Alarm.com Holdings, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ALARM.COM HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 75 Consolidated Financial Statements Consolidated Statements of Operations 77 Consolidated Balance Sheets 78 Consolidated Statements of Cash Flows 79 Consolidated Statements of Equity 81 Notes to the Consolidated Financial Statements 82 Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 2020, 2019 and 2018 125 74 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Alarm.com Holdings, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Alarm.com Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Changes in Accounting Principles As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. 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 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 75 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. 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 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 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 McLean, Virginia February 25, 2021 We have served as the Company’s auditor since 2009. 76 ALARM.COM HOLDINGS, INC. Consolidated Statements of Operations (in thousands, except share and per share data) Year Ended December 31, 2020 2019 2018 Revenue: SaaS and license revenue $ 393,257 $ 337,375 $ 291,072 Hardware and other revenue 224,746 164,988 129,422 Total revenue 618,003 502,363 420,494 Cost of revenue (1) : Cost of SaaS and license revenue 53,539 50,066 44,933 Cost of hardware and other revenue 173,889 133,533 100,782 Total cost of revenue 227,428 183,599 145,715 Operating expenses: Sales and marketing 75,967 61,815 55,902 General and administrative 78,643 69,959 95,750 Research and development 152,147 114,443 89,204 Amortization and depreciation 27,520 22,134 21,721 Total operating expenses 334,277 268,351 262,577 Operating income 56,298 50,413 12,202 Interest expense ( 2,596 ) ( 2,974 ) ( 2,918 ) Interest income 870 4,922 2,272 Other income, net 25,588 6,535 143 Income before income taxes 80,160 58,896 11,699 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 — Net income allocated to participating securities — — ( 3 ) Net income attributable to common stockholders $ 77,853 $ 53,531 $ 21,521 Per share information attributable to common stockholders: 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 _______________ (1) Exclusive of amortization and depreciation shown in operating expenses below. See accompanying notes to the consolidated financial statements. 77 ALARM.COM HOLDINGS, INC. Consolidated Balance Sheets (in thousands, except share and per share data) December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 253,459 $ 119,629 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 Property and equipment, net 44,796 38,548 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 Current liabilities: Accounts payable, accrued expenses and other current liabilities $ 53,927 $ 48,727 Accrued compensation 22,307 16,342 Deferred revenue 4,037 3,043 Operating lease liabilities 9,973 7,683 Total current liabilities 90,244 75,795 Deferred revenue 8,492 7,455 Long-term debt 110,000 63,000 Operating lease liabilities 37,697 37,199 Other liabilities 6,811 7,489 Total liabilities 253,244 190,938 Commitments and contingencies (Note 13) Redeemable noncontrolling interest 10,691 11,210 Stockholders’ equity Preferred stock, $ 0.001 par value, 10,000,000 shares authorized; 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 49,483,620 and 48,700,713 shares outstanding as of December 31, 2020 and 2019, respectively 496 487 Additional paid-in capital 405,831 365,627 Treasury stock, at cost; 147,153 and 0 shares as of December 31, 2020 and 2019, respectively ( 5,149 ) — Retained earnings / (accumulated deficit) 66,574 ( 10,463 ) Total stockholders’ equity 467,752 355,651 Total liabilities, redeemable noncontrolling interest and stockholders’ equity $ 731,687 $ 557,799 See accompanying notes to the consolidated financial statements. 78 ALARM.COM HOLDINGS, INC. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 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 credit losses on accounts receivable 2,162 1,170 149 Reserve for product returns 1,795 ( 123 ) 273 (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 Amortization and depreciation 27,520 22,134 21,721 Amortization of debt issuance costs 108 108 108 Amortization of operating leases 8,888 7,600 — Deferred income taxes ( 3,256 ) 2,599 ( 11,482 ) Change in fair value of contingent liability ( 2,595 ) ( 198 ) — Stock-based compensation 29,176 20,603 13,429 Gain on notes receivable — ( 6,931 ) — Acquired in-process research and development 3,297 850 — Gain on sale of investment ( 24,737 ) — — (Gain on) / impairment of investment ( 676 ) 605 — Disposal of property and equipment — — 1,410 Changes in operating assets and liabilities (net of business acquisitions): 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 Accounts payable, accrued expenses and other current liabilities 13,781 ( 10,980 ) 30,615 Deferred revenue 2,031 ( 1,567 ) ( 1,502 ) Operating lease liabilities ( 10,177 ) ( 8,268 ) — Other liabilities ( 443 ) 403 ( 1,758 ) Cash flows from operating activities 102,080 47,112 60,710 Cash flows used in investing activities: Business acquisitions, net of cash acquired ( 26,299 ) ( 58,833 ) — Additions to property and equipment ( 16,141 ) ( 19,324 ) ( 11,015 ) Purchases of in-process research and development ( 3,297 ) ( 850 ) — Issuances or purchases of notes receivable ( 1,200 ) ( 26,103 ) ( 1,287 ) 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 from / (used in) financing activities: Proceeds from credit facility 50,000 — — Repayments of credit facility ( 3,000 ) ( 4,000 ) ( 4,000 ) 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 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 Cash and cash equivalents at end of the period $ 253,459 $ 119,629 $ 146,061 See accompanying notes to the consolidated financial statements. 79 ALARM.COM HOLDINGS, INC. Consolidated Statements of Cash Flows — Continued (in thousands) Year Ended December 31, 2020 2019 2018 Supplemental disclosures: Cash paid for interest $ 2,427 $ 2,730 $ 2,695 Cash paid for / (received from) income taxes, net of refunds 7,369 2,254 ( 2,052 ) Noncash investing and financing activities: Cash not yet paid for capital expenditures 2,020 837 1,857 Cash not yet paid for business and asset acquisitions - holdback 1,017 2,970 — Contingent liability from business acquisition — 2,595 — See accompanying notes to the consolidated financial statements. 80 ALARM.COM HOLDINGS, INC. Consolidated Statements of Equity (in thousands) Redeemable Noncontrolling Interest Preferred Stock Common Stock Additional Paid-In Capital Treasury Stock Retained Earnings / (Accumulated Deficit) Total Stockholders’ Equity Shares Amount Shares Amount Shares Amount Balance as of December 31, 2017 $ — — $ — 47,202 $ 472 $ 321,032 — $ — $ ( 88,677 ) $ 232,827 Adoption of accounting standard on revenue recognition — — — — — — — — 3,122 3,122 Common stock issued in connection with equity-based plans — — — 888 9 6,391 — — — 6,400 Vesting of common stock subject to repurchase — — — 12 — 55 — — — 55 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 Adoption of accounting standard on leases — — — — — — — — 37 37 Common stock issued in connection with equity-based plans — — — 598 6 3,864 — — — 3,870 Vesting of common stock subject to repurchase — — — 1 — 8 — — — 8 Stock-based compensation expense — — — — — 20,616 — — — 20,616 Noncontrolling interest assumed through acquisition 11,411 — — — — — — — — — 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. 81 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements December 31, 2020, 2019 and 2018 Note 1. Organization Alarm.com Holdings, Inc. (referred to herein as Alarm.com, the Company, or we) is the leading platform for the intelligently connected property. We offer a comprehensive suite of cloud-based solutions for the smart residential and commercial property, including interactive security, video monitoring, intelligent automation and energy management. Millions of property owners depend on our technology to intelligently secure, automate and manage their residential and commercial properties. Our solutions are delivered through an established network of over 10,000 trusted service provider partners, who are experts at selling, installing and supporting our solutions. We derive revenue from the sale of our cloud-based Software-as-a-Service, or SaaS, services, license fees, software, hardware, activation fees and other revenue. Our fiscal year ends on December 31. Note 2. Summary of Significant Accounting Policies Principles of Consolidation Our consolidated financial statements include our accounts and those of our majority-owned and controlled subsidiaries after elimination of intercompany accounts and transactions. Equity investments over which we are able to exercise significant influence but do not control the investee are accounted for using the equity method. We determine whether we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity, or VIE. Voting interest entities are entities that have sufficient equity and provide equity investor voting rights that give them power to make significant decisions relating to the entity’s operations. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. In VIEs, a controlling financial interest is attained through means other than voting rights and the entities lack one or more of the characteristics of a voting entity. We have unconsolidated equity investments in third-party businesses. Equity investments with readily determinable fair values are recorded at fair value. Equity investments without readily determinable fair values are recorded 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. We make a separate election to use the measurement alternative for each eligible investment, and reassess whether an investment qualifies for the alternative at each reporting period. Adjustments resulting from impairment, fair value, or observable price changes are recorded in other income, net in our consolidated statements of operations. Use of Estimates 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. 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 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 We consider all highly liquid instruments purchased with an original maturity from the date of purchase of three months or less to be cash equivalents. As of December 31, 2020 and 2019, we have invested $ 221.4 million and $ 93.3 million in cash equivalents in the form of money market funds with one financial institution, respectively. We consider these money market funds to be Level 1 financial instruments (see Note 10). 