10-Q 1 alrm-20220930.htm 10-Q ALARM.COM HOLDINGS, INC. SEPTEMBER 30, 2022 alrm-20220930
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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, 2022
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-20220930_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 November 1, 2022, there were 49,910,824 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, 2022

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,
 2022202120222021
Revenue:
SaaS and license revenue$133,126 $118,059 $385,826 $338,628 
Hardware and other revenue83,012 74,265 248,594 215,051 
Total revenue216,138 192,324 634,420 553,679 
Cost of revenue(1):
Cost of SaaS and license revenue18,437 17,425 54,019 49,782 
Cost of hardware and other revenue67,149 62,959 208,990 173,731 
Total cost of revenue85,586 80,384 263,009 223,513 
Operating expenses:
Sales and marketing23,057 22,557 69,182 62,085 
General and administrative28,011 18,689 81,314 64,839 
Research and development55,581 44,143 161,227 130,101 
Amortization and depreciation7,587 7,467 23,123 22,329 
Total operating expenses114,236 92,856 334,846 279,354 
Operating income16,316 19,084 36,565 50,812 
Interest expense(787)(4,196)(2,356)(11,718)
Interest income2,903 140 4,062 446 
Other (expense) / income, net(76)53 42 (70)
Income before income taxes18,356 15,081 38,313 39,470 
Provision for / (benefit from) income taxes246 1,787 472 (2,864)
Net income18,110 13,294 37,841 42,334 
Net loss attributable to redeemable noncontrolling interests222 244 412 779 
Net income attributable to common stockholders$18,332 $13,538 $38,253 $43,113 
Per share information attributable to common stockholders:
Net income per share:
Basic$0.37 $0.27 $0.77 $0.87 
Diluted$0.35 $0.26 $0.73 $0.83 
Weighted average common shares outstanding:
Basic49,791,465 49,954,565 49,974,925 49,776,578 
Diluted54,832,528 51,836,239 54,988,020 51,879,061 
_______________
(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,
2022
December 31,
2021
Assets
Current assets:
Cash and cash equivalents$621,347 $710,621 
Accounts receivable, net of allowance for credit losses of $3,536 and $2,168, and net of allowance for product returns of $1,535 and $1,181 as of September 30, 2022 and December 31, 2021, respectively
118,833 105,548 
Inventory112,319 75,276 
Other current assets, net of allowance for credit losses of zero and $2 as of September 30, 2022 and December 31, 2021, respectively
27,498 26,175 
Total current assets879,997 917,620 
Property and equipment, net59,483 41,713 
Intangible assets, net87,171 91,406 
Goodwill150,808 112,901 
Deferred tax assets69,117 13,547 
Operating lease right-of-use assets30,915 30,479 
Other assets, net of allowance for credit losses of $3 and $78 as of September 30, 2022 and December 31, 2021, respectively
32,282 24,349 
Total assets$1,309,773 $1,232,015 
Liabilities, redeemable noncontrolling interest and stockholders’ equity
Current liabilities:
Accounts payable, accrued expenses and other current liabilities$106,653 $89,816 
Accrued compensation24,585 23,495 
Deferred revenue7,879 5,697 
Operating lease liabilities12,024 10,331 
Total current liabilities151,141 129,339 
Deferred revenue10,556 9,140 
Convertible senior notes, net489,586 425,345 
Operating lease liabilities30,074 32,591 
Other liabilities11,611 9,545 
Total liabilities692,968 605,960 
Commitments and contingencies (Note 12)
Redeemable noncontrolling interests23,029 12,888 
Stockholders’ equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2022 and December 31, 2021
  
