 .

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 Connect 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 attrition and renewal rate, margin and discount rate.

We are amortizing the first customer relationship, valued at $ 92.5 million , on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of twelve years and the second group of customer relationships, valued at $ 0.8 million , on the same basis, over an estimated useful life of four years .

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

Developed Technology

Developed technology primarily consists of intellectual property of proprietary software that is marketed for sale.

The Software platform is software for interactive security, automation and related solutions that is typically deployed and operated by the service provider in its own network operations center.

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 royalty rate and discount rate.

We are amortizing the Connect developed technology, valued at $ 4.4 million , on an attribution method based on the discounted cash flows of the model over an estimated useful life of three years .

Other developed technologies, valued at $ 0.3 million , were also acquired.

We determined that there was no fair value for the Connect trade name as the largest service provider partner for Connect had re-branded the interactive security and automation platform and marketed it under the service provider partner 's own name.

We valued the other trade names acquired using a relief from royalty method.

We used several assumptions in the income approach, including royalty and discount rates.

We are amortizing the other trade names, valued at $ 0.2 million , on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of three years .

Deferred Tax Asset

The equity interests in the subsidiaries we acquired provided for a carryover tax basis in goodwill and intangible assets that arose from a previous acquisition.

We recorded a deferred tax asset of $ 4.1 million that represents the excess of the carryover tax basis in those previously acquired goodwill and intangible assets over the fair value of goodwill and intangible assets we recorded on the date of the Acquisition.

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

January 1, 2017

Calculation of Purchase Consideration:

Cash paid, net of working capital adjustment

Tangible and Intangible Net Assets:

Developed technology

Current liabilities

Total tangible and intangible net assets

Goodwill of $ 2.3 million reflects the value of acquired workforce and expected synergies from pairing ObjectVideo Labs' video analytics capabilities with our offerings.

The goodwill will be deductible for tax purposes.

The purchase price allocation for the ObjectVideo Labs acquisition was finalized during the third quarter of 2017.

The final fair value of the assets and liabilities related to the ObjectVideo Labs acquisition reflects an increase of $ 0.4 million in developed technology and a decrease of $ 0.4 million in goodwill as well as a corresponding change to amortization of the developed technology based on our use of the replacement cost method to value the developed technology.

We accounted for the contingent consideration related to the potential earn-out payment using fair value and established 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.

As of December 31, 2020, the 2020 revenue targets were not met and the fair value of the contingent consideration related to the potential earn-out

ALARM.COM HOLDINGS, INC.

1 unchanged sentence

December 31, 2020, 2019 and 2018

Fair Value of Net Assets Acquired and Intangibles

In accordance with ASC 805, the assets and liabilities of ObjectVideo Labs we acquired were recorded at their respective fair values as of January 1, 2017 , the date of the acquisition.

We developed our estimate of the fair value of intangible assets using the replacement cost method for the developed technology.

Developed Technology

Developed technology recorded separately from goodwill consists of intellectual property such as proprietary software used internally for revenue producing activities.

ObjectVideo Labs proprietary software consists of source code and video analytics testing programs used internally to provide video analytics consulting services and research and development to customers and for the SaaS Alarm.com platform.

We valued the developed technology by applying the replacement cost method.

We used several assumptions in this cost approach, which included analyzing costs that a company would expect to incur to recreate an asset of equivalent utility.

We amortized the developed technology, valued at $ 3.8 million , on a straight-line basis over an estimated useful life of two years which coincides with the rapidly developing technology of video analytics.

Unaudited Pro Forma Information - OpenEye

The following unaudited pro forma data is presented as if OpenEye were included in our historical consolidated statements of operations beginning January 1, 2018.

payment decreased to zero .

See Note 10 for details on the significant unobservable inputs used in the fair value estimate and post-acquisition accounting.

Unaudited Pro Forma Information - SDS

The following unaudited pro forma data is presented as if SDS were included in our historical consolidated statements of operations beginning January 1, 2019.

These pro forma results do not necessarily represent what would have occurred if all the business combination had taken place on January 1, 2019, 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 OpenEye business combination with the following adjustments:

This pro forma financial information includes our historical financial statements and those of our SDS business combination with the following adjustments:

(i) we adjusted the pro forma amounts for income taxes, (ii) we adjusted for amortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2019, and (iii) we adjusted for transaction fees incurred and reclassified them to January 1, 2019.

1 unchanged sentence

Year Ended December 31,

Revenue $ 626,080 $ 508,662

Net income attributable to common stockholders 75,258 52,999

1 unchanged sentence

Net income attributable to common stockholders per share - diluted $ 1.48 $ 1.04

Business Combinations in Operations - OpenEye

The operations of the OpenEye business combination discussed above were included in the consolidated financial statements as of the acquisition date.

Business Combinations in Operations - SDS

The operations of the SDS business combination discussed above were included in the consolidated financial statements as of the acquisition date.

The following table presents the revenue and earnings of the business combination in the year of acquisition as reported within the consolidated financial statements (in thousands):

Year Ended December 31, 2020

Unaudited Pro Forma Information - Connect and Piper Business Units from Icontrol and ObjectVideo Labs

The following unaudited pro forma data is presented as if the Acquisition and ObjectVideo Labs were included in our historical consolidated statements of operations beginning January 1, 2016.

These pro forma results do not necessarily represent what would have occurred if all the business combinations had taken place on January 1, 2016, 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:

(i) we adjusted the pro forma amounts for income taxes, (ii) we applied interest expense as if the additional borrowing for the acquisitions were as of January 1, 2016, (iii) we adjusted for amortization expense assuming the fair

Revenue $ 334

Net loss ( 413 )

Unaudited Pro Forma Information - OpenEye

The following unaudited pro forma data is presented as if OpenEye were included in our historical consolidated statements of operations beginning January 1, 2018.

These pro forma results do not necessarily represent what would have occurred if all the business combination had taken place on January 1, 2018, 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 OpenEye business combination with the following adjustments:

(i) we adjusted the pro forma amounts for income taxes, (ii) we adjusted for amortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2018, and (iii) we adjusted for transaction fees incurred and reclassified them to January 1, 2018.

ALARM.COM HOLDINGS, INC.

1 unchanged sentence

December 31, 2020, 2019 and 2018

value adjustments to intangible assets had been applied beginning January 1, 2016, and (iv) we adjusted for transaction fees incurred and reclassified them to January 1, 2016.

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, except per share data):

Year Ended December 31,

Net income per diluted share

Business Combinations in Operations - Connect and Piper Business Units from Icontrol and ObjectVideo Labs

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 (in thousands):

Revenue $ 527,550 $ 451,013

Net income attributable to common stockholders 51,075 13,264

Net income attributable to common stockholders per share - basic $ 1.05 $ 0.27

Net income attributable to common stockholders per share - diluted $ 1.02 $ 0.26

Business Combinations in Operations - OpenEye

The operations of the OpenEye business combination discussed above were included in the consolidated financial statements as of the acquisition date.

The following table presents the revenue and losses of the business combination in the year of acquisition as reported within the consolidated financial statements (in thousands):

Year Ended December 31, 2019

For the Acquisition, we included the results of Connect's operations since its acquisition date in the Alarm.com segment and the results of Piper's operations since its acquisition date in the Other segment.

We included the results of ObjectVideo Labs operations since its acquisition date in the Alarm.com segment.

Revenue $ 5,863

Net loss ( 1,646 )

Goodwill and Intangible Assets, Net

The changes in goodwill by reportable segment are outlined below (in thousands):

Alarm.com Other Total

Balance as of January 1, 2019 $ 63,591 $ — $ 63,591

2 unchanged sentences

Goodwill acquired 7,176 — 7,176

Measurement period adjustment 699 — 699

Balance as of December 31, 2020 $ 112,838 $ — $ 112,838

On October 21, 2019, we acquired 85 % of the issued and outstanding capital stock of OpenEye and recorded $ 42.1 million of goodwill in the Alarm.com segment.

There were no impairments of goodwill recorded during the year s ended December 31, 2019 , 2018 or 2017 .

On December 14, 2020, we acquired 100 % of the issued and outstanding ownership interest units of SDS and recorded $ 7.2 million of goodwill in the Alarm.com segment.

There were no impairments of goodwill recorded during the years ended December 31, 2020, 2019 or 2018.

As of December 31, 2020, the accumulated balance of goodwill impairments was $ 4.8 million, which is related to our acquisition of EnergyHub in 2013.

The following table reflects changes in the net carrying amount of the components of intangible assets (in thousands):

Relationships

Relationships Developed

Technology Trade Name Total

Balance as of January 1, 2019 $ 77,264 $ 1,678 $ 125 $ 79,067

Intangible assets acquired 19,805 16,583 2,219 38,607

Amortization ( 12,673 ) ( 1,441 ) ( 122 ) ( 14,236 )

Balance as of December 31, 2019 84,396 16,820 2,222 103,438

Intangible assets acquired 2,362 13,522 512 16,396

Amortization ( 14,088 ) ( 2,119 ) ( 368 ) ( 16,575 )

Balance as of December 31, 2020 $ 72,670 $ 28,223 $ 2,366 $ 103,259

3 unchanged sentences

We recorded $ 16.6 million, $ 14.2 million and $ 15.2 million of amortization related to our intangible assets for the years ended December 31, 2020, 2019 and 2018, respectively.

There were no impairments of long-lived assets during the years ended December 31, 2019 , 2018 and 2017 .

There were no impairments of long-lived intangible assets during the years ended December 31, 2020, 2019 and 2018.

The following tables reflect the weighted-average remaining life and carrying value of finite-lived intangible assets (in thousands, except weighted-average remaining life):

December 31, 2020

Amount Accumulated

Amortization Net

Value Weighted-

Remaining Life

1 unchanged sentence

Developed technology 44,064 ( 15,841 ) 28,223 7.3

Trade name 3,815 ( 1,449 ) 2,366 4.0

Other 234 ( 234 ) — 0.0

Total intangible assets $ 174,206 $ ( 70,947 ) $ 103,259

December 31, 2019

Amount Accumulated

Amortization Net

Value Weighted-

Remaining Life

1 unchanged sentence

Developed technology 30,542 ( 13,722 ) 16,820 8.7

Trade name 3,304 ( 1,082 ) 2,222 4.8

Other 234 ( 234 ) — 0.0

Total intangible assets $ 157,811 $ ( 54,373 ) $ 103,438

The following table reflects the future estimated amortization expense for intangible assets (in thousands):

Year Ended December 31,

Year Ended December 31, Amortization

2021 $ 17,044

2026 and thereafter 26,160

Total future amortization expense $ 103,259

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

Purchases of Patents and Patent Licenses

From time to time, we enter into agreements to purchase patents or patent licenses.

In April 2020, we purchased 30 patents for $ 0.9 million and in October 2020, we purchased one patent for $ 0.2 million.

The carrying value, net of amortization, of our purchased patents and patent licenses was $ 2.9 million and $ 2.4 million as of December 31, 2020 and 2019, respectively.

