What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-05-04 compared with 2020-11-05 · 412 added, 493 removed, 596 unchanged (60% of the section changed)

4 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

SaaS and license revenue $ 107,383 $ 91,950

14 unchanged sentences

Interest income 157 459

Other income, net 24,753 6,380 24,910 6,468

Other (expense) / income, net ( 155 ) 92

Income before income taxes 11,637 9,773

Provision for income taxes 6,546 2,873 5,471 3,428

(Benefit from) / provision for income taxes ( 2,913 ) 1,202

Net income 14,550 8,571

14 unchanged sentences

(in thousands, except share and per share data)

September 30,

2021 December 31,

3 unchanged sentences

88,406 83,326

Inventory, net 40,199 34,168

Inventory 47,228 44,281

Other current assets, net of allowance for credit losses of $ 6 and $ 17 , respectively

17 unchanged sentences

Deferred revenue 8,373 8,492

Convertible senior notes, net 412,772 —

Long-term debt — 110,000

6 unchanged sentences

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

no shares issued and outstanding as of September 30, 2020 and December 31, 2019

no shares issued and outstanding as of March 31, 2021 and December 31, 2020

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

49,803,750 and 49,630,773 shares issued;

and 49,109,244 and 48,700,713 shares outstanding as of September 30, 2020 and December 31, 2019, respectively

and 49,656,597 and 49,483,620 shares outstanding as of March 31, 2021 and December 31, 2020, respectively

Additional paid-in capital 471,748 405,831

Treasury stock, at cost;

147,153 and 0 shares as of September 30, 2020 and December 31, 2019, respectively

Retained earnings / (accumulated deficit) 50,607 ( 10,463 )

147,153 shares as of March 31, 2021 and December 31, 2020

( 5,149 ) ( 5,149 )

Retained earnings 81,404 66,574

Total stockholders’ equity 548,501 467,752

4 unchanged sentences

(in thousands)

Nine Months Ended

September 30,

Three Months Ended

Cash flows from operating activities:

1 unchanged sentence

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

Provision for / (recovery of) credit losses on accounts receivable ( 237 ) 722

Provision for credit losses on accounts receivable 32 1,885

Reserve for product returns 574 291

Recovery of credit losses on notes receivable ( 11 ) ( 349 )

Provision for excess and obsolete inventory 1,178 15

Amortization on patents and tooling 288 199

Amortization and depreciation 7,385 6,422

Amortization of debt issuance costs 81 81

Amortization of debt discount and debt issuance costs 3,250 27

Amortization of operating leases 2,338 2,045

2 unchanged sentences

Stock-based compensation 7,888 6,358

Gain on notes receivable — ( 6,931 )

Acquired in-process research and development — 3,297

Gain on sale of investment ( 24,737 ) —

Impairment of investment — 605

Loss on early extinguishment of debt 185 —

Changes in operating assets and liabilities:

7 unchanged sentences

Cash flows from operating activities 21,232 12,900

Cash flows from / (used in) investing activities:

Cash flows used in investing activities:

Additions to property and equipment ( 4,069 ) ( 3,719 )

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

Issuances or purchases of notes receivable ( 600 ) ( 26,074 )

Receipt of payment on notes receivable 2,023 31,695

Proceeds from sale of investment 25,687 —

Purchases of patents and patent licenses ( 900 ) —

Cash flows from / (used in) investing activities 12,236 ( 5,889 )

Receipt of payments on notes receivable 2 3

Purchase of investment in unconsolidated entity ( 5,000 ) —

Cash flows used in investing activities ( 9,067 ) ( 7,013 )

Cash flows from financing activities:

1 unchanged sentence

Repayments of credit facility ( 110,000 ) —

Proceeds from issuance of convertible senior notes 500,000 —

Payments of debt issuance costs ( 15,291 ) —

Payments of deferred consideration for business acquisitions ( 150 ) —

9 unchanged sentences

(in thousands)

Redeemable Noncontrolling Interest Additional Paid-In Capital Retained Earnings / (Accumulated Deficit) Total Stockholders’ Equity

Redeemable Noncontrolling Interest Additional Paid-In Capital Retained Earnings Total Stockholders’ Equity

Preferred Stock Common Stock Treasury Stock

1 unchanged sentence

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

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

Common stock issued in connection with equity-based plans — — — 173 2 1,987 — — — 1,989

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

Stock-based compensation expense — — — — — 7,888 — — — 7,888

Net income / (loss) attributable to common stockholders ( 236 ) — — — — — — — 8,807 8,807

Balance as of March 31, 2020 $ 10,974 — $ — 48,808 $ 488 $ 373,349 147 $ ( 5,149 ) $ ( 2,472 ) $ 366,216

Common stock issued in connection with equity-based plans — — — 263 3 3,056 — — — 3,059

Stock-based compensation expense — — — — — 7,095 — — — 7,095

Accretion adjustments of redeemable noncontrolling interest to redemption value 112 — — — — ( 112 ) — — — ( 112 )

Net income / (loss) attributable to common stockholders ( 370 ) — — — — — — — 16,995 16,995

Balance as of June 30, 2020 $ 10,716 — $ — 49,071 $ 491 $ 383,388 147 $ ( 5,149 ) $ 14,523 $ 393,253

Common stock issued in connection with equity-based plans — — — 185 2 2,183 — — — 2,185

Stock-based compensation expense — — — — — 7,448 — — — 7,448

Equity component of convertible senior notes, net — — — — — 56,515 — — — 56,515

Accretion adjustments of redeemable noncontrolling interest to redemption value 473 — — — — ( 473 ) — — — ( 473 )

Net income / (loss) attributable to common stockholders ( 280 ) — — — — — — — 14,830 14,830

Balance as of September 30, 2020 $ 10,711 — $ — 49,256 $ 493 $ 392,765 147 $ ( 5,149 ) $ 50,607 $ 438,716

ALARM.COM HOLDINGS, INC.

Condensed Consolidated Statements of Equity — (Continued)

(in thousands)

Redeemable Noncontrolling Interest Preferred Stock Common Stock Additional Paid-In Capital Accumulated Deficit Total Stockholders’ Equity

Shares Amount Shares Amount

Balance as of March 31, 2021 $ 10,884 — $ — 49,804 $ 498 $ 471,748 147 $ ( 5,149 ) $ 81,404 $ 548,501

Redeemable Noncontrolling Interest Preferred Stock Common Stock Additional Paid-In Capital Treasury Stock Accumulated Deficit Total Stockholders’ Equity

Shares Amount Shares Amount Shares Amount

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

Adoption of accounting standard on leases — — — — — — 37 37

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

Common stock issued in connection with equity-based plans — — — 107 1 1,364 — — — 1,365

Vesting of common stock subject to repurchase — — — — — 2 — 2

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

Stock-based compensation expense — — — — — 6,358 — — — 6,358

Net income attributable to common stockholders — — — — — — 9,010 9,010

Net income / (loss) attributable to common stockholders ( 236 ) — — — — — — — 8,807 8,807

Balance as of March 31, 2020 $ 10,974 — $ — 48,808 $ 488 $ 373,349 147 $ ( 5,149 ) $ ( 2,472 ) $ 366,216

Common stock issued in connection with equity-based plans — — — 232 3 698 — 701

Vesting of common stock subject to repurchase — — — — — 2 — 2

Stock-based compensation expense — — — — — 5,433 — 5,433

Net income attributable to common stockholders — — — — — — 13,796 13,796

Balance as of June 30, 2019 $ — — $ — 48,482 $ 485 $ 353,131 $ ( 41,188 ) $ 312,428

Common stock issued in connection with equity-based plans — — — 90 1 1,011 — 1,012

Vesting of common stock subject to repurchase — — — — — 2 — 2

Stock-based compensation expense — — — — — 5,034 — 5,034

Net income attributable to common stockholders — — — — — — 17,690 17,690

Balance as of September 30, 2019 $ — — $ — 48,572 $ 486 $ 359,178 $ ( 23,498 ) $ 336,166

See accompanying notes to the condensed consolidated financial statements.