82 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 Accounts Receivable Accounts receivable are principally derived from sales to customers located in the United States and Canada. Substantially all of our sales in Canada are transacted in U.S. dollars. 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 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. Notes Receivable 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. Outstanding notes receivable that are aged 30 days or more from the contractual payment date are considered past due. Notes receivable are evaluated for impairment at least quarterly. Impairment occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value and the probability of collecting payments when due. 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 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. 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. 83 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 Inventory 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. Leases 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. If we enter into leases that contain multiple components, we identify separate lease components based on whether or not the right to use the underlying assets is distinct and either highly dependent or highly interrelated with other rights in the contract. We also evaluate whether there are any non-lease components in the arrangement. For certain classes of underlying assets, such as data centers, we have elected not to separate non-lease components from lease components. For all other classes of underlying assets, if separate lease and non-lease components are identified, we allocate the consideration in the contract to the lease and non-lease components using the relative stand-alone selling price method at the lease inception. Many of our leases include options to renew at our sole discretion. We also have several leases that provide us an option to terminate the lease prior to the end of the lease term. These renewal and termination options are included in the lease term at the commencement date when we are reasonably certain the options will be exercised. When assessing the likelihood of electing these options, we consider the length of the renewal period, market conditions, our expansion plans, the existence of a termination penalty, as well as other factors. Our lease agreements do not contain any material residual value guarantees, restrictive covenants or variable lease payments. Right-of-use, or ROU, assets represent our right to use an underlying asset for the term of the lease and lease liabilities represent our obligation to make lease payments throughout the term of the lease. ROU assets and lease liabilities are recognized as of the commencement date of the lease based on the present value of contractual lease payments due over the term of the lease. We use our incremental borrowing rate to determine the present value of the lease payments, as our leases do not state the rate implicit in the lease. Our incremental borrowing rate is determined on a collateralized basis at the commencement date of the lease. ROU assets and lease liabilities resulting from operating leases are recorded on our consolidated balance sheets. We did no t have any finance leases or subleases as of December 31, 2020 and 2019. Lease expense is recognized on a straight-line basis over the term of the lease and is recorded in general and administrative expense. Some of our leases include tenant improvement allowances, which are recorded when we are reasonably certain to utilize the allowance and are amortized on a straight-line basis over the shorter of the lease terms or the asset lives. Leases with an initial lease term of twelve months or less are considered short-term leases. Short-term leases are not recorded on our consolidated balance sheets. 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 years ended December 31, 2020 and 2019. Redeemable Noncontrolling Interests Noncontrolling interests with redemption features that are not solely within our control are considered redeemable noncontrolling interests. Our redeemable noncontrolling interest relates to our 85 % equity ownership interest in PC Open Incorporated, a Washington corporation, doing business as OpenEye (see Note 7). The OpenEye stockholder agreement contains a put option that gives the minority OpenEye stockholders the right to sell their OpenEye shares to us based on the fair value of the shares. The OpenEye stockholder agreement also contains a call option that gives us the right to purchase the remaining OpenEye shares from the minority OpenEye stockholders based on the fair value of the shares. The put and call options can each be exercised beginning in the first quarter of 2023. This redeemable noncontrolling interest is considered temporary equity and we report it between liabilities and stockholders’ equity in the consolidated balance sheets. 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 $ 10.7 million and $ 11.2 million as of December 31, 2020 and 2019. 84 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 Internal-Use Software We capitalize the costs directly related to the development of internal-use software for our platforms during the application development stage of the projects. Such costs primarily include payroll and payroll-related costs for engineers and product development employees directly associated with the development project. Our internal-use software is reported at cost less accumulated depreciation. Depreciation begins once the project is ready for its intended use, which is usually when the code goes into production in weekly software builds on our platforms. We depreciate the asset on a straight-line basis over a period of three years , which is the estimated useful life. We update our software for our SaaS multi-tenant platforms on a weekly basis utilizing continuous agile development methods, which primarily consists of bug-fixes and user interface changes. We evaluate whether a project should be capitalized if it adds significant functionality to our platforms. Maintenance activities or minor upgrades are expensed in the period performed. External Software Costs incurred in researching and developing a computer software product that will be marketed and sold are charged to expense when incurred until technological feasibility is established. Technological feasibility is established upon completion of a detailed program design or, in its absence, completion of a working model (a beta version). After technological feasibility is established, certain payroll and payroll-related costs are capitalized for engineers and product development employees directly associated with the development project. Cost capitalization ceases when the product is available for general release. Our non-hosted software is typically developed in an agile environment with frequent revisions to product release features and functions. Agile development results in a short duration between completion of the detailed program design and beta release. 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 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. We sell our platform and hardware solutions to service provider partners that resell our solutions and hardware to residential and commercial property owners, who are the service provider partners’ customers. Our subscribers consist of all of the properties maintained by those residential and commercial property owners to which we are delivering at least one of our solutions. We also sell our hardware to distributors who resell the hardware to service provider partners. We enter into contracts with our service provider partners that establish pricing for access to our platform solutions and for the sale of hardware. These service provider contracts typically have an initial term of one year , with subsequent renewal terms of one year . 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, 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 purchase of our platform services. The performance obligation is primarily satisfied when the hardware is received by our service provider partner or distributor. Service provider partners transact with us to purchase our platform solutions and resell our solutions to a new subscriber, or to upgrade or downgrade the solutions of an existing subscriber, at which time the subscriber’s access to our platform solutions is enabled and the delivery of the services commences. Our performance obligation related to providing our platform solutions is satisfied on a daily basis as the subscriber uses the platform services. The purchase of platform solutions and the purchase of hardware are separate transactions as revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. We generate all of our revenue from contracts with customers. SaaS and license revenue associated with our contracts is invoiced and revenue is recognized at an amount that corresponds directly with the value of the performance completed to date. 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. To determine the transaction price, we analyze all of the performance obligations included in the contract. We consider the terms of the contract and our customary business practices, which typically do not include financing components or non-cash consideration. 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 85 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. We estimate the variable consideration at the onset of a contract and include the variable consideration within the transaction price if it is probable that a significant reversal of the variable consideration would not occur in the future. When determining whether the amount of variable consideration included in the transaction price should be constrained, we look at the history of hardware purchased and subscribers added by our service provider partners to estimate the likelihood of those service provider partners obtaining the retrospective volume discounts and rebates. At times, our contracts include consideration payable to a customer in the form of fixed discounts or rebates. We record the consideration payable to a customer as a reduction to the transaction price resulting in a reduction to revenue over the service period. If we enter into contracts that contain multiple promised services, we evaluate which of the promised services represent separate performance obligations based on whether or not the promised services are distinct and whether or not the services are separable from other promises in the contract. If these criteria are met, then we allocate the transaction price to the performance obligations using the relative stand-alone selling price method at contract inception. In determining the relative estimated selling prices, we consider market conditions, entity-specific factors and information about the customer or class of customer. Any discount within the contract is allocated proportionately to all of the separate performance obligations in