Common stock, $0.01 par value, 300,000,000 shares authorized; 50,846,671 and 50,406,606 shares issued; and 49,859,269 and 50,259,453 shares outstanding as of September 30, 2022 and December 31, 2021, respectively
508 504 
Additional paid-in capital483,225 498,979 
Treasury stock, at cost; 987,402 and 147,153 shares as of September 30, 2022 and December 31, 2021, respectively
(57,015)(5,149)
Retained earnings167,058 118,833 
Total stockholders’ equity593,776 613,167 
Total liabilities, redeemable noncontrolling interests and stockholders’ equity$1,309,773 $1,232,015 

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:20222021
Net income$37,841 $42,334 
Adjustments to reconcile net income to net cash flows from operating activities:
Provision for / (recovery of) credit losses on accounts receivable1,606 (238)
Reserve for product returns3,721 1,628 
Recovery of credit losses on notes receivable(77)(10)
Provision for excess and obsolete inventory 374 
Amortization on patents and tooling1,037 947 
Amortization and depreciation23,123 22,329 
Amortization of debt discount and debt issuance costs2,342 11,590 
Amortization of operating leases7,767 7,173 
Deferred income taxes(42,566)(5,918)
Stock-based compensation38,053 27,362 
Gain on investment(140) 
Loss on early extinguishment of debt 185 
Changes in operating assets and liabilities (net of business acquisitions):
Accounts receivable(18,321)(8,689)
Inventory(37,043)(12,619)
Other current and non-current assets(7,443)(8,368)
Accounts payable, accrued expenses and other current liabilities17,803 10,672 
Deferred revenue3,531 3,548 
Operating lease liabilities(9,390)(8,745)
Other liabilities611 (361)
Cash flows from operating activities22,455 83,194 
Cash flows used in investing activities:
Business acquisition, net of cash acquired(31,730) 
Additions to property and equipment(28,084)(8,939)
Issuances of notes receivable(3,000) 
Receipt of payments on notes receivable49 42 
Purchase of investment in unconsolidated entity (5,000)
Proceeds from sale of investment140  
Cash flows used in investing activities(62,625)(13,897)
Cash flows (used in) / from financing activities:
Repayments of credit facility (110,000)
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)
Purchases of treasury stock(51,866) 
Issuances of common stock from equity-based plans3,391 4,409 
Cash flows (used in) / from financing activities(48,475)377,551 
Net (decrease) / increase in cash, cash equivalents and restricted cash(88,645)446,848 
Cash, cash equivalents and restricted cash at beginning of the period710,621 253,459 
Cash, cash equivalents and restricted cash at end of the period$621,976 $700,307 
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$621,347 $700,307 
Restricted cash included in other current assets and other assets629  
Total cash, cash equivalents and restricted cash$621,976 $700,307 

See accompanying notes to the condensed consolidated financial statements.
4

ALARM.COM HOLDINGS, INC.
Condensed Consolidated Statements of Equity
(in thousands)
(unaudited)
Redeemable Noncontrolling InterestsAdditional Paid-In CapitalRetained EarningsTotal Stockholders’ Equity
Preferred StockCommon StockTreasury Stock
 SharesAmountSharesAmountSharesAmount
Balance as of December 31, 2021$12,888  $ 50,407 $504 $498,979 147 $(5,149)$118,833 $613,167 
Adoption of accounting standard on debt with conversion and other options— — — — — (56,515)— — 9,972 (46,543)
Common stock issued in connection with equity-based plans— — — 85 1 1,079 — — — 1,080 
Purchase of treasury stock— — — — — — 354 (23,331)— (23,331)
Stock-based compensation expense— — — — — 12,110 — — — 12,110 
Accretion adjustments of redeemable noncontrolling interest to redemption value2,569 — — — — (2,569)— — — (2,569)
Net income / (loss) attributable to common stockholders(176)— — — — — — — 9,079 9,079 
Balance as of March 31, 2022$15,281  $ 50,492 $505 $453,084 501 $(28,480)$137,884 $562,993 
Common stock issued in connection with equity-based plans— — — 205 2 581 — — — 583 
Purchase of treasury stock— — — — — — 481 (28,168)— (28,168)
Reclassification of subsidiary long-term incentive plan liability related to modification— — — — — 3,104 — — — 3,104 
Stock-based compensation expense— — — — — 12,789 — — — 12,789 
Accretion adjustments of redeemable noncontrolling interest to redemption value860 — — — — (860)— — — (860)
Net income / (loss) attributable to common stockholders(14)— — — — — — — 10,842 10,842 
Balance as of June 30, 2022$16,127  $ 50,697 $507 $468,698 982 $(56,648)$148,726 $561,283 
Common stock issued in connection with equity-based plans— — — 150 1 1,727 — — — 1,728 
Purchase of treasury stock — — — — — — 5 (367)— (367)
Stock-based compensation expense— — — — — 13,154 — — — 13,154 
Noncontrolling interest assumed through acquisition 6,770 — — — — — — — — — 
Accretion adjustments of redeemable noncontrolling interest to redemption value354 — — — — (354)— — — (354)
Net income / (loss) attributable to common stockholders(222)— — — — — — — 18,332 18,332 
Balance as of September 30, 2022$23,029  $ 50,847 $508 $483,225 987 $(57,015)$167,058 $593,776 