1 unchanged sentence

Notes to the Condensed Consolidated Financial Statements

September 30, 2020 and 2019

March 31, 2021 and 2020

Alarm.com Holdings, Inc.

13 unchanged sentences

In the opinion of management, these condens ed consolidated fin ancial statements include all normal recurring adjustments necessary for a fair statement of the results of operations, financial position and cash flows for the periods presented.

However, the COVID-19 pandemic disrupted and may intermittently continue to disrupt our supply chain for an unknown period of time due to its impact on manufacturing, production and global transportation.

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.

The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2020, which is increasingly true in periods of extreme uncertainty, such as the uncertainty caused by the COVID-19 pandemic.

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.

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2021, which is increasingly true in periods of extreme uncertainty, such as the uncertainty caused by the COVID-19 pandemic.

Prolonged uncertainty with respect to COVID-19 could cause further economic slowdown or cause other unpredictable events, each of which could adversely affect our business, results of operations or financial condition.

Use of Estimates

2 unchanged sentences

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 given the additional unknowable duration and effects of 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, stock-based compensation, income taxes, legal reserves, contingent consideration and goodwill and intangible assets.

Reclassifications

Certain previously reported amounts in the condensed consolidated statements of cash flows for the nine months ended September 30, 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, as well as changes to the presentation of line items related to operating leases.

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 rates for leases, stock-based compensation, income taxes, legal reserves, fair value of the debt component of convertible notes, contingent consideration and goodwill and intangible assets.

Comprehensive Income

Our comprehensive income for the three and nine months ended September 30, 2020 and 2019 was equal to our net income disclosed in the condensed consolidated statements of operations.

Our comprehensive income for the three months ended March 31, 2021 and 2020 was equal to our net income disclosed in the condensed consolidated statements of operations.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

March 31, 2021 and 2020

Significant Accounting Policies

Other than those disclosed herein, there have been no other material changes to our significant accounting policies during the three and nine months ended September 30, 2020 from those disclosed in our Annual Report.

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 condensed consolidated balance sheets and statements of equity.

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

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 three and nine months ended September 30, 2020 as compared to historical periods.

There were no purchases or sales of financial assets during the three and nine months ended September 30, 2020 and 2019.

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 three and nine months ended September 30, 2020, we recorded a reduction of credit loss expense of $ 1.2 million and $ 0.7 million in general and administrative expense in our condensed consolidated statements of operations.

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 September 30, 2020 and December 31, 2019 was less than $ 0.1 million and is reflected in other current assets within our condensed 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 three and nine months ended September 30, 2020 and 2019.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

Other than those disclosed herein, there have been no other material changes to our significant accounting policies during the three months ended March 31, 2021 from those disclosed in our Annual Report.

Convertible Senior Notes

On January 20, 2021, we issued $ 500.0 million aggregate principal amount of 0 % convertible senior notes in a private placement to qualified institutional buyers due January 15, 2026.

In accounting for the issuance of our convertible senior notes, we separate the notes into liability and equity components.

The carrying amount of the liability component is calculated by measuring the fair value of a similar liability that does not have an associated convertible feature, using a discounted cash flow model with a risk adjusted yield.

The carrying amount of the equity component representing the conversion option is determined by deducting the fair value of the liability component from the par value of the notes as a whole.

This difference represents a debt discount that is amortized to interest expense using the effective interest method over the term of the notes.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the transaction costs related to the issuance of the notes, we allocate the total amount incurred to the liability and equity components using the same proportions as the proceeds from the notes.

Transaction costs attributable to the liability component are netted with the liability component and amortized to interest expense using the effective interest method over the term of the notes.

Transaction costs attributable to the equity component are netted with the equity component of the notes in additional paid-in capital in the condensed consolidated balance sheets.

See Note 12 for the carrying amount and estimated fair value of our convertible senior notes as of March 31, 2021.

Recent Accounting Pronouncements

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 condensed 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 condensed consolidated statements of operations, condensed consolidated statement of equity or our condensed 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.

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 was effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

On January 1, 2020, we adopted Topic 820 and updated our fair value measurement disclosures (see Note 9).

On January 1, 2021, we adopted Topic 740.

This pronouncement did not have a material impact on our condensed 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 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

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

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.

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

2 unchanged sentences

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

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

Due to the termination of our credit facility on January 20, 2021 (see Note 12), this pronouncement is not expected to have an impact on our condensed consolidated financial statements or disclosures.

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.

We are currently assessing the impact this pronouncement may have on our consolidated financial statements when we adopt the pronouncement on January 1, 2022.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

March 31, 2021 and 2020

Revenue from Contracts with Customers

10 unchanged sentences

We record a reserve against revenue for hardware returns based on historical returns.

For the twelve months ended September 30, 2020 and 2019, our reserve against revenue for hardware returns was 1 %.

We evaluate our h ardware 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.

For the twelve months ended March 31, 2021 and 2020, our reserve against revenue for hardware returns was 1 %.

We evaluate our hardware reserve on a quarterly basis or if there is an indication of significant changes in return experience.

Hist orically, 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 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.

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

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

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

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

Our hardware and other revenue also includes our revenue from Shooter Detection Systems related to 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.

6 unchanged sentences

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 approp riate, until the ten-year expected term is complete.

The balance of deferred revenue for activation fees was $ 7.2 million and $ 8.1 million as of September 30, 2020 and December 31, 2019, respectively, which combines current and long-term balances.

The balance of deferred revenue for activation fees was $ 6.8 million and $ 7.0 million as of March 31, 2021 and December 31, 2020, respectively, which combines current and long-term balances.

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

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

sales corresponds directly with the stand-alone selling price of the hardware.

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.

1 unchanged sentence

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.

To identify the performance obligations, we consider all of the goods or services promised in the contract, whether explicitly stated or implied

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

March 31, 2021 and 2020

based on customary business practices.

We record a contract asset when we satisfy a performance obligation by transferring a promised good or service.

10 unchanged sentences

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.

We applied the portfolio approach to account for the amortization of contract costs for those contracts that have 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.

1 unchanged sentence

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

Our amortization of contract assets during the three and nine months ended September 30, 2020 was $ 1.0 million and $ 2.7 million, respectively, as compared to $ 0.6 million and $ 1.8 million during the same periods in the prior year.