As of December 31, 2019 and 2018 , $ 0.5 million of patent costs were included in other current assets and $ 1.9 million and $ 2.4 million of patent costs were included in other assets, respectively.

In October 2018, we purchased six patents for $ 1.1 million , which increased our historical patent costs related to purchased patents and patent licenses to $ 5.9 million .

We are amortizing the patent costs over the estimated useful lives of the patents, which range from three years to twelve years .

As of December 31, 2020 and 2019, $ 0.7 million and $ 0.5 million of patent costs were included in other current assets and $ 2.2 million and $ 1.9 million of patent costs were included in other assets, respectively.

We have $ 7.0 million of historical cost in purchased patents and patent licenses as of December 31, 2020.

We are amortizing the patent costs over the estimated useful lives of the patents, which range from three years to eighteen years .

Patent cost amortization of $ 0.4 million, $ 0.4 million and $ 0.5 million was included in cost of SaaS and license revenue in our consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018, respectively.

Patent cost amortization of $ 0.1 million and less than $ 0.1 million was included in amortization and depreciation in our consolidated statements of operations for the year ended December 31, 2019 and 2018 , respectively.

There was no amortization of patent costs included in amortization and depreciation during the year ended December 31, 2017 .

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

Patent cost amortization of $ 0.2 million, $ 0.1 million and less than $ 0.1 million was included in amortization and depreciation in our consolidated statements of operations for the year ended December 31, 2020, 2019 and 2018, respectively.

Loan to a Distribution Partner

3 unchanged sentences

The advance period for the loan was amended in August 2017 to begin each year on September 1 and end each year on December 31.

Interest on the outstanding principal accrued at a rate per annum equal to the greater of 6.0 % or the Eurodollar Base Rate, or LIBOR, plus 4.0 % , as determined on the first date of each annual advance period.

Interest on the outstanding principal accrued at a rate per annum equal to the greater of 6.0 % or LIBOR, plus 4.0 %, as determined on the first date of each annual advance period.

The repayment of principal and accrued interest was due in three installments beginning in July and ending in August following the advance period.

The term date of the loan was August 31, 2019;

The maturity date of the loan was August 31, 2019;

however, the borrower had the option to extend the term of the loan for two successive terms of one year each.

In May 2018, the loan agreement with our distribution partner was amended to convert the entire $ 4.0 million note receivable outstanding into a $ 4.0 million term loan.

The term loan matures on July 31, 2022 and requires annual principal repayments of $ 1.0 million on July 31 of each year, commencing on July 31, 2019.

The term loan also requires monthly interest payments, with interest accruing on the outstanding principal balance at a rate per annum equal to 6.0 % through June 30, 2018 and a rate per annum equal to the LIBOR rate on the first of any interest period plus 7.0 % beginning on July 1, 2018.

As of December 31, 2019 and 2018 , $ 1.0 million of the note receivable balance was included in other current assets in our consolidated balance sheets.

As of December 31, 2019 and 2018 , $ 2.0 million and $ 3.0 million of the note receivable balance was included in other assets in our consolidated balance sheets, respectively.

The term loan had a maturity date of July 31, 2022 and required annual principal repayments of $ 1.0 million on July 31 of each year, commencing on July 31, 2019.

The term loan also required monthly interest payments, with interest accruing on the outstanding principal balance at a rate per annum equal to 6.0 % through June 30, 2018 and a rate per annum equal to the LIBOR rate on the first of any interest period plus 7.0 % beginning on July 1, 2018.

In April 2017, we entered into a subordinated credit agreement with an affiliated entity of the distribution partner and loaned the affiliated entity $ 3.0 million, with a maturity date of November 21, 2022.

Interest on the outstanding principal balance accrues at a rate of 8.5 % per annum and requires monthly interest payments.

The $ 3.0 million loan receivable balance was included in other assets as of December 31, 2019 and 2018 .

For the years ended December 31, 2019 , 2018 and 2017 , we recognized $ 1.9 million , $ 1.3 million and $ 1.2 million of revenue from the distribution partners associated with these loans.

Loan to a Hardware Supplier

In October 2018, we entered into a subordinate convertible promissory note with one of our hardware suppliers, or the October 2018 Promissory Note, which was amended in November 2018, January 2019 and February 2019 as a result of the hardware supplier's financial restructuring.

Interest on the outstanding principal balance accrued at a rate of 8.5 % per annum and required monthly interest payments.

In June 2020, we amended the term loan with our distribution partner and also amended the subordinated credit agreement with the affiliated entity of the distribution partner.

At the time of the amended term loan and subordinated credit agreement in June 2020, the outstanding balance of the term loan was $ 3.0 million and the outstanding balance of the subordinated credit agreement was $ 3.0 million.

Under the amended terms, the distribution partner paid us $ 2.0 million in principal for the term loan on June 9, 2020 and the remaining $ 1.0 million was transferred to the amended subordinated credit agreement with the affiliated entity of the distribution partner.

As of December 31, 2020, none of the notes receivable balance related to the amended term loan was outstanding.

As of December 31, 2019, $ 1.0 million of the note receivable balance related to the term loan was included in other current assets in our consolidated balance sheets and $ 2.0 million of the note receivable balance was included in other assets in our consolidated balance sheets.

The amended subordinated credit agreement with the affiliated entity of the distribution partner matures on September 9, 2025 and interest on the outstanding principal balance accrues at a rate of 9.0 % per annum and is payable in kind.

As of December 31, 2020 and 2019, $ 4.2 million and $ 3.0 million of the notes receivable balance related to the subordinated credit agreement was included in other assets in our consolidated balance sheets, respectively.

For the years ended December 31, 2020, 2019 and 2018, we recognized $ 2.4 million, $ 1.9 million and $ 1.3 million of revenue from the distribution partners associated with these loans, respectively.

Loan to and Investment in a Hardware Supplier

In October 2018, we entered into a subordinate convertible promissory note with one of our hardware suppliers, or the October 2018 Promissory Note, which was subsequently amended.

In March 2019, we entered into a separate secured promissory note with the same hardware supplier, which, together with the October 2018 Promissory Note, we refer to as the Promissory Notes.

Under the Promissory Notes, we agreed to provide the hardware supplier loans of up to $ 7.4 million, collateralized by all assets owned by the supplier.

Interest on the outstanding principal accrued at a rate per annum equal to 12.0 % , of which 6.0 % per annum was payable in cash and the remaining 6.0 % per annum was payable in kind.

Payment of accrued interest was due quarterly beginning with the quarter ended March 31, 2019.

The repayment of principal was due at the term date, which was the earlier of (i) the five-year anniversary of the issuance date of each of the Promissory Notes, (ii) the occurrence of a change of control, (iii) one day following the maturity day of the hardware supplier's senior indebtedness or (iv) immediately upon the acceleration of the hardware supplier's senior indebtedness.

In March 2019, we also purchased and acquired a secured promissory note, or the Acquired Promissory Note, that matured on March 30, 2019 and was originally executed between our hardware supplier and another third-party secured creditor.

The Acquired Promissory Note had an outstanding balance of $ 26.6 million as of December 31, 2018, including interest.

Interest on the outstanding principal accrued at a rate per annum equal to 13.0 % .

Under the terms of the Acquired Promissory Note, we paid $ 16.4 million to the third-party secured creditor in exchange for all of the rights associated with the Acquired Promissory Note, including a security interest and a right to enforce that interest against all assets owned by the hardware supplier.

In addition to the $ 16.4 million paid in March 2019, we agreed to pay the third-party secured creditor an additional $ 6.0 million , subject to certain contingencies measured as of May 4, 2019.

Based on the outcome of those contingencies, we recorded a $ 6.0 million liability in March 2019 related to the Acquired Promissory Note and paid the $ 6.0 million contingent liability during the three months ended September 30, 2019.

The fair value of the Acquired Promissory Note at the date of purchase was $ 22.4 million , which represented the initial cash consideration paid in March 2019 and the contingent consideration paid in September 2019.

On May 6, 2019, we entered into a forbearance agreement with the hardware supplier, or the Forbearance Agreement.

Under the Forbearance Agreement, the hardware supplier agreed to pay us the outstanding balance of principal and interest under the Promissory Notes and the Acquired Promissory Note before June 30, 2019.

In consideration for the full and timely payments under the Forbearance Agreement, we agreed to temporarily forbear from exercising the remedies available to us with respect to the collateral securing the Promissory Notes and the Acquired Promissory Note.

On June 24, 2019, we entered into a Forbearance Extension Agreement with the hardware supplier, under which the hardware supplier agreed to pay us $ 7.4 million on or before June 24, 2019.

In consideration for the $ 7.4 million payment under the Forbearance Extension Agreement, we agreed to temporarily forbear from exercising the remedies available to us with respect to the collateral securing the Promissory Notes and the Acquired Promissory Note until July 10, 2019.

ALARM.COM HOLDINGS, INC.

1 unchanged sentence

December 31, 2020, 2019 and 2018

The Acquired Promissory Note had an outstanding balance of $ 26.6 million as of December 31, 2018, including interest.

We paid $ 16.4 million to the third-party secured creditor in exchange for all of the rights associated with the Acquired Promissory Note, including a security interest and a right to enforce that interest against all assets owned by the hardware supplier.

We also paid an additional $ 6.0 million to the third-party secured creditor in September 2019 based on the outcome of certain contingencies measured as of May 4, 2019.

The fair value of the Acquired Promissory Note at the date of purchase was $ 22.4 million, which represented the initial cash consideration paid in March 2019 and the contingent consideration paid in September 2019.

On June 24, 2019, we received a payment of $ 7.4 million from the supplier for the partial satisfaction of amounts due under the Promissory Notes and the Acquired Promissory Note.

On July 15, 2019, we received an additional payment of $ 25.0 million from the supplier and converted the remaining $ 5.6 million outstanding notes receivable balance into an equity investment in the hardware supplier within the Alarm.con segment.

We have concluded that the $ 5.6 million equity investment does not meet the criteria for consolidation and will be accounted for using the measurement alternative.

On July 15, 2019, we received an additional payment of $ 25.0 million from the supplier and converted the remaining $ 5.6 million outstanding notes receivable balance into 9,520,832 shares of Series B preferred stock in the hardware supplier.

We concluded that the $ 5.6 million equity investment, which is included in the Alarm.com segment, does not meet the criteria for consolidation and will be accounted for using the measurement alternative.

Under the alternative, we measure investments without readily determinable fair values at cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments.

2 unchanged sentences

As a result of the $ 25.0 million payment received and conversion of the $ 5.6 million outstanding notes receivable balance into an equity investment on July 15, 2019, we recorded interest of $ 1.7 million within interest income and a gain of $ 6.9 million within other income, net, in our consolidated statements of operations during the year ended December 31, 2019, related to the Promissory Notes and the Acquired Promissory Note.

As of December 31, 2019 , there was no remaining outstanding balance of the Promissory Notes and the Acquired Promissory Note.