5

ALARM.COM HOLDINGS, INC.
Condensed Consolidated Statements of Equity — (Continued)
(in thousands)
(unaudited)
Redeemable Noncontrolling InterestsPreferred StockCommon StockAdditional Paid-In CapitalTreasury StockRetained EarningsTotal Stockholders’ Equity
 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, 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 value743 — — — — (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 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.
6

ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
September 30, 2022 and 2021

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 trusted service provider partners, who are experts at selling, installing and supporting our solutions. The number of our service provider partners exceeded 10,900 in 2021. 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, 2021 included in our Annual Report on Form 10-K filed with the SEC on February 24, 2022, or the Annual Report. The condensed consolidated balance sheet as of December 31, 2021 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 global economy, credit markets and financial markets have and may continue to experience significant volatility as a result of significant worldwide events, including public health crises, such as the COVID-19 pandemic, and geopolitical upheaval, such as Russia’s incursion into Ukraine (collectively, the Macroeconomic Conditions). These Macroeconomic Conditions have and may continue to create supply chain disruptions, inventory disruptions, and fluctuations in economic growth, including fluctuations in employment rates, inflation, energy prices and consumer sentiment. In particular, 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. It remains difficult to assess or predict the ultimate duration and economic impact of the Macroeconomic Conditions including, the path of the COVID-19 pandemic, the evolution of COVID-19 variants or the emergence of other public health crises. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2022, which is increasingly true in periods of extreme uncertainty, such as the uncertainty caused by the Macroeconomic Conditions. Prolonged uncertainties 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 Macroeconomic Conditions, 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 and goodwill and intangible assets.

Comprehensive Income

Our comprehensive income for the three and nine months ended September 30, 2022 and 2021 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)
September 30, 2022 and 2021
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, 2022 from those disclosed in our Annual Report.

Restricted Cash

We consider all cash reserved for a specific use and not available for immediate or general business use to be restricted cash. As of September 30, 2022, we had a total of $0.6 million of restricted cash, of which less than $0.1 million was included in other current assets and $0.6 million was included in other assets within our condensed consolidated balance sheets. We had no restricted cash as of December 31, 2021.

