Alarm.com Holdings, Inc. 10-Q

Item 1. FINANCIAL STATEMENTS (unaudited) ALARM.COM HOLDINGS, INC. Condensed Consolidated Statements of Operations (in thousands, except share and per share data) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenue: SaaS and license revenue $ 118,059 $ 100,126 $ 338,628 $ 287,780 Hardware and other revenue 74,265 58,725 215,051 164,647 Total revenue 192,324 158,851 553,679 452,427 Cost of revenue (1) : Cost of SaaS and license revenue 17,425 14,344 49,782 39,673 Cost of hardware and other revenue 62,959 46,839 173,731 128,495 Total cost of revenue 80,384 61,183 223,513 168,168 Operating expenses: Sales and marketing 22,557 18,410 62,085 52,405 General and administrative 18,689 17,410 64,839 55,634 Research and development 44,143 36,914 130,101 113,280 Amortization and depreciation 7,467 6,878 22,329 20,023 Total operating expenses 92,856 79,612 279,354 241,342 Operating income 19,084 18,056 50,812 42,917 Interest expense ( 4,196 ) ( 556 ) ( 11,718 ) ( 2,069 ) Interest income 140 118 446 734 Other income / (expense), net 53 24,753 ( 70 ) 24,910 Income before income taxes 15,081 42,371 39,470 66,492 Provision for / (benefit from) income taxes 1,787 6,546 ( 2,864 ) 5,471 Net income 13,294 35,825 42,334 61,021 Net loss attributable to redeemable noncontrolling interest 244 259 779 865 Net income attributable to common stockholders $ 13,538 $ 36,084 $ 43,113 $ 61,886 Per share information attributable to common stockholders: Net income per share: Basic $ 0.27 $ 0.74 $ 0.87 $ 1.27 Diluted $ 0.26 $ 0.71 $ 0.83 $ 1.22 Weighted average common shares outstanding: Basic 49,954,565 49,007,343 49,776,578 48,842,333 Diluted 51,836,239 50,979,679 51,879,061 50,673,752 _______________ (1) Exclusive of amortization and depreciation shown in operating expenses below. See accompanying notes to the condensed consolidated financial statements. 2 ALARM.COM HOLDINGS, INC. Condensed Consolidated Balance Sheets (in thousands, except share and per share data) (unaudited) September 30, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 700,307 $ 253,459 Accounts receivable, net of allowance for credit losses of $ 3,158 and $ 4,696 , respectively, and net of allowance for product returns of $ 1,025 and $ 1,480 , respectively 90,624 83,326 Inventory 56,526 44,281 Other current assets, net of allowance for credit losses of $ 3 and $ 17 , respectively 23,310 16,348 Total current assets 870,767 397,414 Property and equipment, net 42,412 44,796 Intangible assets, net 90,476 103,259 Goodwill 112,901 112,838 Deferred tax assets 11,430 21,692 Operating lease right-of-use assets 29,911 33,455 Other assets, net of allowance for credit losses of $ 76 and $ 72 , respectively 23,857 18,233 Total assets $ 1,181,754 $ 731,687 Liabilities, redeemable noncontrolling interest and stockholders’ equity Current liabilities: Accounts payable, accrued expenses and other current liabilities $ 62,966 $ 53,927 Accrued compensation 21,442 22,307 Deferred revenue 7,037 4,037 Operating lease liabilities 10,242 9,973 Total current liabilities 101,687 90,244 Deferred revenue 9,040 8,492 Convertible senior notes, net 421,112 — Long-term debt — 110,000 Operating lease liabilities 32,322 37,697 Other liabilities 8,530 6,811 Total liabilities 572,691 253,244 Commitments and contingencies (Note 12) Redeemable noncontrolling interest 11,889 10,691 Stockholders’ equity Preferred stock, $ 0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2021 and December 31, 2020 — — Common stock, $ 0.01 par value, 300,000,000 shares authorized; 50,174,272 and 49,630,773 shares issued; and 50,027,119 and 49,483,620 shares outstanding as of September 30, 2021 and December 31, 2020, respectively 501 496 Additional paid-in capital 492,135 405,831 Treasury stock, at cost; 147,153 shares as of September 30, 2021 and December 31, 2020 ( 5,149 ) ( 5,149 ) Retained earnings 109,687 66,574 Total stockholders’ equity 597,174 467,752 Total liabilities, redeemable noncontrolling interest and stockholders’ equity $ 1,181,754 $ 731,687 See accompanying notes to the condensed consolidated financial statements. 3 ALARM.COM HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Nine Months Ended September 30, Cash flows from operating activities: 2021 2020 Net income $ 42,334 $ 61,021 Adjustments to reconcile net income to net cash from operating activities: Recovery of credit losses on accounts receivable ( 238 ) ( 237 ) Reserve for product returns 1,628 1,491 Recovery of credit losses on notes receivable ( 10 ) ( 368 ) Provision for excess and obsolete inventory 374 1,178 Amortization on patents and tooling 947 604 Amortization and depreciation 22,329 20,023 Amortization of debt discount and debt issuance costs 11,590 81 Amortization of operating leases 7,173 6,562 Deferred income taxes ( 5,918 ) ( 1,480 ) Change in fair value of contingent liability — ( 2,593 ) Stock-based compensation 27,362 20,901 Acquired in-process research and development — 3,297 Gain on sale of investment — ( 24,737 ) Loss on early extinguishment of debt 185 — Changes in operating assets and liabilities: Accounts receivable ( 8,689 ) ( 7,131 ) Inventory ( 12,619 ) ( 7,209 ) Other current and non-current assets ( 8,368 ) ( 5,549 ) Accounts payable, accrued expenses and other current liabilities 10,672 5,897 Deferred revenue 3,548 2,374 Operating lease liabilities ( 8,745 ) ( 7,427 ) Other liabilities ( 361 ) ( 28 ) Cash flows from operating activities 83,194 66,670 Cash flows (used in) / from investing activities: Additions to property and equipment ( 8,939 ) ( 10,677 ) Purchases of in-process research and development — ( 3,297 ) Issuances of notes receivable — ( 600 ) Receipt of payments on notes receivable 42 2,023 Purchase of investment in unconsolidated entity ( 5,000 ) — Proceeds from sale of investment — 25,687 Purchases of patents and patent licenses — ( 900 ) Cash flows (used in) / from investing activities ( 13,897 ) 12,236 Cash flows from financing activities: Proceeds from credit facility — 50,000 Repayments of credit facility ( 110,000 ) ( 2,000 ) Proceeds from issuance of convertible senior notes 500,000 — Payments of debt issuance costs ( 15,698 ) — Payments of deferred consideration for business acquisitions ( 1,160 ) ( 819 ) Purchases of treasury stock — ( 5,149 ) Issuances of common stock from equity-based plans 4,409 6,609 Cash flows from financing activities 377,551 48,641 Net increase in cash and cash equivalents 446,848 127,547 Cash and cash equivalents at beginning of the period 253,459 119,629 Cash and cash equivalents at end of the period $ 700,307 $ 247,176 See accompanying notes to the condensed consolidated financial statements. 4 ALARM.COM HOLDINGS, INC. Condensed Consolidated Statements of Equity (in thousands) (unaudited) Redeemable Noncontrolling Interest Additional Paid-In Capital Retained Earnings Total Stockholders’ Equity Preferred Stock Common Stock Treasury Stock Shares Amount Shares Amount Shares Amount Balance as of December 31, 2020 $ 10,691 — $ — 49,631 $ 496 $ 405,831 147 $ ( 5,149 ) $ 66,574 $ 467,752 Common stock issued in connection with equity-based plans — — — 173 2 1,987 — — — 1,989 Stock-based compensation expense — — — — — 7,888 — — — 7,888 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 March 31, 2021 10,884 — — 49,804 498 471,748 147 ( 5,149 ) 81,404 548,501 Common stock issued in connection with equity-based plans — — — 237 2 876 — — — 878 Stock-based compensation expense — — — — — 10,056 — — — 10,056 Accretion adjustments of redeemable noncontrolling interest to redemption value 743 — — — — ( 743 ) — — — ( 743 ) Net income / (loss) attributable to common stockholders ( 255 ) — — — — — — — 14,745 14,745 Balance as of June 30, 2021 11,372 — — 50,041 500 481,937 147 ( 5,149 ) 96,149 573,437 Common stock issued in connection with equity-based plans — — — 133 1 1,541 — — — 1,542 Stock-based compensation expense — — — — — 9,418 — — — 9,418 Accretion adjustments of redeemable noncontrolling interest to redemption value 761 — — — — ( 761 ) — — — ( 761 ) Net income / (loss) attributable to common stockholders ( 244 ) — — — — — — — 13,538 13,538 Balance as of September 30, 2021 $ 11,889 — $ — 50,174 $ 501 $ 492,135 147 $ ( 5,149 ) $ 109,687 $ 597,174 See accompanying notes to the condensed consolidated financial statements. 5 ALARM.COM HOLDINGS, INC. Condensed Consolidated Statements of Equity — (Continued) (in thousands) (unaudited) Redeemable Noncontrolling Interest Preferred Stock Common Stock Additional Paid-In Capital Treasury Stock (Accumulated Deficit) / Retained Earnings 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 credit losses — — — — — — — — ( 816 ) ( 816 ) Common stock issued in connection with equity-based plans — — — 107 1 1,364 — — — 1,365 Purchases of treasury stock — — — — — — 147 ( 5,149 ) — ( 5,149 ) Stock-based compensation expense — — — — — 6,358 — — — 6,358 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 Accretion adjustments of redeemable noncontrolling interest to redemption value 254 — — — — ( 254 ) — — — ( 254 ) Net income / (loss) attributable to common stockholders ( 259 ) — — — — — — — 36,084 36,084 Balance as of September 30, 2020 $ 10,711 — $ — 49,256 $ 493 $ 392,765 147 $ ( 5,149 ) $ 50,607 $ 438,716 See accompanying notes to the condensed consolidated financial statements. 