As of December 31, 2018 , the outstanding balance of the Promissory Notes excluding interest was $ 3.3 million and was included in other assets in our consolidated balance sheets prior to any adjustments for impairment.

As of December 31, 2020 and 2019, there was no remaining outstanding balance of the Promissory Notes and the Acquired Promissory Note.

The total equity investment in the hardware supplier was $ 5.6 million as of December 31, 2020 and 2019.

Loan to a Service Provider Partner

In July 2020, we entered into a loan agreement with a service provider partner, under which we agreed to loan the service provider partner up to $ 2.5 million , collateralized by the assets of the service provider partner.

Interest on the outstanding principal accrues at a rate per annum equal to 9.0 % and monthly interest and principal payments are required beginning in February 2021.

The maturity date of the loan is July 24, 2025.

As of December 31, 2020, $ 1.2 million of principal was outstanding from the service provider partner under the loan agreement.

For the years ended December 31, 2020, 2019 and 2018, we recognized $ 0.1 million, less than $ 0.1 million and less than $ 0.1 million of revenue from the distribution partner associated with these loans, respectively.

Investment in a Platform Partner

In 2013, we paid $ 3.5 million in cash to purchase 3,548,820 Series A convertible preferred shares from one of our platform partners.

In 2014, we entered into a Series 1 Preferred Stock purchase agreement with the platform partner and another investor.

The other investor purchased shares of the platform partner’s Series 1 Preferred Stock.

As a result of the purchase, our 3,548,820 shares of Series A convertible preferred shares converted into 3,548,820 shares of common stock.

Based upon the level of equity investment at risk, the platform partner is a variable interest entity, or VIE.

We are not the primary beneficiary of the platform partner VIE because we do not direct the activities of the platform partner that most significantly impact its economic performance.

We account for the equity investment in the platform partner using the measu rement alternative.

On July 31, 2020, the platform partner was acquired by an unrelated third party and, as a result of the sale, we received proceeds of $ 25.7 million in exchange for our shares of common stock.

As a result of the sale, we recorded a gain of $ 24.7 million within other income, net, in our consolidate d statements of operations during the year ended December 31, 2020.

As of December 31, 2020 , our investment in the platform partner was zero a nd as of December 31, 2019 , our investment in the platform partner was $ 1.0 million and was included in other assets in our consolidated balance sheets.

Investment in a Technology Partner

In December 2016, we paid $ 0.3 million for a convertible promissory note with a technology partner.

In April 2018, the $ 0.3 million convertible promissory note converted into 135,135 shares of Series A-1 Preferred Stock.

At the time of conversion, we

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

determined there was no value related to the Series A-1 Preferred Stock.

Based on observable price changes from orderly transactions for similar investments, we increased the amount of our investment by $ 0.7 million and recorded a gain within o ther income, net, in our consolidate d statements of operations during the year ended December 31, 2020.

Our investment in the technology partner was $ 0.7 million and zero as of December 31, 2020 and 2019, respectively.

Subsequent to December 31, 2020, in February 2021, we paid $ 5.0 million in cash to purchase 1,000,000 shares of Series B-2 Preferred Stock from the same technology partner as part of a financing round that included other investors.

Allowance for Credit Losses - Notes Receivable

The changes in our allowance for credit losses for notes receivable are as follows (in thousands):

Year Ended December 31, 2020

Receivables Hardware

Beginning of period balance $ — $ ( 16 )

Impact of adopting Topic 326 ( 434 ) ( 15 )

Recovery of / (provision for) expected credit losses 360 ( 1 )

Write-offs 1 16

End of period balance $ ( 73 ) $ ( 16 )

We manage our notes receivables using delinquency as a key credit quality indicator.

Current and delinquent notes receivable by class of financing receivables and by year of origination as of December 31, 2020 are as follows (in thousands):

Loan Receivables:

2020 2019 2018 2017 2016 Prior Total

Current $ 1,200 $ 17 $ — $ 4,207 $ — $ — $ 5,424

30-59 days past due — — — — — — —

60-89 days past due — — — — — — —

90-119 days past due — — — — — — —

120+ days past due — — — — — — —

Total $ 1,200 $ 17 $ — $ 4,207 $ — $ — $ 5,424

Hardware Financing Receivables:

Current $ — $ 67 $ 49 $ — $ — $ — $ 116

30-59 days past due — — — 2 — — 2

60-89 days past due — 57 27 — — — 84

90-119 days past due — — — — — — —

120+ days past due — — — 9 — — 9

Total $ — $ 124 $ 76 $ 11 $ — $ — $ 211

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

The amortized cost of notes receivables placed on nonaccrual status is as follows (in thousands):

December 31, 2020 December 31, 2019

Loan receivables $ — $ —

Hardware financing receivables 9 16

Total $ 9 $ 16

During the years ended December 31, 2020, 2019 and 2018, there was no interest income recognized related to notes receivables that were in nonaccrual status.

As of December 31, 2020 and 2019, there were no notes receivables placed in nonaccrual status for which there was not a related allowance for credit losses.

As of December 31, 2020 and 2019, there were no notes receivables that were 90 days or greater past due for which we continued to accrue interest income.

Prepaid Expenses

As of December 31, 2019, $ 6.1 million of prepaid expenses were included in other current assets.

As of December 31, 2018, $ 5.0 million of prepaid expenses were included in other current assets.

In February 2020, we made a prepayment of $ 4.7 million for long lead-time parts related to our inventory.

As of December 31, 2020 and 2019, $ 8.4 million and $ 6.1 million of prepaid expenses were included in other current assets, respectively, primarily related to software licenses.

Fair Value Measurements

3 unchanged sentences

Fair value measurements in:

Level 1 Level 2 Level 3 Total

Money market accounts $ 221,407 $ — $ — $ 221,407

Subsidiary unit awards

Total $ 221,407 $ — $ — $ 221,407

Contingent consideration liability from acquisitions $ — $ — $ — $ —

Total $ — $ — $ — $ —

Fair Value Measurements on a Recurring Basis as of

1 unchanged sentence

Fair value measurements in:

Level 1 Level 2 Level 3 Total

Money market accounts $ 93,303 $ — $ — $ 93,303

Subsidiary unit awards

Total $ 93,303 $ — $ — $ 93,303

Contingent consideration liability from acquisitions $ — $ — $ 2,595 $ 2,595

Total $ — $ — $ 2,595 $ 2,595

ALARM.COM HOLDINGS, INC.

1 unchanged sentence

December 31, 2020, 2019 and 2018

The following table summarizes the change in fair value of the Level 3 liabilities with significant unobservable inputs (in thousands):

Fair Value Measurements Using Significant Unobservable Inputs

Year Ended December 31, 2019

The following table summarizes the change in fair value of the Level 3 liabilities for contingent consideration liabilities from acquisitions with significant unobservable inputs (in thousands):

Year Ended December 31,

Subsidiary Unit Awards

Contingent Consideration Liability from Acquisitions

Subsidiary Unit Awards

Beginning of period balance $ 2,595 $ —

4 unchanged sentences

Our money market assets are valued using quoted prices in active markets.

The liability for the subsidiary unit awards relates to agreements established with employees of our subsidiaries for cash awards contingent upon the subsidiary companies meeting certain financial milestones such as revenue, working capital, EBITDA and EBITDA margin.

We account for these subsidiary awards using fair value and establish liabilities for the future payment for the repurchase of subsidiary units under the terms of the agreements based on estimating revenue, working capital, EBITDA and EBITDA margin of the subsidiary units over the periods of the awards through the anticipated repurchase dates.

We estimated the fair value of each 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 each 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 will remeasure these liabilities, using the same valuation approach based on the applicable subsidiary's revenue and future collection of financed customer receivables, the unobservable inputs, and we will record any changes in the employee's compensation expense.

Some of the awards are subject to the employees' continued employment and therefore, recorded on a straight-line basis over the remaining service period.

During the year ended December 31, 2019 , we settled $ 0.2 million of the liability related to the subsidiary unit awards.

The remaining liability balances are included in either accounts payable, accrued expenses and other current liabilities or other liabilities in our consolidated balance sheets (see Note 13 ).

The contingent consideration liability consists of the potential earn-out payment related to our acquisition of 85 % of the issued and outstanding capital stock of OpenEye on October 21, 2019 .

The earn-out payment is contingent on the satisfaction of certain calendar 2020 revenue targets and has a maximum potential payment of up to $ 11.0 million .

We account for the contingent consideration 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.

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 contingent consideration liability was valued with Level 3 unobservable inputs, including the revenue volatility and the discount rate.

At October 21, 2019 , the fair value of the liability was $ 2.8 million .

At each reporting date until the payment date in 2021, we will remeasure the liability, using the same valuation approach.

Changes in the fair value resulting from information that existed subsequent to the acquisition date are recorded in the consolidated statements of operations.

During the year ended December 31, 2019 , the contingent consideration liability decreased $ 0.2 million to $ 2.6 million as compared to the initial liability recorded at the acquisition date, primarily due to a change to OpenEye's 2020 projected revenue.

The unobservable inputs used in the valuation as of December 31, 2019 included a revenue volatility of 45 % and a discount rate of 3 % .

Selecting another revenue volatility or discount rate within an acceptable range would not result in a significant change to the fair value of the contingent consideration liability.

The contingent consideration liability is included in other liabilities in our consolidated balance sheet as of December 31, 2019 (see Note 13 ).

The contingent consideration liability consisted of the potential earn-out payment related to our acquisition of 85 % of the issued and outstanding capital stock of OpenEye on October 21, 2019.

The earn-out payment was contingent on the satisfaction of certain calendar 2020 revenue targets and had a maximum potential payment of up to $ 11.0 million.

During parts of 2019 and 2020, we accounted for the contingent consideration using fair value and established 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.

The contingent consideration liability was valued with significant unobservable inputs, including the revenue volatility and the discount rate.

Selecting another revenue volatility or discount rate within an acceptable range would not have resulted in a significant change to the fair value of the contingent consideration liability.

As of October 21, 2019, the fair value of the liability was $ 2.8 million.

At each reporting date until December 31, 2020, we remeasured the liability, using the same valuation approach.

Changes in the fair value resulting from information that existed subsequent to the acquisition date were recorded in general and administrative expense in our consolidated statements of operations.

As of December 31, 2020, the 2020 revenue targets were not met and the fair value of the contingent consideration related to the potential earn-out payment decreased to zero as compared to the initial liability recorded at the acquisition date, primarily due to OpenEye's 2020 actual revenue being less than the projected revenue.

The contingent consideration liability was included in other liabilities in our consolidated balance sheets as of December 31, 2019 (see Note 13).

We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy.

Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another.

In such instances, the transfer is reported at the beginning of the reporting period.

There were no transfers between Levels 1, 2 or 3 during the years ended December 31, 2019 , 2018 and 2017 .

There were no transfers in or out of Level 3 during the years ended December 31, 2020, 2019 and 2018.

We also monitor the value of the investments for other-than-temporary impairment on a quarterly basis.