the contract unless the terms of discount relate specifically to the entity’s efforts to satisfy some but not all of the performance obligations. For our standard service provider agreements, we have used a portfolio approach for purposes of revenue recognition, as each agreement has similar characteristics and we do not expect the effects of applying this approach would have a material impact on our financial statements as compared to assessing each agreement individually. SaaS and License Revenue We generate the majority of our SaaS and license revenue primarily from monthly fees charged to our service provider partners sold on a per subscriber basis for access to our cloud-based intelligently connected property platform and related solutions. Our fees per subscriber vary based upon the service plan and features utilized. Under the terms of our contractual arrangements with our service provider partners, we bill a monthly fee to our service provider partners in advance of the month of service, with the exception of the initial partial month of service, which is paid in arrears. Due to the limited period of time between receipt of payment and delivery of service, we have not accounted for these advance payments as significant financing components. We typically transfer the promised SaaS services to our customers over time, which is evidenced by the fact that the customers receive and consume the benefits provided by our performance of the services as such services are rendered. As a result, we recognize revenue from SaaS services on a monthly basis as we satisfy our performance obligations. We have demonstrated that we can sell our SaaS offering on a stand-alone basis, as it can be sold separately from hardware and activation services. As there is neither a minimum required initial service term nor a stated renewal term in our contractual arrangements, we recognize revenue over the period of service, which is monthly. Our service provider partners typically incur and pay the same monthly fee per subscriber account for the entire period a subscriber account is active. 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. The fee paid by our service provider partners each month for the delivery of our solutions is based on the combination of packages and add-ons enabled for each subscriber. We utilize tiered pricing plans where our service provider partners may receive prospective pricing discounts driven by volume. We also generate SaaS and license revenue from the fees paid to us when we license our intellectual property to third parties for use of our patents. We bill a monthly fee to third parties based on the number of customers that were active during the prior month. We apply the usage-based royalty exception to recognize license revenue because the sole or 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 of service. In addition, in certain markets, our EnergyHub subsidiary sells its demand response service for an annual service fee, with pricing based on the number of subscribers or amount of aggregate electricity demand made available for a utility’s or market’s control. Software License Revenue Our SaaS and license revenue also includes our software license revenue from monthly fees charged to service providers sold on a per subscriber basis for access to our Software platform. The non-hosted software for interactive security, automation and related solutions is typically deployed and operated by the service provider in its own network operations center. Our agreements for the Software platform solution typically include software and services, such as post-contract customer support, or PCS. Software sales that include multiple elements are typically allocated to the various elements using the relative stand-alone selling price method. 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 86 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. Our software license revenue during the years ended December 31, 2020, 2019 and 2018 was $ 38.0 million, $ 43.4 million and $ 41.3 million, respectively. 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, gunshot detection sensors and other 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. As a result, we recognize hardware and other revenue as we satisfy our performance obligations, which primarily occurs when the hardware is received by our service provider partner or distributor, net of a reserve for estimated returns. There are a few contracts in which we provide shipping and handling services to the customer after control of the hardware transfers to the customer. In these instances, we have elected to account for shipping and handling costs as activities performed to fulfill the promise to transfer hardware to the customer and not as a separate promised service. Amounts due from the sale of hardware are payable in accordance with the terms of our agreements with our service provider partners or distributors, and are not contingent on resale to end-users, or to service provider partners in the case of sales of hardware to distributors. Payment for our hardware is typically due within 30 days from shipment, with the exception of certain hardware finance arrangements, which are paid over a 36-month period. Our distributors sell directly to our service provider partners under terms between the two parties. When determining the amount of consideration we expect to be entitled to for the sale of our hardware, we estimate the variable consideration associated with customer returns. We record a reserve against revenue for hardware returns based on historical returns. For the years ended December 31, 2020, 2019 and 2018, our reserve against revenue for hardware returns was 1 %, 1 % and 2 % of hardware and other revenue, respectively. We evaluate our hardware reserve on a quarterly basis or if there is an indication of significant changes in return experience. Historically, our returns of hardware have not significantly differed from our estimated reserve. 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 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. 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. The activation fee is non-refundable, separately negotiated and specified in our contractual arrangements with our service provider partners and is charged to the service provider partner for each subscriber activated on our platforms. The decision whether to charge an activation fee is based in part on the expected number of subscribers to be added by our service provider partners and as a result, many of our largest service provider partners do not pay an activation fee. Activation fees are not offered on a stand-alone basis separate from our SaaS offering and are billed and received at the beginning of the arrangement. We record activation fees initially as deferred revenue and we recognize these fees ratably over the expected term of the subscribers’ account which we estimate is ten years based on our annual attrition rate. The portion of these activation fees included in current and long-term deferred revenue as of our balance sheet date represents the amounts that will be recognized ratably as revenue over the following twelve months , or longer as appropriate, until the ten-year expected term is complete. 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. 87 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 Cost of Revenue Our cost of SaaS and license revenue primarily includes the amounts paid to wireless network providers and, to a lesser extent, the costs of running our network operations centers which are expensed as incurred, as well as patent and royalty costs in connection with technology licensed from third-party providers. Our cost of SaaS and license revenue also includes our cost of software license revenue, which primarily includes the payroll and payroll-related costs of the department dedicated to providing service exclusively to those service providers that host the Software platform. 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, 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. We record the cost of SaaS and license revenue as expenses are incurred, which corresponds to the delivery period of our services to our subscribers. We record the cost of hardware and other revenue primarily when the hardware and other services are delivered to the service provider partner, which occurs when control of the hardware and other services transfers to the service provider partner. Our cost of revenue excludes amortization and depreciation shown in operating expenses. Contract Asset and Contract Liability Balances At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each distinct promise to transfer a good or service, or bundle of goods or services. To identify the performance obligations, we consider all of the goods or services promised in the contract, whether explicitly stated or implied based on customary business practices. We record a contract asset when we satisfy a performance obligation by transferring a promised good or service. Contract assets can be conditional or unconditional depending on whether another performance obligation must be satisfied before payment can be received. We receive payments from our service provider partners based on the billing schedule established in our contracts. All of the accounts receivable presented in the balance sheet represent unconditional rights to consideration. We do not have any assets from contracts containing conditional rights and we do not have any assets from satisfied performance obligations that have not been invoiced. We recognize an asset related to the costs incurred to obtain a contract only if we expect to recover those costs and we would not have incurred those costs if the contract had not been obtained. We recognize an asset from the costs incurred to fulfill a contract if the costs (i) are specifically identifiable to a contract, (ii) enhance resources that will be used in satisfying performance obligations in future and (iii) are expected to be recovered. Our contract assets consist of capitalized commission costs and upfront payments made to a customer. Based on the policy above, we capitalize a portion of our commission costs as an incremental cost of obtaining a contract. When calculating the incremental cost of obtaining a contract, we exclude any commission costs related to metrics that could be satisfied without obtaining a contract, including training-related metrics. We amortize our commission costs over a period of three years , which is consistent with the period over which the products and services related to the commission are transferred to the customer. The three-year period was determined based on our review of historical enhancements and upgrades to our products and services. We applied the portfolio approach to account for the amortization of contract costs as each contract has similar characteristics. Upfront payments made to a customer are capitalized and amortized over the expected period of benefit and are recorded as a reduction to revenue. Contract liabilities include payments received in advance of performance under the contract, and are realized with the associated revenue recognized under the contract. All of the deferred revenue presented in the balance sheets represents contract liabilities resulting from advance cash receipts from customers or amounts billed in advance to customers from the sale of services. 