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 r elates, less the costs that relate directly to providing those good and services and that have not been recognized as an expense.

W e did not recor d an impairment loss on our contract assets during the three and nine months ended September 30, 2020 and 2019.

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 r elat es, 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 three months ended March 31, 2021 and 2020.

The changes in our contract assets are as follows (in thousands):

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Beginning of period balance $ 4,306 $ 4,578

6 unchanged sentences

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

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

The changes in our contract liabilities are as follows (in thousands):

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Beginning of period balance $ 12,529 $ 10,498

2 unchanged sentences

End of period balance $ 13,656 $ 12,102

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

March 31, 2021 and 2020

The revenue recognized from amounts included in contract liabilities primarily relates to prepayment contracts with customers as well as payments of activation fees.

1 unchanged sentence

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

September 30,

2021 December 31,

3 unchanged sentences

Accounts receivable, net $ 88,406 $ 83,326

For the three and nine months ended September 30, 2020, we recorded a reduction to the provision for credit losses of $ 1.2 million and $ 0.2 million on our accounts receivable.

For the three and nine months ended September 30, 2019, we recorded a provision for credit losses $ 0.2 million and $ 0.7 million, respectively.

For the three and nine months ended September 30, 2020, we recorded a reserve for product returns of $ 0.5 million and $ 1.5 million, respectively.

For the three and nine months ended September 30, 2019, we recorded a reduction to the reserve for product returns in our hardware and other revenue of $ 0.1 million.

For the three months ended March 31, 2021, we recorded a provision for credit losses of less than $ 0.1 million on our accounts receivable, as compared to $ 1.9 million for the same period in the prior year.

For the three months ended March 31, 2021, we recorded a reserve for product returns of $ 0.6 million, as compared to $ 0.3 million for the same period in the prior year.

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

Allowance for Credit Losses - Accounts Receivable

The allowance for credit losses is a valuation account that is deducted from the accounts receivable and notes receivable amortized cost basis (see Note 8) to present the net amount expected to be collected.

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.

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.

There were no changes to our portfolio segments for our accounts receivable during the three months ended March 31, 2021, and no changes to our policies or practices that influenced our estimate of expected credit losses for accounts receivable.

There were no significant changes in the amount of accounts receivable write-offs during the three months ended March 31, 2021, as compared to historical periods other than a partial write-off of $ 0.7 million related to one of our distribution partners' outstanding balance during the three months ended March 31, 2021, upon the distributor being acquired by a third party.

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 three months ended March 31, 2021, we recorded a reduction of credit loss expense for accounts receivable and notes receivable of less than $ 0.1 million and for the three months ended March 31, 2020, we recorded credit loss expense for accounts receivable and notes receivable of $ 1.4 million in general and administrative expense in our condensed consolidated statements of operations.

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.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

March 31, 2021 and 2020

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

Three Months Ended

September 30, 2020 Nine Months Ended

September 30, 2020

March 31, 2021 Three Months Ended

March 31, 2020

Subsidiaries All Other

3 unchanged sentences

Impact of adopting Topic 326 — — ( 212 ) ( 155 )

Recovery of expected credit losses 1,146 56 195 42

(Provision for) / recovery of expected credit losses ( 36 ) 4 ( 1,886 ) 1

Write-offs 808 8 43 4

End of period balance $ ( 3,670 ) $ ( 242 ) $ ( 4,555 ) $ ( 234 )

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

Inventory, Net

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

September 30,

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

2021 December 31,

1 unchanged sentence

Finished goods 39,820 34,806

Total inventory, net $ 40,199 $ 34,168

Acquisition of a Business - OpenEye

On October 21, 2019, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired 85 % of the issued and outstanding capital stock of PC Open Incorporated, a Washington corporation, doing business as OpenEye.

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

We believe the acquisition of OpenEye will provide a key element to our comprehensive suite of interactive cloud-based services spanning video, access control, intrusion and automation for domestic and international commercial enterprises.

In consideration for the purchase of 85 % of the issued and outstanding capital stock of OpenEye, we paid $ 61.2 million in cash on October 21, 2019, after deducting $ 2.8 million related to an agreed holdback.

Pursuant to the terms of the stock purchase agreement, following the preliminary determination of the working capital of OpenEye as of the closing date, the purchase price increased by $ 0.2 million.

The working capital adjustm ent 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 off set for any indemnification obligations.

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

Total inventory $ 47,228 $ 44,281

Asset Acquisitions

On March 12, 2020, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party.

Substantially all of the acquired assets consisted of in-process research and development, or IPR&D.

We believe the acquisition of the IPR&D will strengthen our smart intercom capability, including building access security and convenience within the multiple dwelling unit market for residents, guests and deliveries.

In consideration for the purchase of the IPR&D, we paid $ 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 condensed consolidated statements of operations during the three months ended March 31, 2020 , as the IPR&D had no alternative future use.

On March 31, 2020, 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 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 condensed consolidated statements of operations during the three months ended March 31, 2020 , 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.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

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

March 31, 2021 and 2020

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 purch ase price decreased by $ 0.1 million.

The working capital adjustment is expected to be finalized in the second quarter of 2021.

The purchase price allocation, which is pending the final determination of the working capital, was not finalized as of the filing date of this Quarterly Report on Form 10-Q.

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

December 14, 2020

Calculation of Purchase Consideration:

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

Holdback consideration 2,820

Contingent consideration 2,793

Total consideration $ 26,514

Tangible and Intangible Net Assets:

Estimated Tangible and Intangible Net Assets:

Accounts receivable 1,179

2 unchanged sentences

Property and equipment 77

Operating lease right-of-use assets 384

Other assets 348

Customer relationships 2,362

3 unchanged sentences

Accrued expenses ( 111 )

Other current liabilities ( 1,683 )

Deferred tax liability ( 9,209 )

Deferred revenue ( 889 )

Redeemable noncontrolling interest ( 11,411 )

Operating lease current liabilities ( 51 )

Operating lease liabilities ( 333 )

Goodwill 7,176

Total tangible and intangible net assets $ 67,016

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 exp ected 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.

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, 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.

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 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.

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 .

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

March 31, 2021 and 2020

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 .

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

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

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

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 .

Redeemable Noncontrolling Interests

Our redeemable noncontrolling interest relates to our 85 % equity ownership interest in OpenEye.

The OpenEye stockholder agreement contains a put option that gives the minority OpenEye stockholders the right to sell their remaining 15 % equity ownership interest to us based on the fair value of the shares.

The OpenEye stockholder agreement also contains a call option that gives us the right to purchase the remaining OpenEye shares from the minority OpenEye stockholders based on the fair value of the shares.

The put and call options can each be exercised beginning in the first quarter of 2023.

The redeemable noncontrolling interest was recorded at fair value on October 21, 2019, by applying the income approach using unobservable inputs for projected cash flows, including projected financial results and a discount rate, which are considered Level 3 inputs.

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

The redemption value of the noncontrolling interest was $ 11.4 million as of October 21, 2019, and decreased to $ 10.7 million as of September 30, 2020.