No other-than-temporary impairments occurred during the years ended December 31, 2020, 2019 and 2018.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

We lease office space, data centers and office equipment under non-cancelable operating leases with various expiration dates through 2026.

1 unchanged sentence

We have subsequently entered into amendments to this lease to provide us with additional office space.

In May 2019 and July 2019, we entered into two amendments to the lease for our corporate headquarters, which provides for additional office space, additional parking spaces, the extension of additional storage space and additional tenant improvement allowance.

The lease term ends in 2026, includes a five-year renewal option and a cumulative tenant improvement allowance of $ 11.2 million .

In March 2020, we entered into an amendment to the lease for our corporate headquarters, which provides for additional office space, additional parking spaces and additional tenant improvement allowance.

In December 2020, we entered into an amendment to the lease for our corporate headquarters to extend the lease term for additional storage space.

The lease term ends in 2026, includes a five-year renewal option and a cumulative tenant improvement allowance of $ 11.8 million, including the $ 0.7 million tenant improvement allowance within the March 2020 lease amendment.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

Supplemental information related to leases is presented in the table below (in thousands, except weighted-average term and discount rate):

3 unchanged sentences

Operating lease right-of-use assets obtained in exchange for new operating lease liabilities 10,073 7,886

Weighted-average remaining lease term — operating leases

2020 December 31, 2019

Weighted-average remaining lease term — operating leases 4.9 years 5.7 years

Weighted-average discount rate — operating leases 3.6 % 4.0 %

Maturities of lease liabilities are as follows (in thousands):

Year Ended December 31,

Operating Leases (1)

2025 and thereafter and thereafter

Year Ended December 31, Operating Leases (1)

2021 $ 11,485

2026 and thereafter 4,443

Total lease payments 52,069

2 unchanged sentences

_______________

(1) Operating lease payments exclude $ 5.1 million of legally binding minimum lease payments for leases executed but not yet commenced and includes less than $ 0.1 million for options to extend lease terms that were reasonably certain of being exercised.

(1) Operating lease payments exclude $ 0.1 million of legally binding minimum lease payments for leases executed but not yet commenced and includes $ 1.0 million for options to extend lease terms that were reasonably certain of being exercised.

(2) Imputed interest was calculated using the incremental borrowing rate applicable for each lease.

Prior to our adoption of Topic 842, rent expense was $ 6.3 million and $ 6.2 million for the years ended December 31, 2018 and 2017, respectively.

Prior to our adoption of Topic 842, rent expense was $ 6.3 million for the year ended December 31, 2018.

The following table presents the future minimum lease payments under the non-cancelable operating leases as of December 31, 2018 prior to our adoption of Topic 842 (in thousands):

Year Ended December 31, Minimum Lease Payments

2024 and thereafter 14,838

Total $ 49,091

ALARM.COM HOLDINGS, INC.

1 unchanged sentence

December 31, 2020, 2019 and 2018

The following table presents the future minimum lease payments under the non-cancelable operating leases as of December 31, 2018 prior to our adoption of Topic 842 (in thousands):

Year Ended December 31,

Minimum Lease Payments

2024 and thereafter

The components of accounts payable, accrued expenses and other current liabilities are as follows (in thousands):

2020 December 31,

Accounts payable $ 38,163 $ 32,878

Accrued expenses 11,449 10,092

Subsidiary unit awards

Other current liabilities 4,315 5,757

1 unchanged sentence

The components of other liabilities are as follows (in thousands):

Deferred rent

2020 December 31,

Contingent consideration liability from acquisitions $ — $ 2,595

4 unchanged sentences

The debt, commitments and contingencies described below would require us, or our subsidiaries, to make payments to third parties under certain circumstances.

On October 6, 2017 , we entered into a $ 125.0 million senior secured revolving credit facility, or the 2017 Facility, with SVB, as administrative agent, PNC Bank, National Association, as documentation agent, and a syndicate of lenders.

On October 6, 2017, we entered into a $ 125.0 million senior secured revolving credit facility, or the 2017 Facility, with Silicon Valley Bank, or SVB, as administrative agent, PNC Bank, National Association, as documentation agent, and a syndicate of lenders.

Upon entry into the 2017 Facility, we borrowed $ 72.0 million, which was used to repay the previously outstanding balance under our previous credit facility.

The 2017 Facility matures in October 2022 and includes an option to further increase the borrowing capacity to $ 175.0 million with the consent of the lenders.

Costs incurred in connection with the 2017 Facility were capitalized and are being amortized as interest expense over the term of the 2017 Facility.

The 2017 Facility is secured by substantially all of our assets, including our intellectual property.

During each of the years ended December 31, 2019 and 2018 , we repaid $ 4.0 million of the outstanding balance of the 2017 Facility.

The outstanding principal balance on the 2017 Facility accrues interest at a rate equal to, at our option, either (1) LIBOR, plus an applicable margin based on our consolidated leverage ratio, or (2) the highest of (a) the Wall Street Journal prime rate, (b) the Federal Funds rate plus 0.50 % , or (c) LIBOR plus 1.00 % plus an applicable margin based on our consolidated leverage ratio.

For the year ended December 31, 2019 , we elected for the outstanding principal balance to accrue interest at LIBOR plus 1.50 % , LIBOR plus 1.75 % , LIBOR plus 2.00 % , and LIBOR plus 2.50 % when our consolidated leverage ratio is less than 1.00 :1.00, greater than or equal to 1.00 :1.00 but less than 2.00 :1.00, greater than or equal to 2.00 :1.00 but less than 3.00 :1.00

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

and greater than or equal to 3.00 :1.00, respectively.

The 2017 Facility also carries an unused line commitment fee of 0.20 % .

The 2017 Facility was set to mature in October 2022 and included an option to further increase the borrowing capacity to $ 175.0 million with the consent of the lenders.

Costs incurred in connection with the 2017 Facility were capitalized and were being amortized as interest expense over the term of the 2017 Facility.

The 2017 Facility was secured by substantially all of our assets, including our intellectual property.

On March 25, 2020, we borrowed $ 50.0 million under the 2017 Facility as a precautionary measure in order to provide financial flexibility in light of current uncertainty in the financial markets resulting from the COVID-19 pandemic.

During the years ended December 31, 2020, 2019 and 2018, we repaid $ 3.0 million, $ 4.0 million, and $ 4.0 million of the outstanding balance of the 2017 Facility, respectively.

See Note 22 for further details on the repayment of all outstanding borrowings under, and the termination of, the 2017 Facility subsequent to December 31, 2020.

The outstanding principal balance on the 2017 Facility accrued interest at a rate equal to, at our option, either (1) LIBOR, plus an applicable margin based on our consolidated leverage ratio, or (2) the highest of (a) the Wall Street Journal prime rate, (b) the Federal Funds rate plus 0.50 %, or (c) LIBOR plus 1.00 % plus an applicable margin based on our consolidated leverage ratio.

For the year ended December 31, 2020, we elected for the outstanding principal balance to accrue interest at LIBOR plus 1.50 %, LIBOR plus 1.75 %, LIBOR plus 2.00 %, and LIBOR plus 2.50 % when our consolidated leverage ratio is less than 1.00 :1.00, greater than or equal to 1.00 :1.00 but less than 2.00 :1.00, greater than or equal to 2.00 :1.00 but less than 3.00 :1.00 and greater than or equal to 3.00 :1.00, respectively.

The 2017 Facility also carried an unused line commitment fee of 0.20 %.

For the years ended December 31, 2020, 2019 and 2018, the effective interest rate on the credit facilities was 2.65 %, 4.45 % and 4.13 %, respectively.

The carrying value of the 2017 Facility was $ 110.0 million and $ 63.0 million as of December 31, 2020 and 2019, respectively.

The 2017 Facility includes a variable interest rate that approximates market rates and, as such, we classified the liability as Level 2 within the fair value hierarchy and determined that the carrying amount of the 2017 Facility approximated its fair value as of December 31, 2019 and 2018 .

The 2017 Facility contains various financial and other covenants that require us to maintain a maximum consolidated leverage ratio not to exceed 3.25 :1.00 and a consolidated fixed charge coverage ratio of at least 1.25 :1.00.

The 2017 Facility included a variable interest rate that approximated market rates and, as such, we classified the liability as Level 2 within the fair value hierarchy and determined that the carrying amount of the 2017 Facility approximated its fair value as of December 31, 2020 and 2019.

The 2017 Facility contained various financial and other covenants that required us to maintain a maximum consolidated leverage ratio not to exceed 3.25 :1.00 and a consolidated fixed charge coverage ratio of at least 1.25 :1.00.

As of December 31, 2020, we were in compliance with all financial and non-financial covenants and there were no events of default.

On November 30, 2018, we amended the 2017 Facility to incorporate the parameters that must be met for us to repurchase our outstanding common stock under the stock repurchase program authorized by our board of directors on November 29, 2018 (see Note 14 ).

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

On November 30, 2018, we amended the 2017 Facility to incorporate the parameters that were required to be met for us to repurchase our outstanding common stock under the stock repurchase program authorized by our board of directors on November 29, 2018 (see Note 14).

Commitments and Contingencies

Repurchase of Subsidiary Units

In 2011, we formed a subsidiary that offers to professional residential property management and vacation rental management companies technology solutions for remote monitoring and control of properties, including access control and energy management.

Since its formation, we granted an award of subsidiary stock to the founder and president.

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 first payment in cash to December 31, 2017, amending the financial targets and allowing for payments in cash based on the future collection of financed customer receivables from 2018 to 2020 that existed as of the valuation date.

During 2019 and 2018 , we settled $ 0.2 million and $ 2.8 million of the liability related to the subsidiary unit awards, respectively.

We recorded a liability of $ 0.1 million in accounts payable, accrued expenses and other current liabilities and less than $ 0.1 million in other liabilities related to this commitment in our consolidated balance sheet as of December 31, 2019 .

We recorded a liability of $ 0.2 million in accounts payable, accrued expenses and other current liabilities and a liability of $ 0.2 million in other liabilities related to this commitment in our consolidated balance sheet as of December 31, 2018 .

At each reporting date until the respective payment dates, we will remeasure these liabilities, and we will record any changes in fair value in general and administrative expense (see Note 10 ).

Contingent Consideration

On October 21, 2019, we acquired 85 % of the issued and outstanding capital stock of OpenEye.

Certain stockholders of OpenEye have the right to receive an earn-out payment of up to an additional $ 11.0 million based upon satisfaction of certain calendar 2020 revenue targets.

Certain stockholders of OpenEye had the right to receive an earn-out payment of up to an additional $ 11.0 million based upon satisfaction of certain calendar 2020 revenue targets.

At October 21, 2019, the fair value of the contingent consideration liability was $ 2.8 million.

At each reporting date until the payment date in 2021, we will remeasure the liability, using the same valuation approach.

At each reporting date until December 31, 2020, we remeasured the liability, using the same valuation approach.