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. Research and Development Our research and development costs consist primarily of personnel and related expenses for our employees working on our product development and software and device engineering teams, including salaries, bonuses, stock-based compensation, benefits and other personnel costs. 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 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. 88 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 Fair Value Measurements The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard established a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date; Level 2 - Inputs other than quoted prices included within Level 1 that are observable for similar assets and liabilities, either directly or indirectly; quoted prices in markets that are not active; and Level 3 - Unobservable inputs supported by little or no market activity. 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 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. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. Additionally, equity investments without readily determinable fair values are recognized at fair value on a nonrecurring basis when observable price changes from orderly transactions for identical or similar investments become available. Concentration of Credit Risk The financial instruments that potentially subject us to concentrations of credit risk consists principally of cash and cash equivalents and accounts receivables. All of our cash and cash equivalents are held at financial institutions that management believes to be of high credit quality. Our cash and cash equivalent accounts may exceed federally insured limits at times. We have not experienced any losses on cash and cash equivalents to date. To manage accounts receivable risk, we evaluate the credit worthiness of our service provider partners and maintain an allowance for doubtful accounts. 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 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 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. During 2020, 2019 and 2018, we recognized compensation expense of $ 29.2 million, $ 20.6 million and $ 13.4 million, respectively, and associated income tax benefit of $ 8.2 million, $ 5.2 million and $ 7.6 million, respectively, in connection with our stock-based compensation plans. We account for stock-based compensation arrangements with non-employees based upon the award’s grant date fair value. 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. 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. The maximum number of shares of our common stock that a participant may purchase during any calendar year is limited to the lesser of 10 % of the participant's base compensation for that year or the number of shares with a fair market value of $ 15,000 . The 2015 ESPP is considered compensatory for purposes of share-based compensation expense. Compensation expense is recognized for the amount of the discount, net of actual forfeitures, over the six-month purchase period. 89 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 401(k) Defined Contribution Plan We adopted the Alarm.com Holdings 401(k) Plan, or the Plan, on April 30, 2009. All of our employees are eligible to participate in the Plan. 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. Business Combinations We are required to allocate the purchase price of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed at the acquisition date based upon their estimated fair values. The net assets and results of operations of an acquired entity are included in our consolidated financial statements from the acquisition date. Acquisition-related costs are expensed as incurred. Goodwill as of the acquisition date represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and intangible assets acquired net of liabilities assumed. 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 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. Any adjustments to provisional amounts that are identified during the measurement period are recorded in the reporting period in which the adjustment amounts are determined. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Some acquisitions may include contingent consideration, which is an obligation to make future payments to the seller contingent upon the achievement of future operational or financial targets. We estimated the fair value of the contingent consideration liability by using a Monte Carlo simulation model for determining each of the projected measures by using an expected distribution of potential outcomes. Significant estimates and assumptions in valuing contingent consideration include estimates about future financial results, revenue volatility and the discount rate. The fair value of the contingent consideration is estimated on a quarterly basis and changes in the fair value of the contingent consideration resulting from information that existed subsequent to the acquisition date are recorded in the consolidated statements of operations. On October 21, 2019, we acquired 85 % of the issued and outstanding capital stock of OpenEye. 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 Goodwill Goodwill represents the excess of (1) the aggregate of the fair value of consideration transferred in a business combination, over (2) the fair value of assets acquired, net of liabilities assumed. Goodwill is allocated to our reporting units, which are our operating segments or one level below our operating segments. Goodwill is not amortized, but is subject to annual impairment tests. We perform our annual impairment review of goodwill on October 1 and when a triggering event occurs between annual impairment tests. We test our goodwill at the reporting unit level. We perform either a qualitative analysis or a quantitative analysis every year depending on the changes to our goodwill balance as well as changes in our business and the economy. Qualitative factors we consider include, but are not limited to, macroeconomic conditions, industry and market conditions, company specific events, changes in circumstances and market capitalization. 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. 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. Based on the results of our qualitative assessment, we determined that it was not more likely than not that the fair value of our reporting unit was less than its carrying amount, including goodwill. Therefore, we concluded that there was no goodwill impairment as of October 1, 2020. 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. 90 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 Intangible Assets and Long-lived Assets Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives. We evaluate the recoverability of our intangible assets with definite lives and long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of intangible assets with definite lives and long-lived assets are measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. 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 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 We expense advertising costs as incurred. Advertising costs totaled $ 11.9 million, $ 7.5 million and $ 11.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. Advertising costs are included within sales and marketing expenses on our consolidated statements of operations. Accounting for Income Taxes We account for income taxes under the asset and liability method as required by accounting standards codification, or ASC 740, " Income Taxes ," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that are included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. 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, 2020 and 2019. 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. Significant judgment is required in evaluating uncertain tax positions. We record uncertain tax positions in accordance with ASC 740-10 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and (2) with respect to those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. 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 Our comprehensive income for each of the years ended December 31, 2020, 2019 and 2018 was equal to our net income disclosed in the consolidated statements of operations. Earnings per Share 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 91 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 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. These participating securities include unvested shares issued upon the early exercise of options that are subject to repurchase which have non-forfeitable rights to participate in any dividends declared on our common stock. The two-class method requires a portion of net income to be allocated to the participating securities to determine the net income attributable to common stockholders. 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 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 Adopted 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 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): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which provides guidance designed to improve the effectiveness of fair value measurement disclosures in notes to the financial statements. The update removes several existing disclosure requirements, including, but not limited to: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) the policy for timing of transfers between levels and (iii) the valuation processes for Level 3 fair value measurements. The update also adds additional disclosure requirements for public companies, including but not limited to: (i) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. 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 92 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. Early adoption is permitted. 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): Simplifying the Accounting for Income Taxes, " which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The update also simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance to improve consistent application. 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. 