6 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) Note 1. Organization Alarm.com Holdings, Inc. (referred to herein as Alarm.com, the Company, or we) is the leading platform for the intelligently connected property. We offer a comprehensive suite of cloud-based solutions for the smart residential and commercial property , including interactive security, video monitoring, intelligent automation and energy management. Millions of property owners depend on our technology to intelligently secure, automate and manage their residential and commercial properties. Our solutions are delivered through an established network of over 10,000 trusted service provider partners, who are experts at selling, installing and supporting our solutions. We derive revenue from the sale of our cloud-based Software-as-a-Service, or SaaS, services, license fees, software, hardware, activation fees and other revenue. Our fiscal year ends on December 31. Note 2. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements include our accounts and those of our majority-owned and controlled subsidiaries after elimination of intercompany accounts and transactions. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all the information and footnotes required by GAAP for annual financial statements. They should be read together with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2020 included in our Annual Report on Form 10-K filed with the SEC on February 25, 2021, or the Annual Report. The condensed consolidated balance sheet as of December 31, 2020 was derived from our audited financial statements, but does not include all disclosures required by GAAP for annual financial statements. In the opinion of management, these condensed consolidated financial 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 continue to disrupt our supply chain for an unknown period of time due to its impact on manufacturing, production and global transportation. The COVID-19 pandemic also disrupted and may intermittently continue to disrupt our sales channels due to restrictions imposed from time to time on our service providers’ ability to meet with residential and commercial property owners who use our solutions. In addition, the COVID-19 pandemic resulted in a global slowdown of economic activity and a recession in the United States and the economic situation remains fluid as parts of the economy appear to be recovering while others continue to struggle. While vaccines have been approved for use in the United States and in many other countries, and vaccination efforts are underway, it remains difficult to assess or predict the ultimate duration and economic impact of the COVID-19 pandemic due to a resurgence of COVID-19 and the emergence and severity of COVID-19 variants. The results of operations for the three and nine months ended September 30, 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 The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. As of the date of issuance of these financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, assumptions and judgments or revise the carrying value of our assets or liabilities. However, our estimates, judgments and assumptions are continually evaluated based on available information and experience and may change as new events occur and additional information is obtained. Because of the use of estimates inherent in the financial reporting process and in light of the continuing uncertainty arising from the COVID-19 pandemic, actual results could differ from those estimates and any such differences may be material. Estimates are used when accounting for revenue recognition, allowances for credit losses, allowance for hardware returns, estimates of obsolete inventory, long-term incentive compensation, the lease term and incremental borrowing 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, 2021 and 2020 was equal to our net income disclosed in the condensed consolidated statements of operations. 7 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) 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, 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 between the aggregate principal amount and the liability component 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 September 30, 2021. Recent Accounting Pronouncements Adopted On December 18, 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or 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, 2021, we adopted Topic 740. This pronouncement did not have a material impact on our condensed consolidated financial statements or disclosures. Not Yet Adopted On March 12, 2020, the FASB issued ASU 2020-04, " Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ," which provides optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued such as the Eurodollar Base Rate, or LIBOR. The update allows entities to elect not to apply certain modification accounting requirements to contracts affected by the discontinuation of a reference rate if certain criteria are met. The amendment was effective beginning March 12, 2020 and will continue to be effective through December 31, 2022. 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. While we are still in the process of determining the impact of this guidance when we adopt the pronouncement on January 1, 2022, we anticipate that the new guidance will have a material impact on our consolidated financial statements and disclosures. We currently expect to record a material reclassification from equity to debt, as well as a reduction in interest expense upon adoption, due to eliminating the amortization of the debt discount. Additionally, this guidance is expected to increase our diluted weighted average common shares outstanding and impact our earnings per share upon adoption. 8 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) On October 28, 2021, the FASB issued ASU 2021-08, " Business Combinations (Topic 606): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ," which requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with GAAP. The amendment in this update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The guidance should be applied prospectively to business combinations occurring on or after the effective date of the amendment in this update. We are currently assessing the impact this pronouncement may have on our consolidated financial statements. Note 3. Revenue from Contracts with Customers Revenue Recognition We derive our revenue from three primary sources: the sale of cloud-based SaaS services on our integrated Alarm.com platform, the sale of licenses and services on our non-hosted software platform, or Software platform, and the sale of hardware products. We sell our platform and hardware solutions to service provider partners that resell our solutions and hardware to residential and commercial property owners, who are the service provider partners’ customers. Our subscribers consist of all of the properties maintained by those residential and commercial property owners to which we are delivering at least one of our solutions. We also sell our hardware to distributors who resell the hardware to service provider partners. We enter into contracts with our service provider partners that establish pricing for access to our platform solutions and for the sale of hardware. These service provider c ontracts typically have an initial term of one year , with subsequent renewal terms of one year . Our service provider partners typically enter into contracts with our subscribers, which our service provider partners have indicated range from three to five years in length. When determining the amount of consideration we expect to be entitled to for the sale of our hardware, we estimate the variable consideration associated with customer returns. We record a reserve against revenue for hardware returns based on historical returns. For the twelve months ended September 30, 2021 and 2020, our reserve against revenue for hardware returns was approximately 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 that these warranties are not separate performance obligations as they cannot be purchased separately and do not provide a service in addition to an assurance the hardware will function as expected. Our hardware and other revenue also includes our revenue from the sale of perpetual licenses that provide our customers in the commercial market the right to use our OpenEye video surveillance software for an indefinite period of time in exchange for a one-time license fee, which is generally paid at contract inception. Our hardware and other revenue also includes our revenue from Shooter Detection Systems 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. Our service provider partners use services on our platforms, such as support tools and applications, to assist in the installation of our solutions in subscriber properties. This installation marks the beginning of the service period on our platforms and, on occasion, we earn activation revenue for fees charged for this service. The activation fee is non-refundable, separately negotiated and specified in our contractual arrangements with our service provider partners and is charged to the service provider partner for each subscriber activated on our platforms. The decision whether to charge an activation fee is based in part on the expected number of subscribers to be added by our service provider partners and as a result, many of our largest service provider partners do not pay an activation fee. Activation fees are not offered on a stand-alone basis separate from our SaaS offering and are billed and received at the beginning of the arrangement. We record activation fees initially as deferred revenue and we recognize these fees ratably over the expected term of the subscribers’ account which we estimate is ten years based on our annual attrition rate. The portion of these activation fees included in current and long-term deferred revenue as of our balance sheet date represents the amounts that will be recognized ratably as revenue over the following twelve months , or longer as appropriate, until the ten-year expected term is complete. The balance of deferred revenue for activation fees was $ 6.3 million and $ 7.0 million as of September 30, 2021 and December 31, 2020, respectively, which combines current and long-term balances. 