Changes in the fair value resulting from information that existed subsequent to the acquisition date are recorded in the consolidated statements of operations.

The contingent consideration liability is included in other liabilities in our consolidated balance sheet as of December 31, 2019 (see Note 10 ).

The contingent consideration liability was included in other liabilities in our consolidated balance sheets as of December 31, 2019 (see Note 10).

Indemnification Agreements

7 unchanged sentences

District Court, District of Utah, alleging that our technology directly and indirectly infringes six patents that Vivint purchased.

Vivint is seeking permanent injunctions, enhanced

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

damages and attorneys' fees.

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

We answered the complaint on July 23, 2015.

13 unchanged sentences

On October 30, 2018 and November 5, 2018, the PTO issued final office actions in the pending reexaminations rejecting all claims being examined as unpatentable over the prior art.

Nine claims asserted in the litigation were found unpatentable in the PTO rejections.

Vivint appealed these rejections to the PTAB on March 29, 2019 and April 4, 2019.

District Court, District of Utah has ordered the litigation regarding the nine claims (from two patents) rejected by the PTO during the reexaminations be stayed until May 15, 2020.

On April 3, 2019, the U.S.

District Court, District of Utah heard argument on the parties’ cross motions for claim construction and Alarm.com’s motion for partial summary judgment as to invalidity.

Decisions on these motions are pending.

The PTAB issued decisions affirming the rejections on February 28, 2020 and May 4, 2020.

Vivint appealed one of these decisions to the Federal Circuit on July 1, 2020, and requested rehearing from the PTAB on the other decision.

On December 20, 2018, the Federal Circuit issued an order regarding the inter partes review of three of the remaining patents in suit that vacated, reversed and remanded the PTAB’s ruling with regard to the construction of a term (“communication device identification code”) as requested by Alarm.com and affirmed the PTAB’s May 2017 rulings invalidating certain of the Vivint patents in all other respects.

On July 24, 2019, the PTAB issued further decisions with respect to two of the remaining patents in suit, finding additional claims unpatentable in view of the Federal Circuit’s December 20, 2018 decision.

One of the claims asserted in the litigation was found unpatentable in the July 14, 2019 decisions, and the U.S.

District Court, District of Utah has stayed the proceedings with respect to that claim until May 15, 2020.

One of the claims asserted in the litigation was found unpatentable in the July 14, 2019 decisions.

Vivint appealed the July 24, 2019 decisions to the Federal Circuit on September 25, 2019.

The appeal has been fully briefed and is now pending decision.

On February 12, 2021, we filed an action in U.S.

District Court, Eastern District of Virginia challenging the refusal by the PTO to proceed with additional reexaminations of the remaining patent claims asserted in the lawsuit.

The PTO has not yet responded to the complaint.

Should Vivint prevail in proving Alarm.com infringes one or more of its patent claims, we could be required to pay damages of Vivint’s lost profits and/or a reasonable royalty for sales of our solution.

2 unchanged sentences

Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time.

On April 25, 2017, Alarm.com Incorporated and its wholly-owned subsidiary ICN Acquisition, LLC, filed a patent infringement complaint against Protect America, Inc., or Protect America, and SecureNet Technologies, LLC, or SecureNet, in the United States District Court for the Eastern District of Virginia.

The complaint sought injunctive relief to stop the further sale of the infringing Protect America and SecureNet products and systems, and damages for the infringement of Alarm.com’s patents.

The complaint asserted that the technology in the Protect America and SecureNet Alarm Systems products infringe one or more claims of Alarm.com’s patents:

United States Patent Numbers 7,113,090;

and 9,141,276.

In June 2017, Alarm.com filed an amended complaint against Protect America only in the Western District of Texas and voluntarily dismissed SecureNet from the suit.

In December 2019, Alarm.com entered into a confidential settlement agreement with Protect America which resulted in the dismissal of the lawsuit without prejudice.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

On October 22, 2019, EcoFactor, Inc., or EcoFactor, filed a complaint with the U.S.

7 unchanged sentences

Among other things, we asserted defenses based on non-infringement and invalidity of the patents in question.

The administrative law judge presiding over the investigation has set March 15, 2021 as the target date for completion of the investigation.

The evidentiary hearing is scheduled to begin on July 21, 2020.

An evidentiary hearing was held in November 2020.

The administrative law judge presiding over the investigation has set August 20, 2021 as the target date for completion of the investigation.

On November 11, 2019, EcoFactor filed a lawsuit against us in U.S.

2 unchanged sentences

On December 26, 2019, the court issued an order staying the lawsuit pending the conclusion of the related ITC investigation.

On January 31, 2020, EcoFactor filed a second lawsuit against us in U.S.

District Court, Western District of Texas, alleging Alarm.com’s products and services infringe four additional U.S.

On May 26, 2020, EcoFactor filed a second lawsuit against us in U.S.

District Court, District of Massachusetts, alleging Alarm.com’s products and services infringe four additional U.S.

patents owned by EcoFactor.

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

Our response to the complaint is due on March 5, 2020.

On January 19, 2021, the court issued an order staying the lawsuit until May 19, 2021 in light of the related ITC investigation.

On February 12, 2021, Alarm.com requested the PTO reexamine the claims of one of the patents asserted in the lawsuit.

The request is pending with the PTO.

Should EcoFactor prevail in the ITC investigation, Alarm.com thermostats manufactured abroad could be excluded from importation into the United States.

Should EcoFactor prevail in its district court lawsuits we could be required to pay damages 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, and we could be required to pay ongoing royalties

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

and comply with unfavorable terms if such a license is made available to us.

While we believe we have valid defenses to EcoFactor’s claims, the outcome of these legal claims cannot be predicted with certainty and any of these outcomes could result in an adverse effect on our business.

Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time.

On December 30, 2015, a putative class action lawsuit was filed against us in the U.S.

District Court for the Northern District of California, or the Court, which alleged violations of the Telephone Consumer Protection Act, or TCPA, and sought to hold us responsible for the marketing activities of one of our service providers as well as telemarketing calls made by one of this service provider’s sub-dealer agents under principles of agency and vicarious liability.

On August 30, 2018, we reached an agreement in principle to settle the case for total cash consideration of $ 28.0 million .

On October 25, 2018, we entered into a definitive settlement agreement, or Settlement Agreement, and submitted it to the Court for approval.

The Court granted preliminary approval of the Settlement Agreement on December 19, 2018 and final approval on August 13, 2019.

In entering into the definitive settlement agreement, we made no admission of liability.

Pursuant to the Settlement Agreement, among other things, (1) we agreed to pay total cash consideration of $ 28.0 million into a settlement fund, (2) we agreed to implement certain business practice changes to increase awareness of TCPA compliance, (3) each party to the Settlement Agreement agreed to a mutual release of claims relating to any claim or potential claim relating to the marketing activities described in the complaint, and (4) each party covenanted not to sue the other with regard to the released claims.

In addition, we agreed to no longer allow the service provider identified in the litigation as purportedly violating the TCPA to continue activating new accounts for Alarm.com products and services following preliminary Court approval of the Settlement Agreement.

We made an initial payment of $ 5.0 million to the settlement administrator on January 2, 2019, and the remaining payment of $ 23.0 million was made on September 30, 2019.

The release of claims includes all alleged damages incurred related to the lawsuit.

Any attorneys’ fees awarded by the Court and all costs of notice and claims administration will be paid from the settlement fund.

We currently expect all distributions to be completed by August 2020.

The $ 28.0 million settlement was reflected in general and administrative expenses within our consolidated statements of operations for the three and nine months ended September 30, 2018.

On July 29, 2020, a putative class action was filed against Alarm.com Incorporated d/b/a ICN Acquisition, among other defendants, by Abante Rooter and Plumbing Inc.

and Sidney Naiman in the U.S.

District Court for the Northern District of California, alleging violations of the TCPA.

The complaint sought statutory damages under the TCPA, injunctive relief, and other relief.

The matter was resolved in December 2020.

On January 27, 2021, the Court entered an order dismissing the case.

In addition to the matters described above, we may be required to provide indemnification to certain of our service provider partners for certain claims regarding our solutions.

For example, we are incurring costs associated with the indemnification of our service provider ADT, LLC in two ongoing patent infringement suits:

Applied Capital, Inc.

The ADT Corporation et al.

and Varatec, LLC v.

For example, we are incurring costs associated with the indemnification of our service provider ADT, LLC in ongoing patent infringement suits.

On July 13, 2016, Applied Capital, Inc., or Applied Capital, filed a lawsuit against ADT, LLC, the ADT Corporation, and Icontrol Networks, Inc.

16 unchanged sentences

Fox reached settlement and stipulated to dismissal of the New Mexico State Court action on October 31, 2019.

The court issued its claim construction order on August 12, 2019, fact discovery closed on November 12, 2019, and the parties served opening expert reports on December 16, 2019.

Rebuttal expert reports are due on February 10, 2020 and expert discovery closes on February 28, 2020.

Applied Capital filed its Second Amended Complaint on January 27, 2020 and ADT answered, adding a claim of inequitable conduct, on February 10, 2020.

The pretrial conference is scheduled for August 5, 2020;

however, the trial date has not yet been set.

On March 4, 2019, Varatec, LLC, or Varatec, sued ADT, LLC d/b/a ADT Security Services in U.S.

District Court for the Northern District of Illinois.

Varatec, LLC v.

ADT, LLC d/b/a ADT Security Services , N.D.

Illinois Case No.

1-19-cv-01543.

Varatec alleges that ADT’s sales of ADT Pulse directly and indirectly infringe U.S.

7,792,256, which was assigned to Varatec.

Varatec seeks a permanent injunction, enhanced damages, and attorneys’ fees.

On May 23, 2019, ADT filed a motion seeking to dismiss the complaint for failure to state a claim, on the basis that the asserted patent fails to claim patent eligible subject matter.

On July 3, 2019, third-party Unified Patents Inc.

filed a petition seeking inter parties review of the asserted patent by the PTAB.

After the completion of briefing of ADT’s motion to dismiss, the parties agreed to stay the case pending resolution of the inter partes review, and the court granted the parties’ motion on August 14, 2019.

Unified Patent’s petition for inter parties review was instituted on December 31, 2019 and Varatec’s response is due on March 23, 2020.

The stay remains in place.

Should either Applied Capital or Varatec prevail on the claims that one or more elements of ADT’s products infringe, we could be required to indemnify ADT for damages in the form of a reasonable royalty or ADT could be enjoined from making, using and selling our solution if a license or other right to continue selling our technology is not made available to us or we are

The court issued its claim construction order on August 12, 2019, fact discovery closed on November 12, 2019, expert discovery closed on March 9, 2020, and summary judgment and Daubert motions briefing closed on June 3, 2020 and are pending.

The pretrial conference is scheduled for March 22, 2021, and trial is set for June 15, 2021.

On July 2, 2020, Port us Singapore Pte.

and Portus Pty.

Ltd., or Portus, sued ADT, LLC d/b/a ADT Security Services in U.S.