Contingent Consideration

We account for the contingent consideration related to the potential earn-out payment using fair value and establish a liability for the future earn-out payment based on an estimation of revenue attributable to perpetual licenses and subscription licenses over the 2020 calendar year.

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

See Note 9 for details on the significant unobservable inputs used in the fair value estimate and post-acquisition accounting.

Asset Acquisitions

On March 12, 2020, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party.

Substantially all of the acquired assets consisted of in-process research and development, or IPR&D.

The $ 1.5 million consideration related to IPR&D was expensed at the time of the asset acquisition, as the IPR&D had no alternative future use.

On March 31, 2020, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party.

Substantially all of the acquired assets consisted of IPR&D.

The $ 2.9 million consideration related to IPR&D was expensed at the time of the asset acquisition, as the IPR&D had no alternative future use.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

Goodwill and Intangible Assets, Net

2 unchanged sentences

Balance as of January 1, 2021

$ 112,838 $ — $ 112,838

Goodwill acquired — — —

Measurement period adjustment 699 — 699

Balance as of September 30, 2020 $ 105,662 $ — $ 105,662

Due to the current uncertainty in the financial markets resulting from the COVID-19 pandemic, we assessed our goodwill for indicators of impairment during the three and nine months ended September 30, 2020.

We elected to perform a qualitative assessment as of September 30, 2020 and determined there was no impairment of goodwill during the three and nine months ended September 30, 2020.

There was also no impairment of goodwill during the three and nine months ended September 30, 2019.

Balance as of March 31, 2021 $ 112,838 $ — $ 112,838

There were no impairments of goodwill during the three months ended March 31, 2021 and 2020.

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

2 unchanged sentences

Balance as of January 1, 2021

$ 72,670 $ 28,223 $ 2,366 $ 103,259

Amortization ( 3,290 ) ( 836 ) ( 135 ) ( 4,261 )

Balance as of September 30, 2020 $ 73,984 $ 15,449 $ 1,951 $ 91,384

We recorded $ 4.0 million and $ 12.1 million of amortization related to our intangible assets for the three and nine months ended September 30, 2020, respectively, as compared to $ 3.4 million and $ 10.3 million for the same periods in the prior year.

There were no impairments of long-lived intangible assets during the three and nine months ended September 30, 2020 and 2019.

Balance as of March 31, 2021 $ 69,380 $ 27,387 $ 2,231 $ 98,998

We recorded $ 4.3 million of amortization related to our intangible assets for the three months ended March 31, 2021, as compared to $ 4.0 million for the same period in the prior year.

There were no impairments of long-lived intangible assets during the three months ended March 31, 2021 and 2020.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

March 31, 2021 and 2020

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

September 30, 2020

March 31, 2021

Amount Accumulated

17 unchanged sentences

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

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

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.

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 September 30, 2020 and December 31, 2019, respectively.

As of September 30, 2020 and December 31, 2019, $ 0.7 million and $ 0.5 million of patent costs were included in other current assets, respectively, and $ 2.2 million and $ 1.9 million of patent costs were included in other assets, respectively.

We have $ 6.8 million of historical cost in purchased patents and patent licenses as of September 30, 2020.

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

Patent cost amortization of $ 0.1 million and $ 0.3 million was included in cost of SaaS and license revenue in our condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019, respectively.

Patent cost amortization of $ 0.1 million and $ 0.2 million was included in amortization and depreciation in our condensed consolidated statements of operations for the three and nine months ended September 30, 2020, as compared to less than $ 0.1 million and $ 0.1 million in the same periods in the prior year.

The carrying value, net of amortization, of our purchased patents and patent licenses was $ 2.7 million and $ 2.9 million as of March 31, 2021 and December 31, 2020, respectively.

As of March 31, 2021 and December 31, 2020, $ 0.7 million of patent costs were included in other current assets and $ 2.0 million and $ 2.2 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 March 31, 2021.

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 $ 0.1 million was included in cost of SaaS and license revenue in our condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020.

Patent cost amortization of $ 0.1 million was included in amortization and depreciation in our condensed consolidated statements of operations for the three months ended March 31, 2021, as compared to less than $ 0.1 million in the same period in the prior year.

Loan to a Distribution Partner

10 unchanged sentences

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.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

March 31, 2021 and 2020

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.

3 unchanged sentences

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 September 30, 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 condensed consolidated balance sheet and $ 2.0 million of the note receivable balance was included in other assets in our condensed consolidated balance sheet.

As of March 31, 2021 and December 31, 2020, none of the notes receivable balance related to the amended term loan was outstanding.

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 September 30, 2020 and December 31, 2019, $ 4.1 million and $ 3.0 million of the notes receivable balance related to the subordinated credit agreement was included in other assets in our condensed consolidated balance sheets, respectively.

For the three and nine months ended September 30, 2020, we recognized $ 0.5 million and $ 1.8 million of revenue from the distribution partners associated with these loans, respectively, as compared to $ 0.4 million and $ 1.3 million for the same periods in the prior year.

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

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

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.

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 condensed 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 condensed consolidated statements of operations during the three and nine months ended September 30, 2019, related to the Promissory Notes and the Acquired Promissory Note.

As of September 30, 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 September 30, 2020 and December 31, 2019.

Loan to a Service Provider Partner

As of March 31, 2021 and December 31, 2020, $ 4.3 million and $ 4.2 million of the notes receivable balance related to the subordinated credit agreement was included in other assets in our condensed consolidated balance sheets, respectively.

For the three months ended March 31, 2021, we recognized $ 0.7 million of revenue from the distribution partners associated with these loans, as compared to $ 0.4 million for the same period in the prior year.

Loans to Service Provider Partners

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 requires monthly interest and principal payments beginning in February 2021.

Interest on the outstanding principal accrues at a rate per annum equal to 9.0 % and monthly interest and principal payments began in April 2021.

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

As of September 30, 2020, $ 0.6 million of principal was outstanding from the service provider partner under the loan agreement.

For the three and nine months ended September 30, 2020, we recognized less than $ 0.1 million and $ 0.1 million of revenue from the distribution partners associated with these loans, respectively, as compared to less than $ 0.1 million for the same periods in the prior year

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 condensed consolidate d statements of operations during the three and nine months ended September 30, 2020.

As of September 30, 2020 , our investment in the platform partner was zero and as of December 31, 2019, our investment in the platform partner was $ 1.0 million and was included in other assets in our condensed consolidated balance sheets.

As of March 31, 2021 and December 31, 2020, $ 1.2 million of principal was outstanding from the service provider partner under the loan agreement.

For the three months ended March 31, 2021 and 2020, we recognized less than $ 0.1 million of revenue from the service provider partner associated with this loan.

Investment in a Hardware Supplier

In October 2018, we entered into a subordinate convertible promissory note with one of our hardware suppliers.

In July 2019, we converted the outstanding notes receivable balance of $ 5.6 million into 9,520,832 shares of Series B preferred stock in the hardware supplier.

As of March 31, 2021 and December 31, 2020, our investment in the hardware supplier was $ 5.6 million.

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 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.

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.

The $ 5.0 million equity investment, which is included in the Alarm.com segment, does not meet the criteria for consolidation and is accounted for using the measurement alternative.