9 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) SaaS and license revenue associated with our contracts is invoiced and revenue is recognized at an amount that corresponds directly with the value of the performance completed to date. Additionally, the consideration received from hardware sales corresponds directly with the stand-alone selling price of the hardware. As a result, we have elected to use the practical expedient related to the amount of transaction price allocated to the unsatisfied performance obligations and therefore, we have not disclosed the total remaining revenue expected to be recognized on all contracts or the expected period over which the remaining revenue would be recognized. Contract Assets At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each distinct promise to transfer a good or service, or bundle of goods or services. To identify the performance obligations, we consider all of the goods or services promised in the contract, whether explicitly stated or implied based on customary business practices. We record a contract asset when we satisfy a performance obligation by transferring a promised good or service. Contract assets can be conditional or unconditional depending on whether another performance obligation must be satisfied before payment can be received. We receive payments from our service provider partners based on the billing schedule established in our contracts. All of the accounts receivable presented in the condensed consolidated balance sheets represent unconditional rights to consideration. We do not have any assets from contracts containing conditional rights and we do not have any assets from satisfied performance obligations that have not been invoiced. We recognize an asset related to the costs incurred to obtain a contract only if we expect to recover those costs and we would not have incurred those costs if the contract had not been obtained. We recognize an asset from the costs incurred to fulfill a contract if the costs (i) are specifically identifiable to a contract, (ii) enhance resources that will be used in satisfying performance obligations in future and (iii) are expected to be recovered. Our contract assets consist of capitalized commission costs and upfront payments made to a customer. Based on the policy above, we capitalize a portion of our commission costs as an incremental cost of obtaining a contract. When calculating the incremental cost of obtaining a contract, we exclude any commission costs related to metrics that could be satisfied without obtaining a contract, including training-related metrics. We amortize our commission costs over a period of three years , which is consistent with the period over which the products and services related to the commission are transferred to the customer. The three-year period was determined based on our review of historical enhancements and upgrades to our products and services. We applied the portfolio approach to account for the amortization of contract costs 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. The current portion of capitalized commission costs and upfront payments made to customers are included in other current assets within our condensed consolidated balance sheets. 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. 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 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 and nine months ended September 30, 2021 and 2020. The changes in our contract assets are as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Beginning of period balance $ 4,771 $ 4,718 $ 4,306 $ 4,578 Commission costs and upfront payments to a customer capitalized in period 540 607 2,697 2,429 Amortization of contract assets ( 899 ) ( 1,046 ) ( 2,591 ) ( 2,728 ) End of period balance $ 4,412 $ 4,279 $ 4,412 $ 4,279 Contract Liabilities Contract liabilities include payments received in advance of performance under the contract and are realized with the associated revenue recognized under the contract. All of the deferred revenue presented in the condensed consolidated balance sheets represents contract liabilities resulting from advance cash receipts from customers or amounts billed in advance to customers from the sale of services. Changes in deferred revenue are due to our performance under the contract as well as to cash received from new contracts for which services have not been provided. 10 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) The changes in our contract liabilities are as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Beginning of period balance $ 15,019 $ 11,537 $ 12,529 $ 10,498 Revenue deferred in period 3,682 3,425 11,131 9,118 Revenue recognized from amounts included in contract liabilities ( 2,624 ) ( 2,090 ) ( 7,583 ) ( 6,744 ) End of period balance $ 16,077 $ 12,872 $ 16,077 $ 12,872 The revenue recognized from amounts included in contract liabilities primarily relates to prepayment contracts with customers as well as payments of activation fees. Note 4. Accounts Receivable, Net The components of accounts receivable, net are as follows (in thousands): September 30, 2021 December 31, 2020 Accounts receivable $ 94,807 $ 89,502 Allowance for credit losses ( 3,158 ) ( 4,696 ) Allowance for product returns ( 1,025 ) ( 1,480 ) Accounts receivable, net $ 90,624 $ 83,326 For the three and nine months ended September 30, 2021, we recorded a reduction to the provision for credit losses of $ 0.4 million and $ 0.2 million on our accounts receivable, respectively. 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, respectively. For the three and nine months ended September 30, 2021, we recorded a reserve for product returns of $ 0.5 million and $ 1.6 million, respectively, as compared to $ 0.5 million and $ 1.5 million for the same periods 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. 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. 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 and nine months ended September 30, 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 and nine months ended September 30, 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 nine months ended September 30, 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 and nine months ended September 30, 2021, we recorded a reduction of credit loss expense for accounts receivable and notes receivable of $ 0.4 million, in general and administrative expense in our condensed consolidated statements of operations. 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, respectively, in our condensed consolidated statements of operations. The contractual term excludes expected extensions, renewals and 11 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) 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. The changes in our allowance for credit losses for accounts receivable are as follows (in thousands): Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 Alarm.com and Certain Subsidiaries All Other Subsidiaries Alarm.com and Certain Subsidiaries All Other Subsidiaries Alarm.com and Certain Subsidiaries All Other Subsidiaries Alarm.com and Certain Subsidiaries All Other Subsidiaries Beginning of period balance $ ( 3,443 ) $ ( 131 ) $ ( 3,550 ) $ ( 238 ) $ ( 4,442 ) $ ( 254 ) $ ( 2,500 ) $ ( 84 ) Impact of adopting Topic 326 — — — — — — ( 212 ) ( 155 ) Recovery of / (provision for) expected credit losses 415 ( 27 ) 1,146 56 268 ( 30 ) 195 42 Write-offs 25 3 170 16 1,171 129 283 31 End of period balance $ ( 3,003 ) $ ( 155 ) $ ( 2,234 ) $ ( 166 ) $ ( 3,003 ) $ ( 155 ) $ ( 2,234 ) $ ( 166 ) Note 5. Inventory The components of inventory are as follows (in thousands): September 30, 2021 December 31, 2020 Raw materials $ 11,127 $ 9,475 Finished goods 45,399 34,806 Total inventory $ 56,526 $ 44,281 Note 6. Acquisitions 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 continue to 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 and the remaining $ 0.3 million in September 2021. 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 nine months ended September 30, 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 continue to 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, $ 0.1 million in December 2019 and the remaining $ 0.7 million in April 2021. 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 nine months ended September 30, 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. 