Redeemable Noncontrolling Interests

Noncontrolling interests with redemption features that are not solely within our control are considered redeemable noncontrolling interests. Our redeemable noncontrolling interests relate to our 85% equity ownership interest in PC Open Incorporated, a Washington corporation, doing business as OpenEye and our 85% equity ownership interest in Noonlight, Inc., or Noonlight, a Delaware corporation (see Note 6). The OpenEye and Noonlight stockholder agreements contain a put option that gives the minority stockholders the right to sell their shares to us based on the fair value of the shares and also contain a call option that gives us the right to purchase the remaining shares from the minority stockholders based on the fair value of the shares. The put and call options related to OpenEye can each be exercised beginning in the first quarter of 2023. The put and call options related to Noonlight can each be exercised beginning in the first quarter of 2026. These redeemable noncontrolling interests are considered temporary equity and we report them between liabilities and stockholders’ equity in the consolidated balance sheets. The amount of the net income or loss attributable to the redeemable noncontrolling interests are recorded in the consolidated statements of operations and the accretion of the redemption values are recorded as an adjustment to additional paid-in capital. The aggregate redemption value of the noncontrolling interests was $23.0 million and $12.9 million as of September 30, 2022 and December 31, 2021.

Stock-Based Compensation

We compensate our executive officers, board of directors, employees and consultants with stock-based compensation plans under our 2015 Equity Incentive Plan, or 2015 Plan. We record stock-based compensation expense related to time-based restricted stock units based upon the award’s grant date fair value and use an accelerated attribution method, net of actual forfeitures, in which compensation cost for each vesting tranche in an award is recognized ratably from the service inception date to the vesting date for that tranche. We record stock-based compensation expense related to performance-based restricted stock units based on management’s determination of the probable outcome of the performance conditions, which requires considerable judgment. We estimate the fair value of each option granted on the date of the grant using the Black-Scholes option-pricing model, which contains uncertainties and requires us to estimate the risk-free interest rate, expected term, expected stock price volatility and dividend yield. In prior years, we used the "simplified method" to calculate the expected term, which was presumed to be the mid-point between the vesting date and the end of the contractual term. Beginning upon the first grant of options in 2022, the expected term for options granted is estimated using our historical experience, including information related to options we have granted.

Recent Accounting Pronouncements

Adopted

On August 5, 2020, the Financial Accounting Standards Board, or 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," or ASU 2020-06, 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.

We adopted ASU 2020-06 effective January 1, 2022, using a modified retrospective adoption method, which required us to record the initial effect of this guidance as a cumulative-effect adjustment to retained earnings on January 1, 2022. Upon adoption of ASU 2020-06, we recombined the liability and equity components of the convertible senior notes assuming that the instrument was accounted for as only a liability from inception to the date of adoption. We also recombined the liability and equity components of the debt issuance costs. The issuance costs are presented as a deduction from the outstanding principal balance of the convertible senior notes and are amortized to interest expense using the effective interest method over the contractual term of the convertible senior notes. We also removed the temporary difference between the book and tax treatment of the debt
8


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2022 and 2021
discount and adjusted the temporary difference between the book and tax treatment of the debt issuance costs of the convertible senior notes. The adoption resulted in the recording of the following increases / (decreases) on our condensed consolidated balance sheets (in thousands):

Balance Sheet Caption As of January 1, 2022
Deferred tax assets $15,356 
Additional paid-in capital (56,515)
Convertible senior notes, net 61,899 
Retained earnings 9,972 

Our net income attributable to common stockholders increased $2.0 million and $6.0 million during the three and nine months ended September 30, 2022, respectively, as a result of adopting ASU 2020-06 due to no longer recording non-cash interest expense related to the amortization of the debt discount associated with the previous equity component of the convertible senior notes. Upon adoption of this guidance on January 1, 2022, we began using the if-converted method when calculating the dilutive impact of the convertible senior notes on net income per share, which required us to increase our diluted weighted average common shares outstanding by 3,396,950 shares for the three and nine months ended September 30, 2022. The impact of ASU 2020-06 on net income attributable to common stockholders and weighted average diluted shares resulted in an increase to basic net income attributable to common stockholders of $0.04 and $0.12 per share and an increase to diluted net income attributable to common stockholders of $0.03 and $0.10 per share, during the three and nine months ended September 30, 2022, respectively. See Note 15 for details on the components of basic and diluted earnings per share.