As of March 31, 2021 and December 31, 2020, our investment in the technology partner was $ 5.7 million and $ 0.7 million, respectively.

Allowance for Credit Losses - Notes Receivable

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 for our notes receivable during the three months ended March 31,

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

Allowance for Credit Losses - Notes Receivable

March 31, 2021 and 2020

2021, 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 for notes receivable.

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.

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 March 31, 2021 and December 31, 2020 was $ 0.1 million and less than $ 0.1 million and is reflected in other current assets within our condensed 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 three months ended March 31, 2021 and 2020.

There were no purchases or sales of financial assets during the three months ended March 31, 2021 and 2020.

There were no significant changes in the amount of note receivable write-offs during the three months ended March 31, 2021, as compared to historical periods.

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

Three Months Ended

September 30, 2020 Nine Months Ended

September 30, 2020

March 31, 2021 Three Months Ended

March 31, 2020

Receivables Hardware

3 unchanged sentences

Impact of adopting Topic 326 — — ( 434 ) ( 15 )

Recovery of / (provision for) expected credit losses ( 20 ) 6 368 —

Recovery of expected credit losses — 11 347 2

Write-offs — — — —

1 unchanged sentence

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 September 30, 2020 are as follows (in thousands):

Current and delinquent notes receivable by class of financing receivables and by year of origination as of March 31, 2021 are as follows (in thousands):

Loan Receivables:

13 unchanged sentences

Total $ — $ — $ 98 $ 49 $ — $ — $ 147

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

March 31, 2021 and 2020

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Loan receivables $ — $ —

1 unchanged sentence

Total $ — $ 9

During the three and nine months ended September 30, 2020 and 2019, there was no interest income recognized related to notes receivables that were in nonaccrual status.

As of September 30, 2020 and December 31, 2019, there were no notes receivables placed in nonaccrual status for which there was not a related allowance for credit losses.

As of September 30, 2020 and December 31, 2019, there were no notes receivables that were 90 days or greater past due for which we continued to accrue interest income.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

During the three months ended March 31, 2021 and 2020, there was no interest income recognized related to notes receivables that were in nonaccrual status.

As of March 31, 2021 and December 31, 2020, there were no notes receivables placed in nonaccrual status for which there was not a related allowance for credit losses.

As of March 31, 2021 and December 31, 2020, 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 September 30, 2020 and December 31, 2019, $ 10.9 million and $ 6.1 million of prepaid expenses were included in other current assets, respectively, primarily related to software licenses.

As of March 31, 2021 and December 31, 2020, $ 10.7 million and $ 8.4 million of prepaid expenses were included in other current assets, respectively, primarily related to software licenses.

Fair Value Measurements

1 unchanged sentence

Fair Value Measurements on a Recurring Basis as of

September 30, 2020

March 31, 2021

Fair value measurements in:

2 unchanged sentences

Total $ 612,279 $ — $ — $ 612,279

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

Total $ — $ — $ 2 $ 2

Fair Value Measurements on a Recurring Basis as of

4 unchanged sentences

Total $ 221,407 $ — $ — $ 221,407

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

Total $ — $ — $ 2,595 $ 2,595

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):

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Beginning of period balance $ — $ 2,595

3 unchanged sentences

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

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

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

We account for the contingent consideration using fair value and establish a liability for the future earn-out payment based on an estimation of revenue attributable to perpetual licenses and subscription licenses over the 2020 calendar year.

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

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

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

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

During the nine months ended September 30, 2020, the contingent consideration liability decreased $ 2.6 million from December 31, 2019 to less than $ 0.1 million, primarily due to a change to OpenEye's 2020 projected revenue.

The si gnificant unobservable inputs used in the valuation as of September 30, 2020 included a revenue volatility of 64 % and a discount rate of

See Note 12 for the carrying amount and estimated fair value of our convertible senior notes as of March 31, 2021.

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.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

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

The contingent consideration liability was included in accounts payable, accrued expenses and other current liabilities in our condensed consolidated balance sheet as of September 30, 2020, and included in other liabilities in our condensed consolidated balance sheet as of December 31, 2019 (see Note 12).

March 31, 2021 and 2020

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 condensed 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.

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 three and nine months ended September 30, 2020 and 2019.

There were no transfers in or out of Level 3 during the three months ended March 31, 2021 and 2020.

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 three and nine months ended September 30, 2020 and 2019.

No other-than-temporary impairments occurred during the three months ended March 31, 2021 and 2020.

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

1 unchanged sentence

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

In 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.

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

The lease term ends in 2026, includes a five-year renewal option and a cumulative tenant improvement allowance of $ 11.8 million.

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Operating lease cost $ 2,338 $ 2,045

1 unchanged sentence

Operating lease right-of-use assets obtained in exchange for new operating lease liabilities 224 6,022

September 30,

2021 December 31,

3 unchanged sentences

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

March 31, 2021 and 2020

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

8 unchanged sentences

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

We did no t have any finance leases or subleases as of September 30, 2020 or December 31, 2019.

We did no t have any finance leases or subleases as of March 31, 2021 or December 31, 2020.

Our lease agreements do not contain any material residual value guarantees, restrictive covenants or variable lease payments.

Short-term lease costs were immaterial for the three and nine months ended September 30, 2020 and 2019.

Short-term lease costs were immaterial for the three months ended March 31, 2021 and 2020.

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

September 30,

2021 December 31,

4 unchanged sentences

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

September 30,

2021 December 31,

Contingent consideration liability from acquisitions $ — $ 2,595

Holdback liability from acquisitions $ 1,500 $ 1,500

3 unchanged sentences

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

Convertible Senior Notes

On January 20, 2021, we issued $ 500.0 million aggregate principal amount of 0 % convertible senior notes due January 15, 2026 in a private placement to qualified institutional buyers, or the 2026 Notes.

The terms of the 2026 Notes are governed by an Indenture, or the Indenture, by and between Alarm.com Holdings, Inc.

Bank National Association, as trustee.

The 2026 Notes are senior unsecured obligations that do not bear regular interest and the principal amount of the 2026 Notes will not accrete.

The 2026 Notes may bear special interest under specified circumstances related to our failure to comply with our reporting obligations under the Indenture.

Special interest, if any, will be payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2021.

We received proceeds from the issuance of the 2026 Notes of $ 484.3 million, net of $ 15.7 million of transaction fees and other debt issuance costs.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

March 31, 2021 and 2020

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 credit facility and also used some of the proceeds to pay accrued interest, fees and expenses related to our credit facility (see the section titled "2017 Facility" below).

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.

In accounting for the transaction, the 2026 Notes were separated into liability and equity components.

The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature.

The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2026 Notes.

The equity component was recorded in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.

The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the contractual term of the 2026 Notes at an effective interest rate of 4.0 %.

In accounting for the debt issuance costs of $ 15.7 million related to the 2026 Notes, we allocated the total amount incurred to the liability and equity components of the 2026 Notes based on their relative values.

Issuance costs attributable to the liability component were $ 13.3 million and will be amortized to interest expense using the effective interest method over the contractual term of the 2026 Notes.

Issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

March 31, 2021 and 2020

As of March 31, 2021, the fair value of our 2026 Notes was $ 465.8 million.

The fair value was determined based on the quoted price of the 2026 Notes in an inactive market on the last traded day of the quarter and has been classified as Level 2 in the fair value hierarchy.

Based on the closing price of our common stock of $ 86.38 on the last trading day of the quarter, the if-converted value of the 2026 Notes did not exceed the principal amount of $ 500.0 million as of March 31, 2021.

The net carrying amount of the liability component of the 2026 Notes is as follows (in thousands):

Three Months Ended

Principal $ 500,000 $ —

Unamortized debt discount ( 74,386 ) —

Unamortized debt issuance costs ( 12,842 ) —

Net carrying amount $ 412,772 $ —

The net carrying amount of the equity component of the 2026 Notes is as follows (in thousands):

Three Months Ended

Debt discount for conversion option $ 77,199 $ —

Debt issuance costs ( 2,424 ) —

Net carrying amount $ 74,775 $ —

Interest expense related to the 2026 Notes is as follows (in thousands):

Three Months Ended

Amortization of debt discount $ 2,812 $ —

Amortization of debt issuance costs 432 —

Total interest expense $ 3,244 $ —

The difference between the book and tax treatment of the debt discount and debt issuance costs of the 2026 Notes resulted in a difference between the carrying amount and tax basis of the 2026 Notes.

This taxable temporary difference resulted in the recognition of a $ 18.3 million net deferred tax liability which was recorded as an adjustment to additional paid-in capital.

2017 Facility

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

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

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

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

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

On March 25, 2020, we borrowed $ 50.0 million under the 2017

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 three months ended March 31, 2021, we repaid the entire outstanding principal balance of $ 110.0 million of the 2017 Facility with proceeds from the 2026 Notes.

The 2017 Facility was terminated on January 20, 2021 and we recognized an extinguishment loss of $ 0.2 million in other (expense) / income, net in our condensed consolidated statements of operations during the three months ended March 31, 2021 for previously capitalized debt issuance costs related to the 2017 Facility that were unamortized at the time of the termination of the 2017 Facility.

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,

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

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 three and nine months ended September 30, 2020, we repaid $ 1.0 million and $ 2.0 million of the outstanding balance of the 2017 Facility, respectively.

During the three and nine months ended September 30, 2019, we repaid $ 1.0 million and $ 3.0 million of the outstanding balance of the 2017 Facility, respectively.

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

For each of the three and nine months ended September 30, 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 carries an unused line commitment fee of 0.20 %.

For the nine months ended September 30, 2020, the effective interest rate on the 2017 Facility was 2.92 %, as compared to 4.61 % for the same period in the prior year.

The carrying value of the 2017 Facility was $ 111.0 million and $ 63.0 million as of September 30, 2020 and December 31, 2019, respectively.

The 2017 Facility includes a variable interest rate that approximates market rates and, as such, we classified the liability as Level 2 within the fair value hierarchy and determined that the carrying amount of the 2017 Facility approximated its fair value as of September 30, 2020 and December 31, 2019.

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

As of September 30, 2020, we were in compliance with all financial and non-financial covenants and there were no events of default.

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

March 31, 2021 and 2020

(b) the Federal Funds rate plus 0.50 %, or (c) LIBOR plus 1.00 % plus an applicable margin based on our consolidated leverage ratio.

During 2021 until the termination of the 2017 Facility on January 20, 2021, 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 three months ended March 31, 2020, the effective interest rate on the 2017 Facility was 3.79 %.

The carrying value of the 2017 Facility was zero and $ 110.0 million as of March 31, 2021 and December 31, 2020, 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.

Commitments and Contingencies

1 unchanged sentence

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

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

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

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

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

The contingent consideration liab ility is included in accounts payable, accrued expenses and other current liabilities in our condensed consolidated balance sheets as of September 30, 2020, and included in other liabilities in our condensed consolidated balance sheets as of December 31, 2019 (see Note 9).

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 were recorded in the condensed consolidated statements of operations.

Indemnification Agreements

3 unchanged sentences

Letters of Credit

As of September 30, 2020 and December 31, 2019, we had no outstanding letters of credit under the 2017 Facility.

As of March 31, 2021 and December 31, 2020, we had no outstanding letters of credit.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

March 31, 2021 and 2020

Legal Proceedings

11 unchanged sentences

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

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

PTAB’s March 2017 decisions that invalidated all challenged claims of two patents.

In July 2018, the Federal Circuit issued orders affirming the PTAB’s March 2017 decisions that invalidated all challenged claims of two patents.

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.

6 unchanged sentences

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.

Vivint appealed these decisions to the Federal Circuit on July 1, 2020 and April 26, 2021.

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.

2 unchanged sentences

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

Oral argument of the appeal is scheduled for December 8, 2020.

On April 13, 2021, the Federal Circuit affirmed the PTAB decisions.

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 moved to dismiss the complaint for lack of jurisdiction.

The PTO’s motion is scheduled to be heard on May 28, 2021.

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.

11 unchanged sentences

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

The administrative law judge presiding over the investigation scheduled an evidentiary hearing to begin on November 16, 2020 and set March 15, 2021 as the target date for completion of the investigation.

An evidentiary hearing was held in November 2020.

On April 20, 2021, the administrative law judge presiding over the investigation issued a final initial determination finding in favor of Alarm.com.

That decision is subject to review by the ITC commissioners and the federal courts.

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

6 unchanged sentences

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

On October 27, 2020, the court issued an order staying the lawsuit until January 25, 2021 in light of the related ITC investigation.

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

On March 9, 2021, the PTO ordered ex parte reexamination of one of the patents asserted in the lawsuit, at Alarm.com’s request.

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.

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

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

March 31, 2021 and 2020

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 May 8, 2020, a putative class action lawsuit was filed against us by Craig Hicks in the U.S.

District Court for the Eastern District of Virginia, alleging violations of the Telephone Consumer Protection Act, or the TCPA, and the Virginia Telephone Privacy Protection Act, or the VTPPA.

The complaint seeks statutory damages under the TCPA and VTPPA, injunctive relief, and other relief, including attorneys' fees.

We filed a motion to dismiss the complaint on July 2, 2020, and plaintiff filed his response on July 16, 2020.

We filed our reply on July 22, 2020.

On August 6, 2020, the Court granted our motion to dismiss the complaint in its entirety.

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.

1 unchanged sentence

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

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

We have agreed to waive service of the complaint, and our response is due November 20, 2020.

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

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

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.

19 unchanged sentences

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 April 5, 2021.

The pretrial conference is scheduled for June 2, 2021, and trial is set for June 16, 2021.

On July 2, 2020, Port us Singapore Pte.

6 unchanged sentences

ADT answered the complaint on August 31, 2020.

The claim construction hearing is set for March 19, 2021.

The court has not yet otherwise entered a schedule.

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 around such patents, and required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us.

The parties have reached settlement and have filed a stipulation for dismissal.

On February 25, 2021, Vivint filed a lawsuit against ADT LLC a/k/a ADT LLC of Delaware d/b/a ADT Security Services in U.S.