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. Note 3. Revenue from Contracts with Customers Contract Assets Our contract assets consist of capitalized commission costs and upfront payments made to customers. The current portion of capitalized commission costs and upfront payments made to customers are included in other current assets within our consolidated balance sheets. 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, 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. Impairment exists if the carrying amount of the asset recognized from contract costs exceeds the remaining amount of consideration we expect to receive in exchange for providing the goods and services to which such asset relates, less the costs that relate directly to providing those good and services and that have not been recognized as an expense. We did no t record an impairment loss on our contract assets during the years ended December 31, 2020, 2019 and 2018. 93 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 The changes in our contract assets are as follows (in thousands): Year Ended December 31, 2020 2019 2018 Beginning of period balance $ 4,578 $ 2,881 $ — Commission costs and upfront payments to a customer capitalized in period 3,262 4,141 4,864 Amortization of contract assets ( 3,534 ) ( 2,444 ) ( 1,983 ) End of period balance $ 4,306 $ 4,578 $ 2,881 Contract Liabilities Contract liabilities include payments received in advance of performance under the contract and are realized with the associated revenue recognized under the contract. The changes in our contract liabilities are as follows (in thousands): Year Ended December 31, 2020 2019 2018 Beginning of period balance $ 10,498 $ 11,176 $ 12,678 Revenue deferred and acquired in current period 12,247 6,127 3,954 Revenue recognized from amounts included in contract liabilities ( 10,216 ) ( 6,805 ) ( 5,456 ) End of period balance $ 12,529 $ 10,498 $ 11,176 The revenue recognized from amounts included in contract liabilities primarily relates to prepayment contracts with customers as well as payments of activation fees. Note 4. Accounts Receivable, Net The components of accounts receivable, net are as follows (in thousands): December 31, 2020 2019 Accounts receivable $ 89,502 $ 80,032 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, 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. 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. 94 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) 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 Alarm.com and Certain Subsidiaries All Other Subsidiaries 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 ) Note 5. Inventory The components of inventory are as follows (in thousands): December 31, 2020 2019 Raw materials $ 9,475 $ 8,921 Finished goods 34,806 25,247 Total inventory $ 44,281 $ 34,168 Note 6. Property and Equipment, Net 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. During the application development phase, we record capitalized development costs in our construction in progress account and then reclass the asset to internal-use software when the project is ready for its intended use, which is usually when the code goes into production. Furniture, fixtures and office equipment and computer software and hardware are depreciated on a straight-line basis over lives ranging from three to five years . Internal-use software is amortized on a straight-line basis over a three-year period. 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 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): December 31, 2020 2019 Furniture, fixtures and office equipment $ 6,811 $ 5,604 Computer software and hardware 22,805 17,767 Internal-use software 8,949 8,949 Construction in progress 9,777 4,232 Leasehold improvements 25,546 23,223 Real property and improvements 4,917 4,917 Land 1,398 1,398 Total property and equipment 80,203 66,090 Accumulated depreciation ( 35,407 ) ( 27,542 ) Property and equipment, net $ 44,796 $ 38,548 Depreciation expense related to property and equipment for the years ended December 31, 2020, 2019 and 2018 was $ 8.3 million, $ 5.9 million and $ 5.7 million, respectively. 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 years ended December 31, 2020 and 2019. Within the Alarm.com segment, we disposed of and wrote off $ 1.4 million of 95 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. This building will be used by OpenEye for sales and training, research and development, warehousing and administrative purposes. Note 7. Acquisitions 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. In consideration for the purchase of the IPR&D, we paid $ 0.9 million in cash on September 18, 2019, with the remaining $ 0.1 million expected to be paid 18 months following the acquisition date, subject to offset for any indemnification obligations. 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. 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. 96 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) 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: Cash $ 311 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 97 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 . Trade Name 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. We believe the acquisition of OpenEye will provide a key element to our comprehensive suite of interactive cloud-based services spanning video, access control, intrusion and automation for domestic and international commercial enterprises. In consideration for the purchase of 85 % of the issued and outstanding capital stock of OpenEye, we paid $ 61.2 million in cash on October 21, 2019, after deducting $ 2.8 million related to an agreed holdback. Pursuant to the terms of the stock purchase agreement, following the preliminary determination of the working capital of OpenEye as of the closing date, the purchase price increased by $ 0.2 million. The working capital adjustment 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 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 Calculation of Purchase Consideration: Cash paid, net of working capital adjustment $ 61,403 Holdback consideration 2,820 Contingent consideration 2,793 Total consideration $ 67,016 Tangible and Intangible Net Assets: Cash $ 2,352 Accounts receivable 5,742 Inventory 4,687 Other current assets 216 Property and equipment 296 Customer relationships 19,805 Developed technology 16,583 Trade name 2,219 Accounts payable ( 2,746 ) Accrued expenses ( 1,017 ) Other current liabilities ( 1,683 ) Deferred tax liability ( 9,209 ) Deferred revenue ( 889 ) Redeemable noncontrolling interest ( 11,411 ) Goodwill 42,071 Total tangible and intangible net assets $ 67,016 98 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 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 In accordance with ASC 805, OpenEye constituted a business and the assets and liabilities were recorded at their respective fair values as of October 21, 2019. We developed our estimate of the fair value of intangible net assets using a multi-period excess earnings method for customer relationships, the relief from royalty method for the developed technology and the relief-from-royalty method for the trade name. Customer Relationships We recorded the customer relationships intangible separately from goodwill based on determination of the length, strength and contractual nature of the relationship that OpenEye shared with its customers. We valued the single group of customer relationships using the multi-period excess earnings method, an income approach. The significant assumptions used in the income approach include estimates about future expected cash flows from customer contracts, the attrition rate and the discount rate. We are amortizing the customer relationships, valued at $ 19.8 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of 13 years. Developed Technology Developed technology primarily consists of intellectual property of proprietary software that is marketed for sale. We valued the developed technology by applying the relief from royalty method, an income approach. The significant assumptions used in the relief from royalty method include estimates about future expected cash flows from the developed technology, the royalty rate, the obsolescence factor and the discount rate. We are amortizing the OpenEye developed technology, valued at $ 16.6 million, on an attribution method based on the discounted cash flows of the model over an estimated useful life of nine years . Trade Name We valued the trade names acquired using a relief from royalty method. The significant assumptions used in the income approach include future expected cash flows from the trade name, the royalty rate and the discount rate. We are amortizing the trade names, valued at $ 2.2 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of five years . Redeemable Noncontrolling Interests Our redeemable noncontrolling interest relates to our 85 % equity ownership interest in OpenEye. The OpenEye stockholder agreement contains a put option that gives the minority OpenEye stockholders the right to sell their remaining 15 % equity ownership interest to us based on the fair value of the shares. The OpenEye stockholder agreement also contains a call option that gives us the right to purchase the remaining OpenEye shares from the minority OpenEye stockholders based on the fair value of the shares. The put and call options can each be exercised beginning in the first quarter of 2023. The redeemable noncontrolling interest was recorded at fair value on October 21, 2019, by applying the income approach using unobservable inputs for projected cash flows, including projected financial results and a discount rate, which are considered Level 3 inputs. This redeemable noncontrolling interest is considered temporary equity and we report it between liabilities and stockholders’ equity in the consolidated balance sheets. 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 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 99 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 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 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. 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): Pro Forma Year Ended December 31, 2020 2019 Revenue $ 626,080 $ 508,662 Net income attributable to common stockholders 75,258 52,999 Net income attributable to common stockholders per share - basic $ 1.54 $ 1.08 Net income attributable to common stockholders per share - diluted $ 1.48 $ 1.04 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 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. 100 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 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): Pro Forma Year Ended December 31, 2019 2018 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 Revenue $ 5,863 Net loss ( 1,646 ) Note 8. 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 Goodwill acquired 41,372 — 41,372 Balance as of December 31, 2019 104,963 — 104,963 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. 