12 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) 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 agreement, following the preliminary determination of the working capital of SDS as of the closing date, the purchase price decreased by $ 0.1 million. The purchase price allocation was finalized during the second quarter of 2021, including the working capital adjustment, resulting in a measurement period adjustment to increase the purchase consideration by $ 0.1 million and to increase goodwill by $ 0.1 million. The table below sets forth the purchase consideration and the fair value allocation of the tangible and intangible net assets acquired (in thousands): December 14, 2020 Calculation of Purchase Consideration: Cash paid, net of working capital adjustment $ 26,577 Total consideration $ 26,577 Tangible and Intangible Net Assets: Cash $ 311 Accounts receivable 1,179 Inventory 917 Other current assets 240 Property and equipment 77 Operating lease right-of-use assets 384 Other assets 348 Customer relationships 2,362 Developed technology 13,522 Trade name 512 Accounts payable ( 19 ) Accrued expenses ( 111 ) Operating lease current liabilities ( 51 ) Operating lease liabilities ( 333 ) Goodwill 7,239 Total tangible and intangible net assets $ 26,577 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 allocated the goodwill to the Alarm.com segment. Fair Value of Net Assets Acquired and Intangibles In accordance with Accounting Standards Codification, or ASC, 805, Business Combinations , SDS constituted a business and the assets and liabilities were recorded at their respective fair values as of December 14, 2020. We developed our estimate of the fair value of intangible net assets using the with-and-without method for customer relationships, the multi-period excess earnings method for the developed technology and the relief-from-royalty method for the trade name. Customer Relationships We recorded the customer relationships intangible separately from goodwill based on determination of the length, strength and contractual nature of the relationship that SDS shared with its customers. We valued the single group of customer relationships using the with-and-without method, an income approach. The significant assumptions used in the with-and-without method include estimates about future expected cash flows from customer contracts and the discount rate. We are amortizing the customer relationships, valued at $ 2.4 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of six years . 13 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) Developed Technology Developed technology primarily consists of intellectual property of proprietary software that is marketed for sale. We valued the developed technology by applying the multi-period excess earnings method, an income approach. The significant assumptions used in the multi-period excess earnings method include estimates about future expected cash flows from the developed technology, the obsolescence factor and the discount rate. We are amortizing the SDS developed technology, valued at $ 13.5 million, on an attribution method based on the discounted cash flows of the model over an estimated useful life of seven years . Trade Name We valued the trade names acquired using a relief from royalty method. The significant assumptions used in relief from royalty method include future expected cash flows from the trade name, the royalty rate and the discount rate. We are amortizing the trade names, valued at $ 0.5 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of five years . Note 7. Goodwill and Intangible Assets, Net The changes in goodwill by reportable segment are outlined below (in thousands): Alarm.com Other Total Balance as of January 1, 2021 $ 112,838 $ — $ 112,838 Goodwill acquired — — — Measurement period adjustment 63 — 63 Balance as of September 30, 2021 $ 112,901 $ — $ 112,901 There were no impairments of goodwill during the three and nine months ended September 30, 2021 and 2020. The following table reflects changes in the net carrying amount of the components of intangible assets (in thousands): Customer Relationships Developed Technology Trade Name Total Balance as of January 1, 2021 $ 72,670 $ 28,223 $ 2,366 $ 103,259 Amortization ( 9,869 ) ( 2,507 ) ( 407 ) ( 12,783 ) Balance as of September 30, 2021 $ 62,801 $ 25,716 $ 1,959 $ 90,476 We recorded $ 4.3 million and $ 12.8 million of amortization related to our intangible assets for the three and nine months ended September 30, 2021, respectively, as compared to $ 4.0 million and $ 12.1 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, 2021 and 2020. 14 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) 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, 2021 Gross Carrying Amount Accumulated Amortization Net Carrying Value Weighted- Average Remaining Life (in years) Customer relationships $ 126,093 $ ( 63,292 ) $ 62,801 8.2 Developed technology 44,064 ( 18,348 ) 25,716 6.6 Trade name 3,815 ( 1,856 ) 1,959 3.3 Other 234 ( 234 ) — 0.0 Total intangible assets $ 174,206 $ ( 83,730 ) $ 90,476 December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Carrying Value Weighted- Average Remaining Life (in years) Customer relationships $ 126,093 $ ( 53,423 ) $ 72,670 8.8 Developed technology 44,064 ( 15,841 ) 28,223 7.3 Trade name 3,815 ( 1,449 ) 2,366 4.0 Other 234 ( 234 ) — 0.0 Total intangible assets $ 174,206 $ ( 70,947 ) $ 103,259 Note 8. Other Assets Purchases of Patents and Patent Licenses From time to time, we enter into agreements to purchase patents or patent licenses. The carrying value, net of amortization, of our purchased patents and patent licenses was $ 2.4 million and $ 2.9 million as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, $ 0.7 million of patent costs were included in other current assets and $ 1.7 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 September 30, 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 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, 2021 and 2020, 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, 2021 and 2020, respectively. Loan to a Distribution Partner In September 2016, we entered into dealer and loan agreements with a distribution partner. The dealer agreement enables the distribution partner to resell our SaaS services and hardware to their subscribers. Under the loan agreements, we agreed to loan the distribution partner up to $ 4.0 million, collateralized by all assets owned by the distribution partner. The advance period for the loan was amended in August 2017 to begin each year on September 1 and end each year on December 31. Interest on the outstanding principal accrued at a rate per annum equal to the greater of 6.0 % or LIBOR, plus 4.0 %, as determined on the first date of each annual advance period. The repayment of principal and accrued interest was due in three installments beginning in July and ending in August following the advance period. The maturity date of the loan was August 31, 2019; however, the borrower had the option to extend the term of the loan for two successive terms of one year each. In May 2018, the loan agreement with our distribution partner was amended to convert the entire $ 4.0 million note receivable outstanding into a $ 4.0 million term loan. The term loan had a maturity date of July 31, 2022 and required annual principal repayments of $ 1.0 million on July 31 of each year, commencing on July 31, 2019. The term loan also required monthly interest payments, with interest accruing on the outstanding principal balance at a rate per annum equal to 6.0 % through June 30, 2018 and a rate per annum equal to the LIBOR rate on the first of any interest period plus 7.0 % beginning on July 1, 2018. 15 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) In April 2017, we entered into a subordinated credit agreement with an affiliated entity of the distribution partner and loaned the affiliated entity $ 3.0 million, with a maturity date of November 21, 2022. Interest on the outstanding principal balance accrued at a rate of 8.5 % per annum and required monthly interest payments. In June 2020, we amended the term loan with our distribution partner and also amended the subordinated credit agreement with the affiliated entity of the distribution partner. At the time of the amended term loan and subordinated credit agreement in June 2020, the outstanding balance of the term loan was $ 3.0 million and the outstanding balance of the subordinated credit agreement was $ 3.0 million. Under the amended terms, the distribution partner paid us $ 2.0 million in principal for the term loan on June 9, 2020 and the remaining $ 1.0 million was transferred to the amended subordinated credit agreement with the affiliated entity of the distribution partner. 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, 2021 and December 31, 2020, $ 4.5 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 and nine months ended September 30, 2021, we recognized $ 0.8 million and $ 2.4 million of revenue from the distribution partners associated with these loans, respectively, as compared to $ 0.5 million and $ 1.8 million for the same periods in the prior year. Loans to a Service Provider Partner In July 2020, we entered into a loan agreement with a service provider partner, under which we agreed to loan the service provider partner up to $ 2.5 million, collateralized by the assets of the service provider partner. Interest on the outstanding principal accrues at a rate per annum equal to 9.0 % and monthly interest and principal payments began in April 2021. The maturity date of the loan is July 24, 2025. As of each of September 30, 2021 and December 31, 2020, $ 1.2 million of principal was outstanding from the service provider partner under the loan agreement. For each of the three and nine months ended September 30, 2021, we recognized $ 0.1 million of revenue from the service provider partner associated with this loan, as compared to less than $ 0.1 million and $ 0.1 million for the same periods in the prior year. 