10-Q 1 alrm-20210930.htm 10-Q ALARM.COM HOLDINGS, INC. SEPTEMBER 30, 2021 alrm-20210930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-37461
alrm-20210930_g1.jpg
ALARM.COM HOLDINGS, INC.

(Exact name of registrant as specified in its charter)
 
Delaware26-4247032
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
8281 Greensboro DriveSuite 100TysonsVirginia
22102
(Address of principal executive offices)
(Zip Code)
Tel: (877) 389-4033
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.01 par value per shareALRMThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerþAccelerated Filer¨
Non-Accelerated Filer¨
Smaller Reporting Company
¨
Emerging Growth Company
¨




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes þ No

As of October 28, 2021, there were 50,060,440 outstanding shares of the registrant's common stock, par value $0.01 per share.



ALARM.COM HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2021

TABLE OF CONTENTS
1


PART I. FINANCIAL INFORMATION

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,
 2021202020212020
Revenue:
SaaS and license revenue$118,059 $100,126 $338,628 $287,780 
Hardware and other revenue74,265 58,725 215,051 164,647 
Total revenue192,324 158,851 553,679 452,427 
Cost of revenue(1):
Cost of SaaS and license revenue17,425 14,344 49,782 39,673 
Cost of hardware and other revenue62,959 46,839 173,731 128,495 
Total cost of revenue80,384 61,183 223,513 168,168 
Operating expenses:
Sales and marketing22,557 18,410 62,085 52,405 
General and administrative18,689 17,410 64,839 55,634 
Research and development44,143 36,914 130,101 113,280 
Amortization and depreciation7,467 6,878 22,329 20,023 
Total operating expenses92,856 79,612 279,354 241,342 
Operating income19,084 18,056 50,812 42,917 
Interest expense(4,196)(556)(11,718)(2,069)
Interest income140 118 446 734 
Other income / (expense), net53 24,753 (70)24,910 
Income before income taxes15,081 42,371 39,470 66,492 
Provision for / (benefit from) income taxes1,787 6,546 (2,864)5,471 
Net income13,294 35,825 42,334 61,021 
Net loss attributable to redeemable noncontrolling interest244 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:
Basic49,954,565 49,007,343 49,776,578 48,842,333 
Diluted51,836,239 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 
Inventory56,526 44,281 
Other current assets, net of allowance for credit losses of $3 and $17, respectively
23,310 16,348 
Total current assets870,767 397,414 
Property and equipment, net42,412 44,796 
Intangible assets, net90,476 103,259 
Goodwill112,901 112,838 
Deferred tax assets11,430 21,692 
Operating lease right-of-use assets29,911 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 compensation21,442 22,307 
Deferred revenue7,037 4,037 
Operating lease liabilities10,242 9,973 
Total current liabilities101,687 90,244 
Deferred revenue9,040 8,492 
Convertible senior notes, net421,112  
Long-term debt 110,000 
Operating lease liabilities32,322 37,697 
Other liabilities8,530 6,811 
Total liabilities572,691 253,244 
Commitments and contingencies (Note 12)
Redeemable noncontrolling interest11,889 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 capital492,135 405,831 
Treasury stock, at cost; 147,153 shares as of September 30, 2021 and December 31, 2020
(5,149)(5,149)
Retained earnings109,687 66,574 
Total stockholders’ equity597,174 467,752 
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:20212020
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 returns1,628 1,491 
Recovery of credit losses on notes receivable(10)(368)
Provision for excess and obsolete inventory374 1,178 
Amortization on patents and tooling947 604 
Amortization and depreciation22,329 20,023 
Amortization of debt discount and debt issuance costs11,590 81 
Amortization of operating leases7,173 6,562 
Deferred income taxes(5,918)(1,480)
Change in fair value of contingent liability (2,593)
Stock-based compensation27,362 20,901 
Acquired in-process research and development 3,297 
Gain on sale of investment (24,737)
Loss on early extinguishment of debt185  
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 liabilities10,672 5,897 
Deferred revenue3,548 2,374 
Operating lease liabilities(8,745)(7,427)
Other liabilities(361)(28)
Cash flows from operating activities83,194 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 receivable42 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 notes500,000  
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 plans4,409 6,609 
Cash flows from financing activities377,551 48,641 
Net increase in cash and cash equivalents446,848 127,547 
Cash and cash equivalents at beginning of the period253,459 119,629 
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 InterestAdditional Paid-In CapitalRetained EarningsTotal Stockholders’ Equity
Preferred StockCommon StockTreasury Stock
 SharesAmountSharesAmountSharesAmount
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 value473 — — — — (473)— — — (473)
Net income / (loss) attributable to common stockholders(280)— — — — — — — 14,830 14,830 
Balance as of March 31, 202110,884   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 value743 — — — — (743)— — — (743)
Net income / (loss) attributable to common stockholders(255)— — — — — — — 14,745 14,745 
Balance as of June 30, 202111,372   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 value761 — — — — (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 InterestPreferred StockCommon StockAdditional Paid-In CapitalTreasury Stock(Accumulated Deficit) / Retained EarningsTotal Stockholders’ Equity
 SharesAmountSharesAmountSharesAmount
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, 202010,974   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 value112 — — — — (112)— — — (112)
Net income / (loss) attributable to common stockholders(370)— — — — — — — 16,995 16,995 
Balance as of June 30, 202010,716   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 value254 — — — — (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 contracts typically have an initial term of one year, with subsequent renewal terms of one year. Our service provider partners typically enter into contracts with our subscribers, which our service provider partners have indicated range from three to five years in length.

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. Historically, our returns of hardware have not significantly differed from our estimated reserve. Additionally, we provide warranties related to the intended functionality of the products and services provided and those warranties typically allow for the return of hardware up to one year past the date of sale. We determined that these warranties are not separate performance obligations as they cannot be purchased separately and do not provide a service in addition to an assurance the hardware will function as expected.

Our hardware and other revenue also includes our revenue from the sale of perpetual licenses that provide our customers in the commercial market the right to use our OpenEye video surveillance software for an indefinite period of time in exchange for a one-time license fee, which is generally paid at contract inception. Our hardware and other revenue also includes our revenue from Shooter Detection Systems 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 relates, less the costs that relate directly to providing those good and services and that have not been recognized as an expense. We did not 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,
2021202020212020
Beginning of period balance$4,771 $4,718 $4,306 $4,578 
Commission costs and upfront payments to a customer capitalized in period540 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,
2021202020212020
Beginning of period balance$15,019 $11,537 $12,529 $10,498 
Revenue deferred in period3,682 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 losses415 (27)1,146 56 268 (30)195 42 
Write-offs25 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 $