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): Customer 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 $ 103,259 101 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 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 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 Gross Carrying Amount Accumulated Amortization Net Carrying Value Weighted- Average Remaining Life (in years) Customer relationships $ 126,093 $ ( 53,423 ) $ 72,670 8.8 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 Gross Carrying Amount Accumulated Amortization Net Carrying Value Weighted- Average Remaining Life (in years) Customer relationships $ 123,731 $ ( 39,335 ) $ 84,396 9.8 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, Amortization 2021 $ 17,044 2022 17,534 2023 16,193 2024 14,257 2025 12,071 2026 and thereafter 26,160 Total future amortization expense $ 103,259 102 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 Note 9. Other Assets 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, 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 $ 0.2 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 In September 2016, we entered into dealer and loan agreements with a distribution partner. The dealer agreement enables the distribution partner to resell our SaaS services and hardware to their subscribers. Under the loan agreements, we agreed to loan the distribution partner up to $ 4.0 million, collateralized by all assets owned by the distribution partner. 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 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 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 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 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. 103 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 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. 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 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. As a result of the payments received, we reversed the $ 3.3 million reserve related to the October 2018 Promissory Note that was previously recorded during the three months ended December 31, 2018. The reversal of the reserve was recorded as a reduction to general and administrative expense in our consolidated statements of operations during the three months ended June 30, 2019. 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, 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 104 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 Loan Receivables Hardware Financing Receivables 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 $ — $ — $ 211 105 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, 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. Note 10. Fair Value Measurements The following tables presents our assets and liabilities measured at fair value on a recurring basis (in thousands): Fair Value Measurements on a Recurring Basis as of December 31, 2020 Fair value measurements in: Level 1 Level 2 Level 3 Total Assets: Money market accounts $ 221,407 $ — $ — $ 221,407 Total $ 221,407 $ — $ — $ 221,407 Liabilities: Contingent consideration liability from acquisitions $ — $ — $ — $ — Total $ — $ — $ — $ — Fair Value Measurements on a Recurring Basis as of December 31, 2019 Fair value measurements in: Level 1 Level 2 Level 3 Total Assets: Money market accounts $ 93,303 $ — $ — $ 93,303 Total $ 93,303 $ — $ — $ 93,303 Liabilities: Contingent consideration liability from acquisitions $ — $ — $ 2,595 $ 2,595 Total $ — $ — $ 2,595 $ 2,595 106 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 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, 2020 2019 Beginning of period balance $ 2,595 $ — Acquired liabilities — 2,793 Changes in fair value included in earnings ( 2,595 ) ( 198 ) End of period balance $ — $ 2,595 The money market accounts are included in our cash and cash equivalents in our consolidated balance sheets. Our money market assets are valued using quoted prices in active markets. 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. 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. Note 11. Leases We lease office space, data centers and office equipment under non-cancelable operating leases with various expiration dates through 2026. In August 2014, we signed a lease for office space in Tysons, Virginia, where we relocated our headquarters to in February 2016. We have subsequently entered into amendments to this lease to provide us with additional office space. 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. 107 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): Year Ended December 31, 2020 2019 Operating lease cost $ 8,888 $ 7,600 Cash paid for amounts included in the measurement of operating lease liabilities 10,177 8,268 Operating lease right-of-use assets obtained in exchange for new operating lease liabilities 10,073 7,886 December 31, 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) 2021 $ 11,485 2022 10,460 2023 9,648 2024 8,494 2025 7,539 2026 and thereafter 4,443 Total lease payments 52,069 Less: imputed interest (2) 4,399 Present value of lease liabilities $ 47,670 _______________ (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 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 2019 $ 7,044 2020 7,168 2021 6,974 2022 6,719 2023 6,348 2024 and thereafter 14,838 Total $ 49,091 108 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 Note 12. Liabilities The components of accounts payable, accrued expenses and other current liabilities are as follows (in thousands): December 31, 2020 December 31, 2019 Accounts payable $ 38,163 $ 32,878 Accrued expenses 11,449 10,092 Other current liabilities 4,315 5,757 Accounts payable, accrued expenses and other current liabilities $ 53,927 $ 48,727 The components of other liabilities are as follows (in thousands): December 31, 2020 December 31, 2019 Contingent consideration liability from acquisitions $ — $ 2,595 Holdback liability from acquisitions 1,500 1,650 Other liabilities 5,311 3,244 Other liabilities $ 6,811 $ 7,489 Note 13. Debt, Commitments and Contingencies The debt, commitments and contingencies described below would require us, or our subsidiaries, to make payments to third parties under certain circumstances. Debt 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 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 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. 109 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 Contingent Consideration On October 21, 2019, we acquired 85 % of the issued and outstanding capital stock of OpenEye. 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 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. 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 10). Indemnification Agreements We have various agreements that may obligate us to indemnify the other party to the agreement with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business. Although we cannot predict the maximum potential amount of future payments that may become due under these indemnification agreements, we do not believe any potential liability that might arise from such indemnity provisions is probable or material. Letters of Credit As of December 31, 2020 and 2019, we had no outstanding letters of credit under the 2017 Facility. Legal Proceedings On June 2, 2015, Vivint, Inc., or Vivint, filed a lawsuit against us in U.S. District Court, District of Utah, alleging that our technology directly and indirectly infringes six patents that Vivint purchased. Vivint is seeking permanent injunctions, enhanced damages and attorneys' fees. We answered the complaint on July 23, 2015. Among other things, we asserted defenses based on non-infringement and invalidity of the patents in question. On August 19, 2016, the U.S. District Court, District of Utah stayed the litigation pending inter partes review by the U.S. Patent Trial and Appeal Board, or PTAB, of five of the patents in suit. In March 2017, the PTAB issued final written decisions relating to two patents finding all challenged claims unpatentable. In May 2017, the PTAB issued final written decisions relating to the remaining three patents that found certain claims unpatentable, while certain other claims were not found to be unpatentable. Vivint appealed the decisions to the U.S. Court of Appeals for the Federal Circuit, or the Federal Circuit, and we cross-appealed. In July 2018, the Federal Circuit issued orders affirming the PTAB’s March 2017 decisions that invalidated all challenged claims of two patents. The U.S. District Court, District of Utah lifted the stay on the litigation on June 26, 2017, with Vivint proceeding with its case on four of the six patents in its complaint. No trial date has been set. In September 2017, the U.S. Patent and Trademark Office, or PTO, ordered ex parte reexaminations of certain claims of two of the remaining patents in suit, at our request. 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. 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. 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. Since all remaining patent claims in the litigation have expired, Vivint shall not be entitled to injunctive relief as a remedy in this matter. While we believe we have valid defenses to Vivint’s claims, any of these outcomes could result in a material adverse effect on our business. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time. 110 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. International Trade Commission, or ITC, naming Alarm.com Incorporated and Alarm.com Holdings, Inc., among others, as proposed respondents. The complaint alleges that Alarm.com’s smart thermostats infringe three U.S. patents owned by EcoFactor. EcoFactor is seeking a permanent limited exclusion order and permanent cease and desist order. On November 22, 2019, the ITC instituted an investigation into EcoFactor’s allegations naming Alarm.com Incorporated, Alarm.com Holdings, Inc. and others as respondents. We answered the complaint on December 19, 2019. Among other things, we asserted defenses based on non-infringement and invalidity of the patents in question. 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. District Court, District of Massachusetts, alleging infringement of the same three patents asserted against us in the ITC. EcoFactor is seeking permanent injunctions, enhanced damages and attorneys' fees. On December 26, 2019, the court issued an order staying the lawsuit pending the conclusion of the related ITC investigation. 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. 