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. 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 of September 30, 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. 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 of September 30, 2021 and December 31, 2020, our investment in the technology partner was $ 5.7 million and $ 0.7 million, respectively. 16 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) Investment in a Platform Partner On July 31, 2020, a platform partner, in which we held 3,548,820 shares of common stock of the platform partner, was acquired by an unrelated third party. As a result of the sale, we received proceeds of $ 25.7 million in exchange for our shares of the platform partner's common stock and we recorded a gain of $ 24.7 million within other income, net, in our condensed consolidated statements of operations during the three and nine months ended September 30, 2020. As of September 30, 2021 and December 31, 2020, our investment in the platform partner was zero . 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 and nine months ended September 30, 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. 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 each of September 30, 2021 and December 31, 2020 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, 2021 and 2020. There were no purchases or sales of financial assets during the three and nine months ended September 30, 2021 and 2020. There were no significant changes in the amount of note receivable write-offs during the three and nine months ended September 30, 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, 2021 Three Months Ended September 30, 2020 Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 Loan Receivables Hardware Financing Receivables Loan Receivables Hardware Financing Receivables Loan Receivables Hardware Financing Receivables Loan Receivables Hardware Financing Receivables Beginning of period balance $ ( 74 ) $ ( 4 ) $ ( 46 ) $ ( 37 ) $ ( 73 ) $ ( 16 ) $ — $ ( 16 ) Impact of adopting Topic 326 — — — — — — ( 434 ) ( 15 ) (Provision for) / recovery of expected credit losses ( 3 ) 2 ( 20 ) 6 ( 4 ) 14 368 — Write-offs — — 1 — — — 1 — End of period balance $ ( 77 ) $ ( 2 ) $ ( 65 ) $ ( 31 ) $ ( 77 ) $ ( 2 ) $ ( 65 ) $ ( 31 ) 17 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) We manage our notes receivables using delinquency as a key credit quality indicator. The following tables reflect the current and delinquent notes receivable by class of financing receivables and by year of origination (in thousands): September 30, 2021 Loan Receivables: 2021 2020 2019 2018 2017 Prior Total Current $ — $ 1,165 $ 10 $ — $ 4,499 $ — $ 5,674 30-59 days past due — — — — — — — 60-89 days past due — — — — — — — 90-119 days past due — — — — — — — 120+ days past due — — — — — — — Total $ — $ 1,165 $ 10 $ — $ 4,499 $ — $ 5,674 Hardware Financing Receivables: Current $ — $ — $ 24 $ — $ — $ — $ 24 30-59 days past due — — — — — — — 60-89 days past due — — 23 — — — 23 90-119 days past due — — — — — — — 120+ days past due — — — — — — — Total $ — $ — $ 47 $ — $ — $ — $ 47 December 31, 2020 Loan Receivables: 2020 2019 2018 2017 2016 Prior Total Current $ 1,200 $ 17 $ — $ 4,207 $ — $ — $ 5,424 30-59 days past due — — — — — — — 60-89 days past due — — — — — — — 90-119 days past due — — — — — — — 120+ days past due — — — — — — — Total $ 1,200 $ 17 $ — $ 4,207 $ — $ — $ 5,424 Hardware Financing Receivables: Current $ — $ 67 $ 49 $ — $ — $ — $ 116 30-59 days past due — — — 2 — — 2 60-89 days past due — 57 27 — — — 84 90-119 days past due — — — — — — — 120+ days past due — — — 9 — — 9 Total $ — $ 124 $ 76 $ 11 $ — $ — $ 211 The amortized cost of notes receivables placed on nonaccrual status is as follows (in thousands): September 30, 2021 December 31, 2020 Loan receivables $ — $ — Hardware financing receivables — 9 Total $ — $ 9 18 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) During the three and nine months ended September 30, 2021 and 2020, there was no interest income recognized related to notes receivables that were in nonaccrual status. As of September 30, 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 September 30, 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, 2021 and December 31, 2020, $ 14.4 million and $ 8.4 million of prepaid expenses were included in other current assets, respectively, primarily related to software licenses and for long lead-time parts related to our inventory . Note 9. Fair Value Measurements The following tables present our assets and liabilities measured at fair value on a recurring basis (in thousands): Fair Value Measurements on a Recurring Basis as of September 30, 2021 Fair value measurements in: Level 1 Level 2 Level 3 Total Assets: Money market accounts $ 671,598 $ — $ — $ 671,598 Total $ 671,598 $ — $ — $ 671,598 Fair Value Measurements on a Recurring Basis as of December 31, 2020 Fair value measurements in: Level 1 Level 2 Level 3 Total Assets: Money market accounts $ 221,407 $ — $ — $ 221,407 Total $ 221,407 $ — $ — $ 221,407 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, 2021 2020 2021 2020 Beginning of period balance $ — $ 306 $ — $ 2,595 Changes in fair value included in earnings — ( 304 ) — ( 2,593 ) End of period balance $ — $ 2 $ — $ 2 The money market accounts are included in our cash and cash equivalents in our condensed consolidated balance sheets. Our money market assets are valued using quoted prices in active markets. See Note 12 for the carrying amount and estimated fair value of our convertible senior notes as of September 30, 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. The contingent consideration liability was valued with significant unobservable inputs, including the revenue volatility and the discount rate. Selecting another revenue volatility or discount rate within an acceptable range would not have resulted in a significant change to the fair value of the contingent consideration liability. As of October 21, 2019, the fair value of the liability was $ 2.8 million. At each reporting date until December 31, 2020, we remeasured the liability, using the same valuation approach. Changes in the fair value resulting from information that existed subsequent to the acquisition date were recorded in general and administrative expense in our 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. 19 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) 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, 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, 2021 and 2020. Note 10. Leases We lease office space, data centers and office equipment under non-cancelable operating leases with various expiration dates through 2026. In August 2014, we signed a lease for office space in Tysons, Virginia, where we relocated our headquarters to in February 2016. We have subsequently entered into amendments to this lease from 2015 to 2020 to provide us with additional office space. 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, 2021 2020 2021 2020 Operating lease cost $ 2,478 $ 2,329 $ 7,173 $ 6,562 Cash paid for amounts included in the measurement of operating lease liabilities 3,068 2,699 8,745 7,427 Operating lease right-of-use assets obtained in exchange for new operating lease liabilities 1,431 1,998 2,446 8,645 September 30, 2021 December 31, 2020 Weighted-average remaining lease term — operating leases 4.3 years 4.9 years Weighted-average discount rate — operating leases 3.6 % 3.6 % Maturities of lease liabilities are as follows (in thousands): Year Ended December 31, Operating Leases (1) Remainder of 2021 $ 3,064 2022 11,229 2023 10,512 2024 8,906 2025 7,535 2026 and thereafter 4,769 Total lease payments 46,015 Less: imputed interest (2) 3,451 Present value of lease liabilities $ 42,564 _______________ (1) Operating lease payments exclude $ 2.4 million of legally binding minimum lease payments for leases executed but not yet commenced and includes $ 1.0 million for options to extend lease terms that were reasonably certain of being exercised. (2) Imputed interest was calculated using the incremental borrowing rate applicable for each lease. We did no t have any finance leases or subleases as of September 30, 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, 2021 and 2020. 