District Court, District of Utah, alleging that ADT Pulse, Control, and Blue each infringe one or more of six patents owned by Vivint.

Vivint is seeking damages and attorneys’ fees.

Vivint filed an amended complaint on March 24, 2021.

ADT answered the amended complaint on April 30, 2021 and asserted defenses based on non-infringement and invalidity of all the patents in question, and inequitable conduct as to one of the patents.

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 or we are unable to design around such patents, and required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us.

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 believe there are valid defenses to the claims made by Applied Capital and Vivint.

Based on currently available information, we have determined a loss in excess of the amount accrued is not reasonably estimable at this time.

We may also be a party to litigation and subject to claims incident to the ordinary course of business.

3 unchanged sentences

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.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

March 31, 2021 and 2020

Stockholders' Equity

Stock Repurchase Program

On November 29, 2018, our board of directors authorized a stock repurchase program, under which we are authorized to purchase up to an aggregate of $ 75.0 million of our outstanding common stock during the two-year period ending November 29, 2020.

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 that ended on November 29, 2020.

During the three months ended March 31, 2020, we repurchased 147,153 shares of our common stock under this program for $ 5.1 million, which includes applicable commissions and fees.

No shares of our common stock were repurchased under this program during the three months ended September 30, 2020 or during each of the three and nine months ended September 30, 2019.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

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.

No shares of our common stock were repurchased under this program during the three months ended March 31, 2021.

Stock-Based Compensation

1 unchanged sentence

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Sales and marketing $ 808 $ 757

4 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Stock options and assumed options $ 617 $ 801

2 unchanged sentences

Total stock-based compensation expense $ 7,888 $ 6,358

Tax benefit from stock-based awards $ 1,658 $ 565 $ 3,846 $ 4,050

We granted an aggregate of 2,000 and 143,650 stock options pursuant to our 2015 Equity Incentive Plan, or the 2015 Plan, during the three and nine months ended September 30, 2020, respectively, as compared to an aggregate of 30,000 and 140,500 stock options for the same periods in the prior year.

There were 139,225 and 397,416 stock options exercised during the three and nine months ended September 30, 2020, respectively, as compared to 60,043 and 258,668 stock options for the same periods in the prior year.

We granted an aggregate of 169,699 and 488,771 restricted stock units during the three and nine months ended September 30, 2020, respectively, as compared to an aggregate of 88,308 and 425,324 restricted stock units for the same periods in the prior year.

There were 34,136 and 121,259 restricted stock units that vested during the three and nine months ended September 30, 2020, respectively, as compared to 15,880 and 177,946 restricted stock units vested during the same periods in the prior year.

Tax windfall benefit from stock-based awards $ 2,560 $ 578

We granted no stock options pursuant to our 2015 Equity Incentive Plan, or the 2015 Plan, during the three months ended March 31, 2021, as compared to an aggregate of 5,000 stock options for the same period in the prior year.

There were 73,175 stock options exercised during the three months ended March 31, 2021, as compared to 63,748 stock options for the same period in the prior year.

We granted an aggregate of 127,216 restricted stock units during the three months ended March 31, 2021, as compared to an aggregate of 100,728 restricted stock units for the same period in the prior year.

There were 89,370 restricted stock units that vested during the three months ended March 31, 2021, as compared to 23,048 restricted stock units vested during the same period in the prior year.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

March 31, 2021 and 2020

Earnings Per Share

2 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Net income $ 14,550 $ 8,571

9 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Stock options — 272,876

7 unchanged sentences

The amount of the net income or loss attributable to redeemable noncontrolling interests is recorded in the condensed consolidated statements of operations.

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 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 has 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.

Based on the initial conversion price and the average market price of our common stock for the three months ended March 31, 2021, there was no dilutive effect of the 2026 Notes on our earnings per share during the three months ended March 31, 2021.

Significant Service Providers

During the three and nine months ended September 30, 2020, our 10 largest revenue service provider partners accounted for 50 % and 49 % of our consolidated revenue, respectively, as compared to 52 % for the same periods in the prior year.

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 three and nine months ended September 30, 2020 and 2019.

One individual serv ice provider partner in the Alarm.com segment represented more than 10% of accounts receivable as of September 30, 2020 and December 31, 2019.

For purposes of interim reporting, our annual effective income tax rate is estimated in accordance with ASC 740-270, "Interim Reporting." This rate is applied to the pre-tax book income of the entities expected to be benefited during the year.

Discrete items that impact the tax provision are recorded in the period incurred.

During the three months ended March 31, 2021, our 10 largest revenue service provider partners accounted for 50 % of our consolidated revenue, as compared to 49 % for the same period in the prior year.

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 three months ended March 31, 2021 and 2020.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

For the three and nine months ended September 30, 2020, we recorded a provision for income taxes of $ 6.5 million and $ 5.5 million, respectively, resulting in an effective income tax rate of 15.4 % and 8.2 % for those periods.

For the three and nine months ended September 30, 2019, we recorded a provision for income taxes of $ 2.9 million and $ 3.4 million, respectively, resulting in an effective income tax rate of 14.0 % and 7.8 % for those periods.

Our effective tax rates were different from 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 non-deductible meal and entertainment expenses.

March 31, 2021 and 2020

One service provider partner in the Alarm.com segment represented more than 10% of accounts receivable as of March 31, 2021.

Two service provider partners in the Alarm.com segment represented more than 10% of accounts receivable as of December 31, 2020.

Discrete items that impact the tax provision are recorded in the period incurred.

For the three months ended March 31, 2021, we recorded a benefit from income taxes of $ 2.9 million, resulting in an effective income tax rate of ( 25.0 )%.

For the three months ended March 31, 2020, we recorded a provision for income taxes of $ 1.2 million, resulting in an effective income tax rate of 12.3 %.

Our effective 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, foreign withholding taxes and other nondeductible expenses.

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 a nd 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 September 30, 2020 and December 31, 2019.

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, we established a valuation allowance of $ 0.3 million during the second quarter of 2019, which remained at $ 0.3 million as of March 31, 2021 and December 31, 2020.

During 2020, we established a valuation allowance of $ 1.3 million for state research and development tax credit carryforwards, which remained at $ 1.3 million as of March 31, 2021 and December 31, 2020.

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 primarily for research and development tax credits claimed during the nine months ended September 30, 2020.

We recorded a reduction to the unrecognized tax benefits of $ 0.2 million for research and development tax credits claimed during the nine months ended September 30, 2019.

As of September 30, 2020 and December 31, 2019, we accrued $ 0.2 million of total interest expense related to unrecognized tax benefits.

We recorded an increase to the unrecognized tax benefits of $ 0.5 million primarily for research and development tax credits claimed during the three months ended March 31, 2021.

We recorded unrecognized tax benefits of $ 0.3 million for research and development tax credits claimed during the three months ended March 31, 2020.

As of March 31, 2021 and December 31, 2020, we accrued $ 0.1 million of total interest expense related to unrecognized tax benefits.

We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.

6 unchanged sentences

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 % of our revenue for each of the three and nine months ended September 30, 2020, as compared to 94 % and 93 % for the same periods in the prior year.

Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that contributed 95 % of our revenue for each of the three months ended March 31, 2021 and 2020.

Our Other segment is focused on researching, developing and offering residential and commercial automation solutions and energy management products and services in adjacent markets.

2 unchanged sentences

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

March 31, 2021 and 2020

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):

Three Months Ended September 30, 2020

Three Months Ended March 31, 2021

Alarm.com Other Intersegment Alarm.com Intersegment Other Total

6 unchanged sentences

17,707 ( 2,853 ) 153 ( 4 ) 15,003

Three Months Ended September 30, 2019

Three Months Ended March 31, 2020

Alarm.com Other Intersegment Alarm.com Intersegment Other Total

6 unchanged sentences

10,817 ( 872 ) 41 ( 119 ) 9,867

Nine Months Ended September 30, 2020

Alarm.com Other Intersegment

Alarm.com Intersegment

SaaS and license revenue $ 269,168 $ 18,612 $ — $ — $ 287,780

Hardware and other revenue

159,800 13,030 ( 2,118 ) ( 6,065 ) 164,647

Total revenue

428,968 31,642 ( 2,118 ) ( 6,065 ) 452,427

Operating income / (loss)

45,427 ( 2,370 ) 246 ( 386 ) 42,917

Nine Months Ended September 30, 2019

Alarm.com Other Intersegment

Alarm.com Intersegment

SaaS and license revenue $ 233,459 $ 13,854 $ — $ — $ 247,313

Hardware and other revenue

107,884 15,810 ( 3,364 ) ( 5,768 ) 114,562

Total revenue

341,343 29,664 ( 3,364 ) ( 5,768 ) 361,875

Operating income / (loss)

37,182 ( 1,782 ) 71 ( 10 ) 35,461

Alarm.com Other Intersegment Alarm.com Intersegment Other Total

Assets as of September 30, 2020 $ 729,845 $ 24,527 $ ( 56,356 ) $ 29 $ 698,045

Assets as of March 31, 2021 $ 1,148,958 $ 24,440 $ ( 58,848 ) $ ( 5 ) $ 1,114,545

Assets as of December 31, 2020 763,925 26,739 ( 58,983 ) 6 731,687

Our SaaS and license revenue for the Alarm.com segment included software license revenue of $ 9.5 million and $ 29.0 million for the three and nine months ended September 30, 2020, respectively, as compared to $ 10.8 million and $ 32.8 million for the same periods in the prior year.

There w as no softwar e license revenue recorded for the Other segment during the three and nine months ended September 30, 2020 and 2019.

Depreciation and amortization expense was $ 6.7 million and $ 19.8 million for the Alarm.com segment for the three and nine months ended September 30, 2020, respectively, as compared to $ 5.5 million and $ 15.8 million for the same periods in the prior year.

Depreciation and amortization expense was $ 0.1 million and $ 0.2 million for the Other segment for the three and nine months ended September 30, 2020 and less than $ 0.1 million for each of the three and nine months ended September 30, 2019.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2020 and 2019

Additions to property and equipment were $ 4.7 million and $ 11.2 million for the Alarm.com segment for the three and nine months ended September 30, 2020, respectively, as compared to $ 4.7 million and $ 8.5 million for the same periods in the prior year.

Additions to property and equipment were $ 0.1 million and $ 1.0 million for the Other segment for the three and nine months ended September 30, 2020, respectively, as compared to $ 0.1 million for the same periods in the prior year.

We derived substantia lly all of our revenue from North America for the three and nine months ended September 30, 2020 and 2019.

Substantially all of our long-lived assets wer e in North America as of September 30, 2020 and December 31, 2019.

Our SaaS and license revenue for the Alarm.com segment included software license revenue of $ 8.7 million for the three months ended March 31, 2021, as compared to $ 9.7 million for the same period in the prior year.

There w as no softwar e license revenue recorded for the Other segment during the three months ended March 31, 2021 and 2020.

Depreciation and amortization expense was $ 7.3 million for the Alarm.com segment for the three months ended March 31, 2021, as compared to $ 6.4 million for the same period in the prior year.

Depreciation and amortization expense was $ 0.1 million for the Other segment for the three months ended March 31, 2021, as compared to less than $ 0.1 million for the same period in the prior year.

Additions to property and equipment were $ 3.5 million for the Alarm.com segment for the three months ended March 31, 2021, as compared to $ 2.6 million for the same period in the prior year.

Additions to property and equipment were less than $ 0.1 million for the Other segment for the three months ended March 31, 2021, as compared to $ 0.8 million for the same period in the prior year.

We derived substantially all reven ue from North America for the three months ended March 31, 2021 and 2020.

Substanti ally all of our long-lived assets wer e in North America as of March 31, 2021 and December 31, 2020.

Related Party Transactions

Installation Partner

Our installation partner in which we have a 48.2 % ownership interest performs installation services for security dealers and also provides installation services for us and certain of our subsidiaries.

Our installation partner in which we have a 48.2 % ownership interest performs installation services for security service providers and also provides installation services for us and certain of our subsidiaries.

We account for this investment using the equity method.

As of September 30, 2020 and December 31, 2019, our investment balance in our installation partner was zero .

During the three and nine months ended September 30, 2020 and 2019, we recorded $ 0.1 million and $ 0.3 million of cost of hardware and other revenue in connection with this installation partner, respectively.

As of September 30, 2020 and December 31, 2019, the accounts payable balance to our installation partner was less than $ 0.1 million.

As of March 31, 2021 and December 31, 2020, our investment balance in our installation partner was zero .

During the three months ended March 31, 2021 and 2020, we recorded $ 0.1 million of cost of hardware and other revenue in connection with this installation partner.

As of March 31, 2021 and December 31, 2020, the accounts payable balance to our installation partner was less than $ 0.1 million.

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

March 31, 2021 and 2020

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 three and nine months ended September 30, 2020, we recorded $ 0.1 million and $ 0.2 million of rent expense in connection with this lease arrangement.

There was no rent expense recorded in connection with the lease arrangement during the three and nine months ended September 30, 2019.

There was no accounts payable balance due to the Landlord under this lease arrangement as of September 30, 2020 or December 31, 2019.

Subsequent Event

On November 4, 2020, we and ADT LLC, or ADT, entered into an amendment to our existing master service agreement, the Amendment.

The Amendment extends the initial term of the master service agreement through January 1, 2023 and sets forth certain terms relating to the integration of certain Google Nest products and services into the platform we operate on behalf of ADT, and assures that subject to certain conditions and exceptions, ADT will enable its end customers to continue as subscribers on an Alarm.com platform after the initial term expires for the natural lifetime of such end customer account.

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

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

OpenEye leased 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 until it was terminated on March 31, 2021.

Total minimum lease payments over the term of the lease were $ 0.2 million.

During the three months ended March 31, 2021, we recorded $ 0.1 million of rent expense in connection with this lease arrangement, as compared to less than $ 0.1 million for the same period in the prior year.

There was no accounts payable balance due to the Landlord under this lease arrangement as of March 31, 2021 or December 31, 2020.

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

What changed 10-Q

Item 1. Financial Statements