District Court for the Western District of Texas.

Portus alle ges that ADT’s sales of ADT Pulse directly and indirectly infringe U.S.

8,914,526 and 9,961,097, which were assigned to Portus.

Portus is seeking damages and attorneys’ fees.

ADT answered the complaint on August 31, 2020.

The claim construction hearing is set for June 11, 2021.

Trial is scheduled for April 4, 2022.

Should the plaintiffs prevail on the claims that one or more elements of ADT’s products infringe, we could be required to indemnify ADT for damages in the form of a reasonable royalty or ADT could be enjoined from making, using and selling our solution if a license or other right to continue selling our technology is not made available to us or we are unable to design

ALARM.COM HOLDINGS, INC.

1 unchanged sentence

December 31, 2020, 2019 and 2018

unable to design around such patents, and required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us.

around such patents, and required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us.

The outcome of these legal claims cannot be predicted with certainty.

We believe there are valid defenses to the claims made by Applied Capital and Varatec.

We believe there are valid defenses to the claims made by Applied Capital and Portus.

Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time.

12 unchanged sentences

Each outstanding share of common stock is entitled to one vote per share.

Stock Repurchase Program

On November 29, 2018 , our board of directors authorized a stock repurchase program, under which we are authorized to purchase up to an aggregate of $ 75.0 million of the Company’s outstanding common stock during the two-year period ending November 29, 2020 .

No shares of the Company's stock were repurchased under this program during the years ended December 31, 2019 and 2018 .

Stock Repurchase Programs

On November 29, 2018, our board of directors authorized a stock repurchase program, under which we were authorized to purchase up to an aggregate of $ 75.0 million of our outstanding common stock during the two-year period ended November 29, 2020.

On December 3, 2020, our board of directors authorized another stock repurchase program, under which we are authorized to purchase up to an aggregate of $ 100.0 million of our outstanding common stock during the three-year period ending December 3, 2023.

During the year ended December 31, 2020, we repurchased 147,153 shares of our common stock under the program that expired on November 29, 2020.

No shares were purchased under these programs during the years ended 2019 and 2018.

Stock-Based Compensation

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

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

Year Ended December 31,

Stock-based compensation expense data:

2020 2019 2018

Sales and marketing $ 3,025 $ 2,075 $ 1,196

2 unchanged sentences

Total stock-based compensation expense $ 29,176 $ 20,603 $ 13,429

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

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

Year Ended December 31,

2020 2019 2018

Stock options and assumed options $ 3,406 $ 3,783 $ 3,511

3 unchanged sentences

Total stock-based compensation expense $ 29,176 $ 20,603 $ 13,429

Tax benefit from stock-based awards

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

Tax windfall benefit from stock-based awards $ 8,202 $ 5,154 $ 7,581

2015 Equity Incentive Plan

5 unchanged sentences

As of December 31, 2020, 5,887,965 shares remained available for future grant under the 2015 Plan.

In December 2020, our board of directors determined that the January 1, 2021 increase in the number of shares reserved for issuance under the 2015 Plan would be 2.5 % of the total number of shares of common stock outstanding on December 31, 2020, or 1,237,090 shares.

There was no increase to the number of shares of common stock reserved for issuance under the 2015 Plan in the years ended December 31, 2020, 2019 and 2018.

Stock Options

5 unchanged sentences

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 250 and 957 unvested shares of common stock outstanding subject to our right of repurchase as of December 31, 2019 and 2018 , respectively.

We repurchased 27 and 107 of these unvested shares of common stock related to early exercised stock options in connection with employee terminations during the years ended December 31, 2019 and 2018 , respectively.

We recorded less than $ 0.1 million in accounts payable, accrued expenses and other current liabilities on our consolidated balance sheets for the proceeds from the early exercise of the unvested stock options as of December 31, 2019 and 2018 .

There were zero and 250 unvested shares of common stock outstanding subject to our right of repurchase as of December 31, 2020 and 2019, respectively.

We repurchased zero and 27 of these unvested shares of common stock related to early exercised stock options in connection with employee terminations during the years ended December 31, 2020 and 2019, respectively.

We recorded zero and less than $ 0.1 million in accounts payable, accrued expenses and other current liabilities on our consolidated balance sheets for the proceeds from the early exercise of the unvested stock options as of December 31, 2020 and 2019.

We account for stock-based compensation options based on the fair value of the award as of the grant date.

4 unchanged sentences

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.

We use the "simplified method" due to the lack

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected term of the stock options.

Beginning in November 2019, the expected volatility for options granted is based on historical volatilities of our stock over the estimated expected term of the stock options.

4 unchanged sentences

As such, we assume that the dividend rate is 0 %.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

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

Year Ended December 31,

Expected term

2020 2019 2018

Volatility 39.2 - 42.3 %

39.6 - 42.2 %

41.9 - 60.8 %

Expected term 6.2 - 6.7 years

6.3 - 7.5 years

2 unchanged sentences

The following table summarizes stock option activity:

Options Weighted

Average Exercise

Price Per Share

Weighted Average

Price Per Share Weighted Average

Contractual Life

(in years) Aggregate

Intrinsic Value

1 unchanged sentence

Outstanding as of December 31, 2019 1,905,751 $ 20.60 6.0 $ 45,344

Granted 143,650 40.89

Exercised ( 696,154 ) 14.70 33,423

Forfeited ( 8,403 ) 34.55

Expired ( 1,365 ) 6.65

Outstanding as of December 31, 2020 1,343,479 $ 25.75 5.7 $ 104,388

7 unchanged sentences

Stock Options Assumed from Acquisition

On March 8, 2017, we completed the Acquisition and assumed the Icontrol Plans.

On March 8, 2017, we acquired certain assets and assumed certain liabilities of the Connect line of business and all of the outstanding equity interests of the two subsidiaries through which Icontrol Networks, Inc., or Icontrol, conducted its Piper line of business, or the Acquisition, and assumed the Icontrol 2013 Equity Incentive Plan and Icontrol 2003 Stock Plan, or collectively, the Icontrol Plans.

The assumed unvested stock options are exercisable for 70,406 shares of Alarm.com common stock.

1 unchanged sentence

The registration also covers an additional 2,308,615 shares of common stock that were automatically added to the shares authorized for issuance under the 2015 Plan pursuant to an evergreen provision contained in the 2015 Plan and an additional 461,723 shares of common stock that were automatically added to the shares authorized for issuance under the 2015 ESPP, pursuant to an evergreen provision contained in the 2015 ESPP.

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 conversion ratio stated in the agreement to convert the original exercise price and number of options.

We applied our graded vesting accounting policy to the fair value of these assumed options and determined $ 1.4 million of the fair value was attributable to pre-combination services and was 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.

ALARM.COM HOLDINGS, INC.

1 unchanged sentence

December 31, 2020, 2019 and 2018

in the agreement to convert the original exercise price and number of options.

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.

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

Year Ended December 31,

Expected term

2.5 - 5.0 years

Volatility 42.7 - 44.4 %

Expected term 2.5 - 5.0 years

Risk-free interest rate 1.4 - 2.0 %

1 unchanged sentence

The following table summarizes the assumed stock option activity:

Options Weighted

Average Exercise

Price Per Share

Weighted Average

Price Per Share Weighted Average

Contractual Life

(in years) Aggregate

Intrinsic Value

1 unchanged sentence

Outstanding as of December 31, 2019 15,805 $ 7.26 5.7 $ 564

Exercised ( 8,172 ) 8.35 391

Outstanding as of December 31, 2020 7,633 $ 6.09 4.6 $ 743

2 unchanged sentences

The weighted average grant date fair value for the assumed stock options granted during the year ended December 31, 2017 was $ 4.78 .

There were no new grants assumed under the Icontrol Plans in 2019 and 2018 .

The total fair value of assumed stock options vested during the years ended December 31, 2019 , 2018 and 2017 was $ 0.1 million .

There were no new grants under the assumed Icontrol Plans in 2020, 2019 and 2018.

The total fair value of assumed stock options vested during the year ended December 31, 2020 was less than $ 0.1 million.

The total fair value of assumed stock options vested during each of the years ended December 31, 2019 and 2018 was $ 0.1 million.

The aggregate intrinsic value of assumed stock options exercised during the years ended December 31, 2020, 2019 and 2018 was $ 0.4 million, $ 0.3 million and $ 0.7 million, respectively.

As of December 31, 2019 , the total compensation cost related to the nonvested awards not yet recognized was less than $ 0.1 million , which will be recognized over a weighted average period of 0.2 years.

Cash received from exercises of stock options was less than $ 0.1 million , $ 0.1 million and less than $ 0.1 million during the years ended December 31, 2019 , 2018 and 2017 , respectively.

Restricted Stock Awards

In March 2017, we assumed 1,622 stock options from Connect upon completion of the Acquisition, which were early exercised according to the provisions of the Icontrol Plans for which the employees had not yet provided service for the applicable vesting periods.

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 during the years ended December 31, 2018 and 2017 .

There were no outstanding RSAs as of December 31, 2018 .

There were no repurchases of RSAs during the year ended December 31, 2018 .

We repurchased 750 RSAs in connection with employee terminations during the year ended December 31, 2017 .

As of December 31, 2020, there were no compensation costs related to the nonvested awards not yet recognized.

Cash received from exercises of stock options was less than $ 0.1 million, less than $ 0.1 million and $ 0.1 million during the years ended December 31, 2020, 2019 and 2018, respectively.

Restricted Stock Units

There was an aggregate of 564,416 , 827,764 and 381,545 RSUs granted to certain of our employees during the years ended December 31, 2020, 2019 and 2018, respectively.

The RSUs vest over a five -year period from the vesting commencement date, which is generally the grant date.

The time-based RSUs vest over a five-year period from the vesting commencement date, which is generally the grant date.

The performance-based RSUs vest when the related performance conditions are met.

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.

We recognize stock-based compensation expense for time-based RSUs 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.

We recognize stock-based compensation expense for performance-based RSUs based on management’s determination of the probable outcome of the performance conditions and we record a cumulative adjustment in periods in which there is a change in the estimated number of shares expected to vest.

As of December 31, 2020, the total unrecognized compensation expense related to RSU awards granted amounted to $ 45.1 million, which is expected to be recognized over a weighted average period of 2.5 years.

3 unchanged sentences

The following table summarizes RSU activity:

Average Grant Date Fair Value

RSUs Weighted

Average Grant Date Fair Value Aggregate

Intrinsic Value

1 unchanged sentence

Outstanding as of December 31, 2019 1,386,488 $ 46.52 $ 59,577

Granted 564,416 51.34

Vested ( 195,551 ) 46.19 11,008

Forfeited ( 58,713 ) 48.89

Outstanding as of December 31, 2020 1,696,640 $ 48.08 $ 175,517

4 unchanged sentences

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 of the preceding fiscal year, 1,500,000 shares of common stock, or such lesser number as determined by the board of directors.