20 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) Note 11. Liabilities The components of accounts payable, accrued expenses and other current liabilities are as follows (in thousands): September 30, 2021 December 31, 2020 Accounts payable $ 40,519 $ 38,163 Accrued expenses 17,819 11,449 Other current liabilities 4,628 4,315 Accounts payable, accrued expenses and other current liabilities $ 62,966 $ 53,927 The components of other liabilities are as follows (in thousands): September 30, 2021 December 31, 2020 Holdback liability from acquisitions $ 1,500 $ 1,500 Other liabilities 7,030 5,311 Other liabilities $ 8,530 $ 6,811 Note 12. Debt, Commitments and Contingencies The debt, commitments and contingencies described below would require us, or our subsidiaries, to make payments to third parties under certain circumstances. Convertible Senior Notes On January 20, 2021, we issued $ 500.0 million aggregate principal amount of 0 % convertible senior notes due January 15, 2026 in a private placement to qualified institutional buyers, or the 2026 Notes. The terms of the 2026 Notes are governed by an Indenture, or the Indenture, by and between Alarm.com Holdings, Inc. and U.S. Bank National Association, as trustee. The 2026 Notes are senior unsecured obligations that do not bear regular interest and the principal amount of the 2026 Notes will not accrete. The 2026 Notes may bear special interest under specified circumstances related to our failure to comply with our reporting obligations under the Indenture. Special interest, if any, will be payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2021. We received proceeds from the issuance of the 2026 Notes of $ 484.3 million, net of $ 15.7 million of transaction fees and other debt issuance costs. We may not redeem the 2026 Notes prior to January 20, 2024. We may redeem for cash, all or any portion of the 2026 Notes, at our option, on or after January 20, 2024, at a redemption price equal to 100 % of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date, if the last reported sale price of our common stock has been at least 130 % of the conversion price for the 2026 Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. No sinking fund is provided for the 2026 Notes. The 2026 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding August 15, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price for the 2026 Notes on each applicable trading day; (2) during the five business day period immediately after any 10 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 21 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) 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 are using 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. As of September 30, 2021, the fair value of our 2026 Notes was $ 450.0 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 $ 78.19 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 September 30, 2021. The net carrying amount of the liability component of the 2026 Notes is as follows (in thousands): September 30, 2021 December 31, 2020 Principal $ 500,000 $ — Unamortized debt discount ( 67,172 ) — Unamortized debt issuance costs ( 11,716 ) — Net carrying amount $ 421,112 $ — 22 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) The net carrying amount of the equity component of the 2026 Notes is as follows (in thousands): September 30, 2021 December 31, 2020 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Amortization of debt discount $ 3,622 $ — $ 10,026 $ — Amortization of debt issuance costs 569 — 1,558 — Total interest expense $ 4,191 $ — $ 11,584 $ — 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 during the three months ended March 31, 2021. 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 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. On January 20, 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 income / (expense), net in our condensed consolidated statements of operations during the nine months ended September 30, 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, (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 nine months ended September 30, 2020, the effective interest rate on the 2017 Facility was 2.92 %. The carrying value of the 2017 Facility was zero and $ 110.0 million as of September 30, 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. 23 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) Commitments and Contingencies Contingent Consideration On October 21, 2019, we acquired 85 % of the issued and outstanding capital stock of OpenEye. Certain stockholders of OpenEye had the right to receive an earn-out payment of up to an additional $ 11.0 million based upon satisfaction of certain calendar 2020 revenue targets. At October 21, 2019, the fair value of the contingent consideration liability was $ 2.8 million. At each reporting date until December 31, 2020, we remeasured the liability, using the same valuation approach. Changes in the fair value resulting from information that existed subsequent to the acquisition date were recorded in the 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 (see Note 9). Indemnification Agreements We have various agreements that may obligate us to indemnify the other party to the agreement with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business. Although we cannot predict the maximum potential amount of future payments that may become due under these indemnification agreements, we do not believe any potential liability that might arise from such indemnity provisions is probable or material. Legal Proceedings On June 2, 2015, Vivint, Inc., or Vivint, filed a lawsuit against us in U.S. District Court, District of Utah, alleging that our technology directly and indirectly infringes six patents that Vivint purchased. Vivint is seeking permanent injunctions, enhanced damages and attorneys' fees. We answered the complaint on July 23, 2015. Among other things, we asserted defenses based on non-infringement and invalidity of the patents in question. On August 19, 2016, the U.S. District Court, District of Utah stayed the litigation pending inter partes review by the U.S. Patent Trial and Appeal Board, or PTAB, of five of the patents in suit. In March 2017, the PTAB issued final written decisions relating to two patents finding all challenged claims unpatentable. In May 2017, the PTAB issued final written decisions relating to the remaining three patents that found certain claims unpatentable, while certain other claims were not found to be unpatentable. Vivint appealed the decisions to the U.S. Court of Appeals for the Federal Circuit, or the Federal Circuit, and we cross-appealed. In July 2018, the Federal Circuit issued orders affirming the PTAB’s March 2017 decisions that invalidated all challenged claims of two patents. The U.S. District Court, District of Utah lifted the stay on the litigation on June 26, 2017. Discovery closed on October 29, 2021. No trial date has been set. In September 2017, the U.S. Patent and Trademark Office, or PTO, ordered ex parte reexaminations of certain claims of two of the remaining patents in suit, at our request. On October 30, 2018 and November 5, 2018, the PTO issued final office actions in the pending reexaminations rejecting all claims being examined as unpatentable over the prior art. Nine claims asserted in the litigation were found unpatentable in the PTO rejections. Vivint appealed these rejections to the PTAB on March 29, 2019 and April 4, 2019. The PTAB issued decisions affirming the rejections on February 28, 2020 and May 4, 2020. Vivint appealed these decisions to the Federal Circuit on July 1, 2020 and April 26, 2021. On September 29, 2021, the Federal Circuit issued a decision as to one of the reexaminations finding that the PTO erred in granting reexamination and ordered the reexamination dismissed. On December 20, 2018, the Federal Circuit issued an order regarding the inter partes review of three of the remaining patents in suit that vacated, reversed and remanded the PTAB’s ruling with regard to the construction of a term (“communication device identification code”) as requested by Alarm.com and affirmed the PTAB’s May 2017 rulings invalidating certain of the Vivint patents in all other respects. On July 24, 2019, the PTAB issued further decisions with respect to two of the remaining patents in suit, finding additional claims unpatentable in view of the Federal Circuit’s December 20, 2018 decision. One of the claims asserted in the litigation was found unpatentable in the July 14, 2019 decisions. Vivint appealed the July 24, 2019 decisions to the Federal Circuit on September 25, 2019. 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 U.S. District Court, Eastern District of Virginia granted the PTO’s motion to dismiss the case for lack of jurisdiction on June 22, 2021. We appealed the dismissal to the Federal Circuit on June 24, 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. Since all remaining patent claims in the litigation have expired, Vivint shall not be entitled to injunctive relief as a remedy in this matter. While we believe we have valid defenses to Vivint’s claims, any of these outcomes could result in a material adverse effect on our business. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time. On October 22, 2019, EcoFactor, Inc., or EcoFactor, filed a complaint with the U.S. International Trade Commission, or ITC, naming Alarm.com Incorporated and Alarm.com Holdings, Inc., among others, as proposed respondents. The complaint alleges that Alarm.com’s smart thermostats infringe three U.S. patents owned by EcoFactor. EcoFactor is seeking a permanent limited exclusion order and permanent cease and desist order. On November 22, 2019, the ITC instituted an investigation into 24 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) EcoFactor’s allegations naming Alarm.com Incorporated, Alarm.com Holdings, Inc. and others as respondents. We answered the complaint on December 19, 2019. Among other things, we asserted defenses based on non-infringement and invalidity of the patents in question. An evidentiary hearing was held in November 2020. On April 20, 2021, the administrative law judge presiding over the investigation issued a final initial determination finding in favor of Alarm.com. On July 20, 2021, the ITC commissioners issued a decision affirming the ruling in favor of Alarm.com and terminated the investigation. EcoFactor appealed the ITC decision to the Federal Circuit on September 20, 2021. On November 11, 2019, EcoFactor filed a lawsuit against us in U.S. District Court, District of Massachusetts, alleging infringement of the same three patents asserted against us in the ITC. EcoFactor is seeking permanent injunctions, enhanced damages and attorneys' fees. On December 26, 2019, the court issued an order staying the lawsuit until the ITC investigation described above is finally resolved. On May 26, 2020, EcoFactor filed a second lawsuit against us in U.S. District Court, District of Massachusetts, alleging Alarm.com’s products and services infringe four additional U.S. patents owned by EcoFactor. EcoFactor is seeking permanent injunctions, enhanced damages and attorneys' fees. On March 9, 2021, the PTO ordered ex parte reexamination of one of the patents asserted in the lawsuit, at Alarm.com’s request. On May 10, 2021, the PTAB instituted inter partes review of the same patent and subsequently stayed the ex parte reexamination pending the conclusion of its review. On September 28, 2021, the court issued an order staying the lawsuit in light of EcoFactor’s appeal of the ITC decision and pending lawsuits that EcoFactor brought against other defendants that are scheduled for trial in January 2022. A joint status report regarding the progress of the related cases is due by March 28, 2022. Should EcoFactor prevail in its district court lawsuits we could be required to pay damages and/or a reasonable royalty for sales of our solution, we could be enjoined from making, using and selling our solution if a license or other right to continue selling such elements is not made available to us, and we could be required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us. While we believe we have valid defenses to EcoFactor’s claims, the outcome of these legal claims cannot be predicted with certainty and any of these outcomes could result in an adverse effect on our business. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time. On July 22, 2021, Causam Enterprises, Inc., or Causam, filed a lawsuit against us in U.S. District Court, Western District of Texas, alleging that Alarm.com’s smart thermostats infringe four U.S. patents owned by Causam. Causam is seeking preliminary and permanent injunctions, enhanced damages and attorneys’ fees. We have not yet responded to the complaint. On September 3, 2021, the court issued an order staying the lawsuit until the ITC investigation described below is finally resolved. On July 28, 2021, Causam filed a complaint with the ITC naming Alarm.com Incorporated, Alarm.com Holdings, Inc., and EnergyHub, Inc., among others, as proposed respondents. The complaint alleges infringement of the same four patents Causam asserted in district court. Causam is seeking a permanent limited exclusion order and permanent cease and desist order. On August 27, 2021, the ITC instituted an investigation into Causam’s allegations naming Alarm.com Incorporated, Alarm.com Holdings, Inc., EnergyHub Inc. and others as respondents. We answered the complaint on October 4, 2021. Among other things, we asserted defenses based on non-infringement and invalidity of the patents in question. The administrative law judge presiding over the hearing has scheduled an evidentiary hearing in the investigation to begin on June 29, 2022. The target date for completion of the investigation is March 16, 2023. Should Causam prevail in an ITC investigation, Alarm.com thermostats manufactured abroad could be excluded from importation into the United States. Should Causam prevail in its district court lawsuit 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 Causam’s claims, the outcome of these legal claims cannot be predicted with certainty, and any of these outcomes could result in an adverse effect on our business. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time. In addition to the matters described above, we may be required to provide indemnification to certain of our service provider partners for certain claims regarding our solutions. For example, we are incurring costs associated with the indemnification of our service provider ADT, LLC in ongoing patent infringement suits. On 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. On June 25, 2021, ADT filed a motion for judgment on the pleadings seeking judgment in its favor as to five of the six asserted patents on the grounds that the claimed inventions are directed to 25 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) ineligible subject matter. The motion has been fully briefed and is pending decision. On August 6, 2021, the parties to the case stipulated to the dismissal of Vivint’s claims as to one of the six patents, leaving five in the case. Should Vivint 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 Vivint. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time. We may also be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Other than the preceding matters, we are not a party to any lawsuit or proceeding that, in the opinion of management, is reasonably possible or probable of having a material adverse effect on our financial position, results of operations or cash flows. We reserve for contingent liabilities based on ASC 450, " Contingencies ," when it is determined that a liability, inclusive of defense costs, is probable and reasonably estimable. Litigation is subject to many factors that are difficult to predict, so there can be no assurance that, in the event of a material unfavorable result in one or more claims, we will not incur material costs. Note 13. Stockholders' Equity Stock Repurchase Program 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 were repurchased under this program during the three months ended September 30, 2020. On December 3, 2020, our board of directors authorized another stock repurchase program, under which we are authorized to purchase up to an aggregate of $ 100.0 million of our outstanding common stock during the three-year period ending December 3, 2023. No shares of our common stock were repurchased under this program during the three and nine months ended September 30, 2021. Additionally, no shares of our common stock were repurchased under this program from December 3, 2020 to December 31, 2020 . Note 14. Stock-Based Compensation Stock-based compensation expense is included in the following line items in the condensed consolidated statements of operations (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Sales and marketing $ 1,189 $ 734 $ 3,232 $ 2,263 General and administrative 1,974 2,154 7,217 6,033 Research and development 6,255 4,560 16,913 12,605 Total stock-based compensation expense $ 9,418 $ 7,448 $ 27,362 $ 20,901 The following table summarizes the components of non-cash stock-based compensation expense (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Stock options and assumed options $ 1,042 $ 879 $ 2,818 $ 2,695 Restricted stock units 8,331 6,531 24,404 18,089 Employee stock purchase plan 45 38 140 117 Total stock-based compensation expense $ 9,418 $ 7,448 $ 27,362 $ 20,901 Tax windfall benefit from stock-based awards $ 1,100 $ 1,658 $ 6,780 $ 3,846 26 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) We granted an aggregate of 7,500 and 141,200 stock options pursuant to our 2015 Equity Incentive Plan, or the 2015 Plan, during the three and nine months ended September 30, 2021, as compared to an aggregate of 2,000 and 143,650 stock options for the same periods in the prior year. There were 74,932 and 211,190 stock options exercised during the three and nine months ended September 30, 2021, respectively, as compared to 139,225 and 397,416 stock options for the same periods in the prior year. We granted an aggregate of 173,005 and 728,415 restricted stock units during the three and nine months ended September 30, 2021, respectively, as compared to an aggregate of 169,699 and 488,771 restricted stock units for the same periods in the prior year. There were no performance-based restricted stock units granted during the three months ended September 30, 2021. The restricted stock units granted during the nine months ended September 30, 2021 included 120,314 of performance-based stock awards, as compared to 66,000 for the three and nine months ended September 30, 2020. There were 49,263 and 312,186 restricted stock units that vested during the three and nine months ended September 30, 2021, respectively, as compared to 34,136 and 121,259 restricted stock units vested during the same periods in the prior year. There were no performance-based restricted stock units that vested during the three months ended September 30, 2021 and there were 20,000 performance-based restricted stock units that vested during the nine months ended September 30, 2021. There were no performance-based restricted stock units that vested during the three and nine months ended September 30, 2020. Note 15. Earnings