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 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 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 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. in U.S. District Court, the District of New Mexico. Applied Capital, Inc v. The ADT Corporation et al. , D. New Mexico Case No. 1-16-cv-00815. Icontrol was dismissed without prejudice on May 22, 2017. Applied Capital alleges that ADT’s sales of ADT Pulse directly and indirectly infringes U.S. Patent Nos. 8,378,817 and 9,728,082, which were allegedly purchased by Applied Capital. Applied Capital is seeking damages and attorneys’ fees. ADT answered Applied Capital’s amended complaint on July 16, 2018. Among other things, ADT has asserted defenses based on non-infringement and invalidity of the patents-in-suit. On April 5, 2019, Applied Capital filed a lawsuit for breach of contract against Rodney Fox, the inventor of the patents-in-suit, in the Second Judicial District Court, County of Bernalillo in New Mexico State Court (No. D-202-CV-2019-02841). Mr. Fox counterclaimed, alleging that he is the rightful owner of the patents-in-suit. Based on the dispute of ownership, on October 15, 2019, ADT filed a motion to stay in this matter pending its resolution. Applied Capital and Mr. Fox reached settlement and stipulated to dismissal of the New Mexico State Court action on October 31, 2019. 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 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. Ltd. 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. Patent Nos. 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 111 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 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 Portus. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time. We may also be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Other than the preceding matters, we are not a party to any lawsuit or proceeding that, in the opinion of management, is reasonably possible or probable of having a material adverse effect on our financial position, results of operations or cash flows. We reserve for contingent liabilities based on ASC 450, " Contingencies ," when it is determined that a liability, inclusive of defense costs, is probable and reasonably estimable. Litigation is subject to many factors that are difficult to predict, so there can be no assurance that, in the event of a material unfavorable result in one or more claims, we will not incur material costs. Note 14. Stockholders' Equity Authorized shares We are authorized to issue two classes of stock, common stock and preferred stock. On June 9, 2015, the board of directors amended and restated our Amended and Restated Certificate of Incorporation, effective upon the closing of our IPO on July 1, 2015, and authorized us to issue up to 300,000,000 shares of common stock and 10,000,000 shares of undesignated preferred stock. Common and Preferred Stock As of December 31, 2020 and 2019, there were 49,630,773 and 48,700,963 shares of common stock issued, and 49,483,620 and 48,700,713 shares of common stock outstanding, respectively. As of December 31, 2020 and 2019, there were no preferred shares issued and outstanding. Each outstanding share of common stock is entitled to one vote per share. 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. Note 15. Stock-Based Compensation 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 General and administrative 7,996 6,474 4,901 Research and development 18,155 12,054 7,332 Total stock-based compensation expense $ 29,176 $ 20,603 $ 13,429 112 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 Restricted stock units 25,605 16,627 9,770 Restricted stock awards — — 1 Employee stock purchase plan 165 193 147 Total stock-based compensation expense $ 29,176 $ 20,603 $ 13,429 Tax windfall benefit from stock-based awards $ 8,202 $ 5,154 $ 7,581 2015 Equity Incentive Plan We issue stock options pursuant to our 2015 Plan. The 2015 Plan allows for the grant of stock options to employees and for the grant of nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, or RSUs, performance-based stock awards, and other forms of equity compensation to our employees, directors and non-employee directors and consultants. In June 2015, our board of directors adopted and our stockholders approved our 2015 Plan pursuant to which we initially reserved a total of 4,700,000 shares of common stock for issuance under the 2015 Plan, which included shares of our common stock previously reserved for issuance under our Amended and Restated 2009 Stock Incentive Plan, or the 2009 Plan. The number of shares of common stock reserved for issuance under the 2015 Plan will automatically increase on January 1 each year, for a period of not more than ten years , commencing on January 1, 2016 through January 1, 2024, by 5.0 % of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the board of directors. As a result of the adoption of the 2015 Plan, no further grants may be made under the 2009 Plan. As of 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 Stock options under the 2015 Plan have been granted at exercise prices based on the closing price of our common stock on the date of grant. Stock options under the 2009 Plan were granted at exercise prices as determined by the board of directors to be the fair market value of our common stock. Our stock options generally vest over a five-year period and each option, if not exercised or forfeited, expires on the ten th anniversary of the grant date. Certain stock options granted under the 2015 Plan and previously granted under the 2009 Plan may be exercised before the options have vested. Unvested shares issued as a result of early exercise are subject to repurchase by us upon termination of employment or services at the original exercise price. The proceeds from the early exercise of stock options are initially recorded as a current liability and are reclassified to common stock and additional paid-in capital as the awards vest and our repurchase right lapses. There were 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. We recognize stock-based compensation expense using the accelerated attribution method, net of actual forfeitures, in which compensation cost for each vesting tranche in an award is recognized ratably from the service inception date to the vesting date for that tranche. We value our stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the risk-free interest rate, expected term, expected stock price volatility and dividend yield. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistent with the expected term of our stock options. The expected term represents the period of time the stock options are expected to be outstanding and is based on the "simplified method." Under the "simplified method," the expected term of an option is presumed to be the mid-point between the vesting date and the end of the contractual term. We use the "simplified method" due to the lack 113 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. The expected volatility for options granted prior to November 2019 was based on historical volatilities of our stock and publicly traded stock of comparable companies over the estimated expected term of the stock options. There were 143,650 , 186,500 and 219,450 stock options granted during the years ended December 31, 2020, 2019 and 2018, respectively. We declared and paid dividends in June 2015 in anticipation of our IPO, which we closed on July 1, 2015. Subsequent to the IPO, we do not expect to declare or pay dividends on a recurring basis. As such, we assume that the dividend rate is 0 %. The following table summarizes the assumptions used for estimating the fair value of stock options granted: Year Ended December 31, 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 6.3 years Risk-free interest rate 0.4 - 1.8 % 1.4 - 2.5 % 2.3 - 3.0 % Dividend rate — % — % — % The following table summarizes stock option activity: Number of Options Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 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 Vested and expected to vest as of December 31, 2020 1,343,479 $ 25.75 5.7 $ 104,388 Exercisable as of December 31, 2020 878,901 $ 16.54 4.6 $ 76,382 The weighted average grant date fair value for our stock options granted during the years ended December 31, 2020, 2019 and 2018 was $ 16.79 , $ 25.01 and $ 19.43 , respectively. The total fair value of stock options vested during the years ended December 31, 2020, 2019 and 2018 was $ 3.6 million, $ 3.4 million and $ 3.5 million, respectively. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2020, 2019 and 2018 was $ 33.4 million, $ 15.1 million and $ 32.7 million, respectively. As of December 31, 2020, the total compensation cost related to nonvested awards not yet recognized was $ 4.1 million, which will be recognized over a weighted average period of 2.5 years. Cash received from exercises of stock options was $ 10.2 million, $ 2.5 million and $ 5.2 million during the years ended December 31, 2020, 2019 and 2018, respectively. Stock Options Assumed from Acquisition 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. On March 15, 2017, we filed a Form S-8 Registration Statement related to the Acquisition. 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 114 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 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. 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. 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, 2017 Volatility 42.7 - 44.4 % Expected term 2.5 - 5.0 years Risk-free interest rate 1.4 - 2.0 % Dividend rate — % The following table summarizes the assumed stock option activity: Number of Options Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 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 Vested and expected to vest as of December 31, 2020 7,633 $ 6.09 4.6 $ 743 Exercisable as of December 31, 2020 7,633 $ 6.09 4.6 $ 743 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 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, 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 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 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. 