There was no increase to the number of shares of common stock reserved for issuance under the 2015 ESPP in any of 2018, 2019 or 2020 nor will the number of shares be increased in 2021.

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.

7 unchanged sentences

Year Ended December 31,

2020 2019 2018

Net income $ 76,660 $ 53,330 $ 21,524

Net loss attributable to redeemable noncontrolling interest 1,193 201 —

2 unchanged sentences

Weighted average common shares outstanding — basic (B) 48,950,328 48,427,446 47,633,739

Dilutive effect of stock options, restricted stock units and restricted stock awards

Dilutive effect of stock options and restricted stock units 2,012,862 1,846,443 2,058,445

Weighted average common shares outstanding — diluted (C) 50,963,190 50,273,889 49,692,184

Net income per share:

Basic (A/B) $ 1.59 $ 1.11 $ 0.45

Diluted (A/C) $ 1.53 $ 1.06 $ 0.43

4 unchanged sentences

Year Ended December 31,

2020 2019 2018

Stock options 158,515 223,259 229,294

Restricted stock awards

Restricted stock units 62,194 136,600 148,175

11 unchanged sentences

Significant Service Providers

During the year s ended December 31, 2019 , 2018 and 2017 , our 10 largest revenue service provider partners accounted for 52 % , 57 % and 60 % of our consolidated revenue.

During the years ended December 31, 2020, 2019 and 2018, our 10 largest revenue service provider partners accounted for 48 %, 52 % and 57 % of our consolidated revenue.

One of our service provider partners within the Alarm.com segment individually represented greater than 15 % but not more than 20 % of our revenue for the years ended December 31, 2020, 2019 and 2018.

Another one of our service provider partners in the Alarm.com segment individually represented greater than 10 % but not more than 15 % of our revenue for the year ended December 31, 2017.

One individual service provider partner in the Alarm.com segment represented more than 10% of accounts receivable as of December 31, 2019 and 2018 .

The Tax Cuts and Jobs Act, or the Tax Act, was signed into law on December 22, 2017.

This legislation made significant changes in U.S.

tax law, including a reduction in the corporate tax rate, changes to net operating loss carryforwards and carrybacks and a repeal of the corporate alternative minimum tax.

The legislation reduced the U.S.

corporate income tax rate from 35% to 21%.

As a result of the enacted Tax Act, we were required to revalue deferred tax assets and liabilities at the rate in effect when the deferred tax balances are scheduled to reverse.

This revaluation resulted in an additional $ 8.8 million of income tax expense and a corresponding reduction in the deferred tax asset which was recorded during the year ended December 31, 2017.

Additionally, on December 22, 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No.

118, or SAB 118, to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act.

Specifically, SAB 118 provides a measurement period for companies to evaluate the impacts of the Tax Act on their financial statements.

We completed the accounting for the tax effects of the Tax Act during the three months ended September 30, 2018 and decreased our provisional estimate from $ 8.8 million to $ 8.7 million .

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

Two service provider partners in the Alarm.com segment represented more than 10% of accounts receivable as of December 31, 2020.

One individual service provider partner in the Alarm.com segment represented more than 10% of accounts receivable as of December 31, 2019 .

The components of our income tax expense are as follows (in thousands):

Year Ended December 31,

2020 2019 2018

Federal $ 3,583 $ 1,615 $ 741

State 2,735 900 653

Foreign 438 452 263

Total Current 6,756 2,967 1,657

Federal ( 3,628 ) 2,622 ( 8,821 )

State 372 ( 23 ) ( 2,643 )

Foreign — — ( 18 )

Total Deferred ( 3,256 ) 2,599 ( 11,482 )

Total $ 3,500 $ 5,566 $ ( 9,825 )

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

The difference between the income tax expense at the federal statutory rate and income tax expense in the consolidated statements of operations is as follows:

Year Ended December 31,

2020 2019 2018

Federal statutory rate 21.0 % 21.0 % 21.0 %

2 unchanged sentences

Nondeductible employee fringe benefits — — 1.3

Foreign-derived intangible income deduction ( 1.4 ) ( 0.7 ) —

Valuation allowance 1.3 — —

Research and development tax credits ( 9.4 ) ( 7.1 ) ( 48.7 )

Tax windfall benefits ( 8.8 ) ( 7.5 ) ( 55.7 )

Change in tax rate due to tax reform

Change in tax rate ( 0.2 ) 0.4 ( 1.4 )

Other 0.4 2.0 0.8

Effective rate 4.4 % 9.5 % ( 84.0 ) %

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

The components of our net deferred tax assets (liabilities) are as follows (in thousands):

Deferred tax assets, non-current

Provision for doubtful accounts

Provision for notes receivable

Provision for credit losses on accounts receivable $ 1,524 $ 606

Depreciation 261 267

Accrued expenses 4,633 3,114

1 unchanged sentence

Operating lease liabilities 11,511 10,929

Deferred rent

Stock-based compensation 12,768 8,840

4 unchanged sentences

Net operating losses 1,198 1,289

Intangible assets and prepaid patent licenses

Tax credits 5,502 7,755

Other 288 106

Total deferred tax assets, non-current prior to valuation allowance 42,703 38,235

4 unchanged sentences

Operating lease right-of-use assets ( 8,043 ) ( 7,441 )

Depreciation ( 5,322 ) ( 3,030 )

Sales commissions ( 866 ) ( 766 )

3 unchanged sentences

Net deferred tax assets, non-current $ 21,692 $ 19,136

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

A reconciliation of the beginning and ending amounts of unrecognized tax benefits (without related interest expense) is as follows (in thousands):

Year Ended December 31,

2020 2019 2018

Beginning balance $ 3,065 $ 2,801 $ 1,973

2 unchanged sentences

Decreases based on tax positions of prior year ( 259 ) ( 253 ) —

Additions resulting from acquisitions

Decreases due to lapse of applicable statute of limitations ( 400 ) ( 219 ) ( 176 )

1 unchanged sentence

Our effective income tax rates were 4.4 %, 9.5 % and ( 84.0 )% for the years ended December 31, 2020, 2019 and 2018, respectively.

Our effective tax rates were below the statutory rate primarily due to the tax windfall benefits from employee stock-based payment transactions, foreign derived intangible income deductions and research and development tax credits claimed, partially offset by the impact of non-deductible meal and entertainment expenses and state taxes.

Our effect ive tax rates were below the statutory rate primarily due to research and development tax credits claimed, tax windfall benefits from employee stock-based payment transactions and foreign derived intangible income deductions, partially offset by the impact of state taxes and valuation allowances recorded against state research and development tax credit carryforwards.

We recognize a valuation allowance if, based on the weight of available evidence, both positive and negative, it is more likely than not that some portion, or all, of net deferred tax assets will not be realized.

Due to the uncertainty of realization of

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

certain deferred tax assets acquired as part of the Acquisition in 2017 related to our Canadian net operating losses and research and development tax credits totaling $ 0.3 million , we established a valuation allowance of $ 0.3 million during the second quarter of 2019, which remained at $ 0.3 million as of December 31, 2019 .

Accordingly, we did no t record a valuation allowance as of December 31, 2018 .

Due to the uncertainty of realization of certain deferred tax assets acquired in 2017 related to our Canadian net operating losses and research and development tax credits totaling $ 0.3 million, we established a valuation allowance of $ 0.3 million during the second quarter of 2019, which remained at $ 0.3 million as of December 31, 2020 and 2019.

During 2020, we established a valuation allowance of $ 1.3 million for state research and development tax credit carryforwards.

We apply guidance for uncertainty in income taxes that requires the application of a more likely than not threshold to the recognition and de-recognition of uncertain tax positions.

If the recognition threshold is met, this guidance permits us to recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is more likely than not to be realized upon settlement.

We recorded unrecognized tax benefits of $ 0.6 million , $ 0.8 million and $ 1.0 million for research and development tax credits claimed during the years ended December 31, 2019 , 2018 and 2017 , respectively.

We recorded an increase to the unrecognized tax benefits of $ 1.1 million, $ 0.6 million and $ 0.8 million primarily for research and development tax credits claimed during the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020 and 2019, we accrued $ 0.1 million and $ 0.2 million of total interest related to unrecognized tax benefits, respectively.

8 unchanged sentences

As of December 31, 2020, we had state net operating loss carryforwards of $ 1.6 million, which are scheduled to begin to expire in 2034.

As of December 31, 2019 , we had federal research and development tax credit carryforwards of $ 5.2 million , which are scheduled to begin to expire in 2038.

As of December 31, 2019 , we had state research and development tax credit carryforwards of $ 4.3 million , which are scheduled to begin to expire in 2021.

As of December 31, 2020, we had federal research and development tax credit carryforwards of $ 2.2 million, on a more likely than not basis, which are scheduled to begin to expire in 2040.

As of December 31, 2020, we had state research and development tax credit carryforwards of $ 4.1 million, on a more likely than not basis, which are scheduled to begin to expire in 2023.

The federal net operating loss carryforward arose in connection with the 2013 acquisition of EnergyHub.

3 unchanged sentences

• Alarm.com segment

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

• Other segment

5 unchanged sentences

Inter-segment revenue includes sales of hardware between our segments.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

Management evaluates the performance of its segments and allocates resources to them based on operating income / (loss) as compared to prior periods and current performance levels.

1 unchanged sentence

Year Ended December 31, 2020

Intersegment Alarm.com

Intersegment Other

Alarm.com Other Intersegment Alarm.com Intersegment Other Total

SaaS and license revenue $ 366,815 $ 26,442 $ — $ — $ 393,257

Hardware and other revenue

219,826 14,254 ( 3,093 ) ( 6,241 ) 224,746

Total revenue

586,641 40,696 ( 3,093 ) ( 6,241 ) 618,003

Operating income / (loss)

59,194 ( 2,908 ) 393 ( 381 ) 56,298

763,925 26,739 ( 58,983 ) 6 731,687

Year Ended December 31, 2019

Intersegment Alarm.com

Intersegment Other

Alarm.com Other Intersegment Alarm.com Intersegment Other Total

SaaS and license revenue $ 317,580 $ 19,795 $ — $ — $ 337,375

Hardware and other revenue

156,265 20,919 ( 4,301 ) ( 7,895 ) 164,988

Total revenue

473,845 40,714 ( 4,301 ) ( 7,895 ) 502,363

Operating income / (loss)

52,046 ( 1,639 ) 134 ( 128 ) 50,413

589,952 17,844 ( 49,997 ) — 557,799

Year Ended December 31, 2018

Intersegment Alarm.com

Intersegment Other

Alarm.com Other Intersegment Alarm.com Intersegment Other Total

SaaS and license revenue $ 278,013 $ 13,059 $ — $ — $ 291,072

Hardware and other revenue

119,221 20,316 ( 4,749 ) ( 5,366 ) 129,422

Total revenue

397,234 33,375 ( 4,749 ) ( 5,366 ) 420,494

Operating income / (loss)

16,927 ( 4,708 ) ( 273 ) 256 12,202

Our SaaS and license revenue for the Alarm.com segment included software license revenue of $ 38.0 million, $ 43.4 million and $ 41.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

1 unchanged sentence

Depreciation and amortization expense was $ 27.2 million, $ 22.1 million and $ 21.4 million for the Alarm.com segment for the years ended December 31, 2020, 2019 and 2018, respectively.