Per Share Basic and Diluted Earnings Per Share The components of basic and diluted earnings per share are as follows (in thousands, except share and per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income $ 13,294 $ 35,825 $ 42,334 $ 61,021 Net loss attributable to redeemable noncontrolling interest 244 259 779 865 Net income attributable to common stockholders (A) $ 13,538 $ 36,084 $ 43,113 $ 61,886 Weighted average common shares outstanding — basic (B) 49,954,565 49,007,343 49,776,578 48,842,333 Dilutive effect of stock options and restricted stock units 1,881,674 1,972,336 2,102,483 1,831,419 Weighted average common shares outstanding — diluted (C) 51,836,239 50,979,679 51,879,061 50,673,752 Net income per share: Basic (A/B) $ 0.27 $ 0.74 $ 0.87 $ 1.27 Diluted (A/C) $ 0.26 $ 0.71 $ 0.83 $ 1.22 The following securities have been excluded from the calculation of diluted weighted average common shares outstanding as the inclusion of these securities would have an anti-dilutive effect: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Stock options 141,200 136,434 141,200 282,595 Restricted stock units 11,630 27,199 71,258 149,699 Our redeemable noncontrolling interest relates to our 85 % equity ownership interest in OpenEye. The OpenEye stockholder agreement contains a put option that gives the minority OpenEye stockholders the right to sell their OpenEye shares to us based on the fair value of the shares. The OpenEye stockholder agreement also contains a call option that gives us the right to purchase the remaining OpenEye shares from the minority OpenEye stockholders based on the fair value of the shares. The put and call options can each be exercised beginning in the first quarter of 2023. This redeemable noncontrolling interest is considered temporary equity and we report it between liabilities and stockholders’ equity in the condensed consolidated balance sheets. The amount of the net income or loss attributable to redeemable noncontrolling interests is recorded in the condensed consolidated statements of operations. 27 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) 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 and nine months ended September 30, 2021, there was no dilutive effect of the 2026 Notes on our earnings per share during the three and nine months ended September 30, 2021. Note 16. Significant Service Providers During the three and nine months ended September 30, 2021, our 10 largest revenue service provider partners accounted for 48 % and 49 % of our consolidated revenue, respectively, as compared to 50 % and 49 % 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 each of the three and nine months ended September 30, 2021 and 2020. No service provider partner in the Alarm.com segment represented more than 10% of accounts receivable as of September 30, 2021. Two service provider partners in the Alarm.com segment represented more than 10% of accounts receivable as of December 31, 2020. Note 17. Income Taxes 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. For the three and nine months ended September 30, 2021, we recorded a provision for income taxes of $ 1.8 million and a benefit from income taxes of $ 2.9 million, respectively, resulting in an effective income tax rate of 11.8 % and ( 7.3 )% for those periods. 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. 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 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 September 30, 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 September 30, 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 $ 2.1 million primarily for research and development tax credits claimed during the nine months ended September 30, 2021. We recorded an increase to the unrecognized tax benefits of $ 1.1 million for research and development tax credits claimed during the nine months ended September 30, 2020. Our tax returns are subject to on-going review and examination by various tax authorities. Tax authorities may not agree with the treatment of items reported in our tax returns, and therefore the outcome of tax reviews and examinations can be unpredictable. On October 13, 2021, the Internal Revenue Service commenced an examination of our federal income tax return for 2018, which is ongoing. The anticipated completion date of the Internal Revenue Service examination cannot be estimated at this time. As of September 30, 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. 28 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) Note 18. Segment Information We have two reportable segments: • Alarm.com segment • Other segment Our chief operating decision maker is our chief executive officer. Management determined the operational data used by the chief operating decision maker is that of the two reportable segments. Management bases strategic goals and decisions on these segments and the data presented below is used to measure financial results. Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that contributed 94 % and 95 % of our revenue, net of intersegment eliminations, for the three and nine months ended September 30, 2021, respectively, as compared to 94 % for the same periods in the prior year. Our Other segment is focused on researching, developing and offering residential and commercial automation solutions and energy management products and services in adjacent markets. Inter-segment revenue includes sales of hardware between our segments. 29 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) 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, 2021 Alarm.com Other Intersegment Alarm.com Intersegment Other Total SaaS and license revenue $ 109,170 $ 8,889 $ — $ — $ 118,059 Hardware and other revenue 73,310 2,445 ( 847 ) ( 643 ) 74,265 Total revenue 182,480 11,334 ( 847 ) ( 643 ) 192,324 Operating income / (loss) 19,968 ( 1,021 ) 244 ( 107 ) 19,084 Three Months Ended September 30, 2020 Alarm.com Other Intersegment Alarm.com Intersegment Other Total SaaS and license revenue $ 92,834 $ 7,292 $ — $ — $ 100,126 Hardware and other revenue 57,726 2,545 ( 554 ) ( 992 ) 58,725 Total revenue 150,560 9,837 ( 554 ) ( 992 ) 158,851 Operating income / (loss) 18,810 ( 889 ) 189 ( 54 ) 18,056 Nine Months Ended September 30, 2021 Alarm.com Other Intersegment Alarm.com Intersegment Other Total SaaS and license revenue $ 315,329 $ 23,299 $ — $ — $ 338,628 Hardware and other revenue 212,194 7,368 ( 2,531 ) ( 1,980 ) 215,051 Total revenue 527,523 30,667 ( 2,531 ) ( 1,980 ) 553,679 Operating income / (loss) 57,130 ( 6,717 ) 632 ( 233 ) 50,812 Nine Months Ended September 30, 2020 Alarm.com Other Intersegment Alarm.com Intersegment Other Total 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 Alarm.com Other Intersegment Alarm.com Intersegment Other Total Assets as of September 30, 2021 $ 1,217,403 $ 28,202 $ ( 63,870 ) $ 19 $ 1,181,754 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 $ 7.9 million and $ 24.9 million for the three and nine months ended September 30, 2021, respectively, as compared to $ 9.5 million and $ 29.0 million for the same periods in the prior year. There was no software license revenue recorded for the Other segment during the three and nine months ended September 30, 2021 and 2020. Depreciation and amortization expense was $ 7.3 million and $ 22.0 million for the Alarm.com segment for the three and nine months ended September 30, 2021, respectively, as compared to $ 6.7 million and $ 19.8 million for the same periods in the prior year. Depreciation and amortization expense was $ 0.1 million and $ 0.3 million for the Other segment for the three and nine months ended September 30, 2021, respectively, as compared to $ 0.1 million and $ 0.2 million for the same periods in the prior year. Additions to property and equipment were $ 1.2 million and $ 7.4 million for the Alarm.com segment for the three and nine 30 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) months ended September 30, 2021, respectively, as compared to $ 4.7 million and $ 11.2 million for the same periods in the prior year. Additions to property and equipment were $ 0.2 million and $ 0.3 million for the Other segment for the three and nine months ended September 30, 2021, respectively, as compared to $ 0.1 million and $ 1.0 million for the same periods in the prior year. We derived substantially all revenue from North America for the three and nine months ended September 30, 2021 and 2020. Substantially all of our long-lived assets were in North America as of September 30, 2021 and December 31, 2020. Note 19. Related Party Transactions Installation Partner Our installation partner in which we have a 48.2 % ownership interest performs installation services for security service providers and also provides installation services for us and certain of our subsidiaries. We account for this investment using the equity method. As of September 30, 2021 and December 31, 2020, our investment balance in our installation partner was zero . During the three and nine months ended September 30, 2021, we recorded $ 0.1 million and $ 0.2 million of cost of hardware and other revenue in connection with this installation partner, respectively, as compared to $ 0.1 million and $ 0.3 million for the same periods in the prior year. As of September 30, 2021 and December 31, 2020, the accounts payable balance to our installation partner was less than $ 0.1 million. 31