115 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 The following table summarizes RSU activity: Number of RSUs Weighted Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) 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 Vested and expected to vest as of December 31, 2020 1,696,640 $ 48.08 $ 175,517 Employee Stock Purchase Plan Our board of directors adopted our 2015 ESPP in June 2015. As of December 31, 2020, 1,974,251 shares have been reserved for future grant under the 2015 ESPP, with provisions established to increase the number of shares available on January 1 of each subsequent year for nine years . The annual automatic increase in the number of shares available for issuance under the 2015 ESPP is the lesser of 1 % of each class of common stock outstanding as of December 31 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. The maximum number of shares of our common stock that a participant may purchase during any calendar year shall not exceed such number of shares having a fair market value equal to the lesser of $ 15,000 or 10 % of the participant's base compensation for that year. The 2015 ESPP is considered compensatory for purposes of share-based compensation expense due to the 10 % discount on the fair market value of the common stock. For the years ended December 31, 2020, 2019 and 2018, an aggregate of 29,933 , 26,811 and 29,131 shares were purchased by employees for which we recognized $ 0.2 million, $ 0.2 million and $ 0.1 million of compensation expense, respectively. Compensation expense is recognized for the amount of the discount, net of actual forfeitures and voluntary withdrawals, over the six-month purchase period. Note 16. Earnings Per Share Basic and Diluted Earnings Per Share The components of basic and diluted earnings per share are as follows (in thousands, except share and per share amounts): 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 — Net income allocated to participating securities — — ( 3 ) Net income attributable to common stockholders (A) $ 77,853 $ 53,531 $ 21,521 Weighted average common shares outstanding — basic (B) 48,950,328 48,427,446 47,633,739 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 $ 0.43 116 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 The following securities have been excluded from the calculation of diluted weighted average common shares outstanding as the inclusion of these securities would have an anti-dilutive effect: Year Ended December 31, 2020 2019 2018 Stock options 158,515 223,259 229,294 Restricted stock units 62,194 136,600 148,175 Common stock subject to repurchase — 250 957 Participating securities are composed of certain stock options granted under the 2015 Plan, and previously granted under the 2009 Equity Incentive Plan, that may be exercised before the options have vested. Unvested shares have a non-forfeitable right to dividends. Unvested shares issued as a result of early exercise are subject to repurchase by us upon termination of employment or services at the original exercise price. The common stock subject to repurchase is no longer classified as participating securities when shares revert to common stock outstanding as the awards vest and our repurchase right lapses. Our redeemable noncontrolling interest relates to our 85 % equity ownership interest in OpenEye. The OpenEye stockholder agreement contains a put option that gives the minority OpenEye stockholders the right to sell their OpenEye shares to us based on the fair value of the shares. The OpenEye stockholder agreement also contains a call option that gives us the right to purchase the remaining OpenEye shares from the minority OpenEye stockholders based on the fair value of the shares. The put and call options can each be exercised beginning in the first quarter of 2023. This redeemable noncontrolling interest is considered temporary equity and we report it between liabilities and stockholders’ equity in the consolidated balance sheets. The amount of the net income or loss attributable to redeemable noncontrolling interests is recorded in the consolidated statements of operations. Note 17. Significant Service Providers 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. 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 . Note 18. Income Taxes The components of our income tax expense are as follows (in thousands): Year Ended December 31, 2020 2019 2018 Current Federal $ 3,583 $ 1,615 $ 741 State 2,735 900 653 Foreign 438 452 263 Total Current 6,756 2,967 1,657 Deferred 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 ) 117 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 % State income tax expense, net of federal benefits 1.4 0.6 ( 3.4 ) Nondeductible meals and entertainment 0.1 0.8 2.1 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 ( 0.2 ) 0.4 ( 1.4 ) Other 0.4 2.0 0.8 Effective rate 4.4 % 9.5 % ( 84.0 ) % The components of our net deferred tax assets (liabilities) are as follows (in thousands): December 31, 2020 2019 Deferred tax assets, non-current Provision for credit losses on accounts receivable $ 1,524 $ 606 Depreciation 261 267 Accrued expenses 4,633 3,114 Deferred revenue 1,725 2,060 Operating lease liabilities 11,511 10,929 Stock-based compensation 12,768 8,840 Acquisition costs 2,773 2,811 Subsidiary unit compensation 249 185 Equity investments 31 243 Inventory reserve 240 30 Net operating losses 1,198 1,289 Tax credits 5,502 7,755 Other 288 106 Total deferred tax assets, non-current prior to valuation allowance 42,703 38,235 Valuation allowance ( 1,568 ) ( 322 ) Total deferred tax assets, non-current, net of valuation allowance 41,135 37,913 Deferred tax liabilities, non-current Intangible assets and prepaid patent licenses ( 4,421 ) ( 6,162 ) Operating lease right-of-use assets ( 8,043 ) ( 7,441 ) Depreciation ( 5,322 ) ( 3,030 ) Sales commissions ( 866 ) ( 766 ) Contingent liability ( 171 ) ( 170 ) Internally developed software ( 620 ) ( 1,208 ) Total deferred tax liabilities, non-current ( 19,443 ) ( 18,777 ) Net deferred tax assets, non-current $ 21,692 $ 19,136 118 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 Additions based on tax positions of the current year 1,166 718 857 Additions based on tax positions of prior year 656 18 147 Decreases based on tax positions of prior year ( 259 ) ( 253 ) — Decreases due to lapse of applicable statute of limitations ( 400 ) ( 219 ) ( 176 ) Ending balance $ 4,228 $ 3,065 $ 2,801 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 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 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 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. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. We are not aware of any events that make it reasonably possible that there would be a significant change in our unrecognized tax benefits over the next twelve months. Our cumulative liability for uncertain tax positions was $ 4.2 million and $ 3.1 million as of December 31, 2020 and 2019, respectively, and if recognized, would reduce our income tax expense and the effective tax rate. We file income tax returns in the United States and Canada. We are no longer subject to U.S. income tax examinations for years prior to 2017, with the exception that operating loss carryforwards generated prior to 2017 may be subject to tax audit adjustment. We are generally no longer subject to state and local income tax examinations by tax authorities for years prior to 2017. As of December 31, 2020, we had federal net operating loss carryforwards of $ 4.6 million, which are scheduled to begin to expire in 2030. 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, 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. Utilization of net operating loss carryforwards may be subject to annual limitations due to ownership change limitations as provided by the Internal Revenue Code of 1986, as amended. Note 19. Segment Information We have two reportable segments: • Alarm.com segment 119 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 • Other segment Our chief operating decision maker is our chief executive officer. Management determined the operational data used by the chief operating decision maker is that of the two reportable segments. Management bases strategic goals and decisions on these segments and the data presented below is used to measure financial results. Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that contributed 94 %, 93 % and 93 % of our revenue for the years ended December 31, 2020, 2019 and 2018, respectively. Our Other segment is focused on researching, developing and offering residential and commercial automation solutions and energy management products and services in adjacent markets. Inter-segment revenue includes sales of hardware between our segments. 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. The reportable segment operational data is presented in the tables below (in thousands): Year Ended December 31, 2020 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 Assets 763,925 26,739 ( 58,983 ) 6 731,687 Year Ended December 31, 2019 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 Assets 589,952 17,844 ( 49,997 ) — 557,799 Year Ended December 31, 2018 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. There was no software license revenue recorded for the Other segment during the years ended December 31, 2020, 2019 and 2018. 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 $ 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. Additions to property and equipment were $ 1.1 million, $ 0.7 million and $ 0.1 million for the Other segment for the years ended December 31, 2020, 2019 and 2018, respectively. We derived substantially all revenue from North America for the years ended December 31, 2020, 2019 and 2018. Substantially all our long-lived assets were in North America as of December 31, 2020 and 2019. 120 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 Note 20. Related Party Transactions Installation Partner 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 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. 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 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 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 . Note 21. Quarterly Financial Data (unaudited) The following table shows selected unaudited quarterly consolidated statement of operations data for each of our eight most recently completed quarters. 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. 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): 121 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 Three Months Ended Mar. 31, 2019 June 30, 2019 Sept. 30, 2019 Dec. 31, 2019 Mar. 31, 2020 June 30, 2020 Sept. 30, 2020 Dec. 31, 2020 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 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 $ 0.31 122 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2020, 2019 and 2018 Note 22. 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. and U.S. 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. 123 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. 124 Schedule II – Valuation and Qualifying Accounts and Reserves Alarm.com Holdings, Inc. Schedule II Valuation and Qualifying Accounts and Reserves (In thousands) Description Balance at Beginning of Year Additions Charged Against Revenue Additions Charged to Other Accounts (1) Deductions Balance at End of Year Year Ended December 31, 2020 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 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 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 credit losses on notes receivable 3,319 — ( 3,272 ) ( 31 ) 16 Deferred tax valuation allowance — — 322 — 322 Year Ended December 31, 2018 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). 125 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.