Depreciation and amortization expense was less than $ 0.1 million , $ 0.3 million and $ 0.3 million for the Other segment for the years ended December 31, 2019 , 2018 and 2017 , respectively.

Depreciation and amortization expense was $ 0.3 million, less than $ 0.1 million and $ 0.3 million for the Other segment for the years ended December 31, 2020, 2019 and 2018, respectively.

Additions to property and equipment were $ 16.4 million, $ 15.6 million and $ 11.7 million for the Alarm.com segment for the years ended December 31, 2020, 2019 and 2018, respectively.

2 unchanged sentences

Substantially all our long-lived assets were in North America as of December 31, 2020 and 2019.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

Related Party Transactions

Installation Partner

Our installation partner in which we have a 48.2 % ownership interest performs installation services for security dealers and also provides installation services for us and certain of our subsidiaries.

Our installation partner in which we have a 48.2 % ownership interest performs installation services for security service providers and also provides installation services for us and certain of our subsidiaries.

We account for this investment using the equity method.

As of December 31, 2020 and 2019, our investment balance in our installation partner was zero .

During the years ended December 31, 2019 , 2018 and 2017 , we recorded $ 0.4 million , $ 0.4 million and $ 0.7 million of cost of hardware and other revenue in connection with this installation partner.

During each of the years ended December 31, 2020, 2019 and 2018, we recorded $ 0.4 million of cost of hardware and other revenue in connection with this installation partner.

As of December 31, 2020 and 2019, the accounts payable balance to our installation partner was less than $ 0.1 million.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements - (Continued)

December 31, 2019, 2018 and 2017

Affiliate Lease

OpenEye leases its production and administration operations facility from a company that is controlled by certain employees of OpenEye, or the Landlord.

The lease term is one year with an expiration date of October 20, 2020.

The one-year lease term expired on October 20, 2020 and was subsequently converted to a month-to-month lease.

OpenEye can terminate the lease at any time by providing 30 days' prior written notice and the Landlord can terminate the lease by providing 90 days' prior written notice.

Total minimum lease payments over the term of the lease are $ 0.2 million.

During the year ended December 31, 2019 , we recorded less than $ 0.1 million of rent expense in connection with this lease arrangement.

There was no accounts payable balance due to the Landlord under this lease arrangement as of December 31, 2019 .

During the years ended December 31, 2020 and 2019, we recorded $ 0.3 million and less than $ 0.1 million of rent expense in connection with this lease arrangement.

There was no accounts payable balance due to the Landlord under this lease arrangement as of December 31, 2020 and 2019 .

Quarterly Financial Data (unaudited)

1 unchanged sentence

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 GAAP.

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.

Information about prior period acquisitions that may affect the comparability of the selected financial information presented below is included in Note 7.

Information about the $ 28.0 million expense recorded in general and administrative expense during the three months ended September 30, 2018, which relates to the agreement reached to settle the legal matter alleging violations of the TCPA and may affect the comparability of the quarterly financial data presented below, is included in Note 13 .

However, the COVID-19 pandemic disrupted and may continue to disrupt our supply chain for an unknown period of time due to its impact on manufacturing, production and global transportation.

The COVID-19 pandemic also disrupted and may intermittently continue to disrupt our sales channels due to restrictions imposed from time to time on our service providers’ ability to meet with residential and commercial property owners who use our solutions.

In addition, the COVID-19 pandemic resulted in a global slowdown of economic activity and a recession in the United States and the economic situation remains fluid as parts of the economy appear to be recovering while others continue to struggle.

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

Historical results are not necessarily indicative of the 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, which is increasingly true in periods of extreme uncertainty, such as the uncertainty caused by the COVID-19 pandemic.

Information about current period and prior period acquisitions that may affect the comparability of the selected financial information presented below is included in Note 7.

Information about the $ 1.7 million of interest recorded within interest income and the $ 6.9 million of gain recorded within other income, net, during the three months ended September 30, 2019, which relates to the Promissory Notes proceeds and the Acquired Promissory Note proceeds received from one of our hardware suppliers and may affect the comparability of the quarterly financial data presented below, is included in Note 9.

Information about the $ 24.7 million gain on the sale of an investment recorded in other income, net, during the three months ended September 30, 2020 , which relates to the sale of an investment in one of our platform partners and may affect the comparability of the quarterly financial data presented below, is included in Note 9.

The selected consolidated statements of operation data in amounts are presented below (in thousands, except per share data):

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

Three Months Ended

2019 June 30,

2020 June 30,

Total revenue $ 112,335 $ 121,660 $ 127,880 $ 140,488 $ 151,939 $ 141,637 $ 158,851 $ 165,576

Total cost of revenue 38,950 44,556 47,523 52,570 57,980 49,005 61,183 59,260

Net income / (loss)

Net income / (loss) attributable to common stockholders

Net income / (loss) per share attributable to common stockholders

Net income 9,010 13,796 17,690 12,834 8,571 16,625 35,825 15,639

Net income attributable to common stockholders 9,010 13,796 17,690 13,035 8,807 16,995 36,084 15,967

Net income per share attributable to common stockholders

Basic $ 0.19 $ 0.29 $ 0.36 $ 0.27 $ 0.18 $ 0.35 $ 0.74 $ 0.32

Diluted $ 0.18 $ 0.27 $ 0.35 $ 0.26 $ 0.18 $ 0.34 $ 0.71 $ 0.31

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

Subsequent Events

Convertible Senior Notes

On January 20, 2021, we issued $ 500.0 million aggregate principal amount of 0 % convertible senior notes due January 15, 2026 in a private placement to qualified institutional buyers, or the 2026 Notes.

The terms of the 2026 Notes are governed by an Indenture, or the Indenture, by and between Alarm.com Holdings, Inc.

Bank National Association, as trustee.

The 2026 Notes are senior unsecured obligations that do not bear regular interest and the principal amount of the 2026 Notes will not accrete.

The 2026 Notes may bear special interest under specified circumstances related to our failure to comply with our reporting obligations under the Indenture.

Special interest, if any, will be payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2021 .

We received proceeds from the issuance of the 2026 Notes of $ 484.3 million, net of $ 15.7 million of transaction fees and other debt issuance costs.

We may not redeem the 2026 Notes prior to January 20, 2024.

We may redeem for cash, all or any portion of the 2026 Notes, at our option, on or after January 20, 2024, at a redemption price equal to 100 % of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date, if the last reported sale price of our common stock has been at least 130 % of the conversion price for the 2026 Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption.

No sinking fund is provided for the 2026 Notes.

The 2026 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding August 15, 2025, only under the following circumstances:

(1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price for the 2026 Notes on each applicable trading day;

(2) during the five business day period immediately after any ten consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of 2026 Notes for such trading day was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate for the 2026 Notes on each such trading day;

(3) if we call any or all of the 2026 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the 2026 Notes called (or deemed called) for redemption;

or (4) upon the occurrence of specified corporate events as set forth in the Indenture.

On or after August 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2026 Notes, holders of the 2026 Notes may convert all or any portion of their 2026 Notes at any time, regardless of the foregoing conditions.

Upon conversion, we may satisfy our conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

It is our current intent to settle the principal amount of the 2026 Notes with cash.

The initial conversion rate for the 2026 Notes is 6.7939 shares of our common stock per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of $ 147.19 per share of our common stock, subject to adjustment under certain circumstances in accordance with the terms of the Indenture.

In addition, following certain corporate events that occur prior to the maturity date of the 2026 Notes or if we deliver a notice of redemption in respect of the 2026 Notes, we will, under certain circumstances, increase the conversion rate of the 2026 Notes for a holder who elects to convert its 2026 Notes (or any portion thereof) in connection with such a corporate event or convert its 2026 Notes called (or deemed called) for redemption during the related redemption period (as defined in the Indenture), as the case may be.

If we undergo a fundamental change (as defined in the Indenture), subject to certain exceptions and except as described in the Indenture, holders may require us to repurchase for cash all or any portion of their 2026 Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the 2026 Notes to be repurchased, plus accrued and unpaid special interest, if any, to, but excluding, the fundamental change repurchase date.

The Indenture includes customary covenants and sets forth certain events of default after which the 2026 Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving us after which the 2026 Notes become automatically due and payable.

We used some of the proceeds to repay the $ 110.0 million outstanding principal balance under our 2017 Facility and also used some of the proceeds to pay accrued interest, fees and expenses related to the 2017 Facility.

We terminated the 2017 Facility effective January 20, 2021.

We intend to use the remaining net proceeds from the issuance of the 2026 Notes for working capital and other general corporate purposes, which may include acquisitions or strategic investments in complementary businesses or technologies.

ALARM.COM HOLDINGS, INC.

Notes to the Consolidated Financial Statements — (Continued)

December 31, 2020, 2019 and 2018

Since we expect to settle the principal amount on our outstanding 2026 Notes in cash and any excess in cash or shares of our common stock, we will use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable.

The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of our common stock for a given period exceeds the conversion price of $ 147.19 per share for the 2026 Notes.

Schedule II – Valuation and Qualifying Accounts and Reserves

2 unchanged sentences

(In thousands)

Description Balance at

Year Additions

Revenue Additions

Deductions Balance at

Year Ended December 31, 2020

Allowance for doubtful accounts

Allowance for credit losses on accounts receivable $ 2,584 $ — $ 2,530 $ ( 418 ) $ 4,696

Allowance for product returns 1,075 1,795 — ( 1,390 ) 1,480

Allowance for notes receivable

Allowance for credit losses on notes receivable 16 — 90 ( 17 ) 89

Deferred tax valuation allowance 322 — 1,246 — 1,568

Year Ended December 31, 2019

Allowance for doubtful accounts

Allowance for credit losses on accounts receivable $ 1,425 $ — $ 1,170 $ ( 11 ) $ 2,584

Allowance for product returns 1,915 ( 123 ) 105 ( 822 ) 1,075

Allowance for notes receivable

Allowance for credit losses on notes receivable 3,319 — ( 3,272 ) ( 31 ) 16

Deferred tax valuation allowance — — 322 — 322

Year Ended December 31, 2018

Allowance for doubtful accounts

Allowance for credit losses on accounts receivable $ 1,449 $ — $ 149 $ ( 173 ) $ 1,425

Allowance for product returns 2,471 273 — ( 829 ) 1,915

Allowance for credit losses on notes receivable — — 3,319 — 3,319

(1) Includes the 2020 impact of the adoption of Topic 326 of $ 0.4 million for the allowance for credit losses on accounts receivable and $ 0.4 million for the allowance for credit losses on note receivable (see Note 2).

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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-K

Item 8. Financial Statements and Supplementary Data