On March 31, 2022, the FASB issued ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures" which includes requirements to disclose current period gross write-offs by year of origination for financing receivables. The amendment in this update is effective for fiscal years beginning after December 15, 2022, including interim periods with those fiscal years. Early adoption is permitted, including adoption in an interim period. The guidance over disclosing current period gross write-offs by year of origination for financial receivables should be applied prospectively. We adopted this guidance during the three months ended March 31, 2022 and there was no impact to the disclosures within the "Allowance for Credit Losses - Notes Receivable" section of Note 8 as there were no write-offs of notes receivable during each of the three and nine months ended September 30, 2022.

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. We adopted this guidance during the three months ended September 30, 2022 and the adoption did not have a material impact on our condensed consolidated financial statements during the three and nine months ended September 30, 2022. Any future financial impact will be dependent on the magnitude and nature of future business combinations.

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 have indicated that they typically have three to five-year service contracts with residential and commercial property owners who use our solutions.

9


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2022 and 2021
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, 2022 and 2021, our reserve against revenue for hardware returns was approximately 1% of hardware and other revenue. 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 $5.5 million and $6.0 million as of September 30, 2022 and December 31, 2021, respectively, which combines current and long-term balances.

SaaS and license revenue associated with our contracts is invoiced and revenue is recognized at an amount that corresponds directly with the value of the performance completed to date. Additionally, the consideration received from hardware 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 assets related to costs incurred to obtain a contract 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,
10


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2022 and 2021
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 is 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 is 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, 2022 and 2021.

The changes in our contract assets are as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Beginning of period balance$7,415 $4,771 $4,520 $4,306 
Commission costs and upfront payments to a customer capitalized in period5,253 540 9,980 2,697 
Amortization of contract assets(1,369)(899)(3,201)(2,591)
End of period balance$11,299 $4,412 $11,299 $4,412 

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.

The changes in our contract liabilities are as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Beginning of period balance$17,241 $15,019 $14,837 $12,529 
Revenue deferred and acquired in period4,373 3,682 13,750 11,131 
Revenue recognized from amounts included in contract liabilities(3,179)(2,624)(10,152)(7,583)
End of period balance$18,435 $16,077 $18,435 $16,077 

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


11


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2022 and 2021

Note 4. Accounts Receivable, Net

The components of accounts receivable, net are as follows (in thousands):
September 30,
2022
December 31,
2021
Accounts receivable$123,904 $108,897 
Allowance for credit losses(3,536)(2,168)
Allowance for product returns(1,535)(1,181)
Accounts receivable, net$118,833 $105,548 

For the three and nine months ended September 30, 2022, we recorded a provision for credit losses of $1.1 million and $1.6 million on our accounts receivable, respectively. 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, 2022, we recorded a reserve for product returns of $2.0 million and $3.7 million, respectively, as compared to $0.5 million and $1.6 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, 2022, and no changes to our policies or practices that influenced our estimate of expected credit losses for accounts receivable. Additionally, there were no significant changes in the amount of accounts receivable write-offs during the three and nine months ended September 30, 2022, 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, 2022, we recorded credit loss expense for accounts receivable and notes receivable of $1.0 million and $1.3 million, respectively, in general and administrative expense in our condensed consolidated statements of operations. For the three and nine months ended September 30, 2021, we recorded a reduction of credit loss expense of $0.4 million, in general and administrative expense in our condensed consolidated statements of operations. The contractual term excludes expected extensions, renewals and modifications because extension and renewal options are unconditionally cancelable by us. Write-offs of the amortized cost basis are recorded to the allowance for credit losses. Any subsequent recoveries of previously written off balances are recorded as a reduction to credit loss expense.
12


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2022 and 2021

The changes in our allowance for credit losses for accounts receivable are as follows (in thousands):
Three Months Ended
September 30, 2022
Three Months Ended
September 30, 2021
Nine Months Ended
September 30, 2022
Nine Months Ended
September 30, 2021
 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$(2,450)$(58)