Company Quick10K Filing
Alarm.com
Price46.49 EPS1
Shares50 P/E48
MCap2,336 P/FCF98
Net Debt-100 EBIT52
TEV2,235 TEV/EBIT43
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-07
10-K 2019-12-31 Filed 2020-02-26
10-Q 2019-09-30 Filed 2019-11-05
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-09
10-K 2018-12-31 Filed 2019-03-01
10-Q 2018-09-30 Filed 2018-11-07
10-Q 2018-06-30 Filed 2018-08-07
10-Q 2018-03-31 Filed 2018-05-04
10-K 2017-12-31 Filed 2018-02-28
10-Q 2017-09-30 Filed 2017-11-09
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-10
10-K 2016-12-31 Filed 2017-03-16
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-15
10-Q 2016-03-31 Filed 2016-05-10
10-K 2015-12-31 Filed 2016-02-29
10-Q 2015-09-30 Filed 2015-11-12
10-Q 2015-06-30 Filed 2015-08-14
8-K 2020-06-03
8-K 2020-05-19
8-K 2020-05-19
8-K 2020-05-07
8-K 2020-02-25
8-K 2019-11-05
8-K 2019-08-08
8-K 2019-06-05
8-K 2019-05-09
8-K 2019-02-28
8-K 2018-11-29
8-K 2018-11-07
8-K 2018-10-25
8-K 2018-08-30
8-K 2018-08-07
8-K 2018-06-07
8-K 2018-05-03
8-K 2018-02-27
8-K 2018-02-20
8-K 2018-01-17

ALRM 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Note 1. Organization
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Note 3. Revenue From Contracts with Customers
Note 4. Accounts Receivable, Net
Note 5. Inventory, Net
Note 6. Acquisitions
Note 7. Goodwill and Intangible Assets, Net
Note 8. Other Assets
Note 9. Fair Value Measurements
Note 10. Leases
Note 11. Liabilities
Note 12. Debt, Commitments and Contingencies
Note 13. Stockholders' Equity
Note 14. Stock - Based Compensation
Note 15. Earnings per Share
Note 16. Significant Service Providers
Note 17. Income Taxes
Note 18. Segment Information
Note 19. Related Party Transactions
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 ex101ninthamendmenttolease.htm
EX-31.1 ex311certification33120.htm
EX-31.2 ex312certification33120.htm
EX-32.1 ex321certification33120.htm

Alarm.com Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
0.60.40.30.1-0.0-0.22013201520172020
Assets, Equity
0.20.10.10.0-0.0-0.12013201520172020
Rev, G Profit, Net Income
0.10.0-0.0-0.1-0.1-0.22013201520172020
Ops, Inv, Fin

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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 March 31, 2020
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
 
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ALARM.COM HOLDINGS, INC.

(Exact name of registrant as specified in its charter)
 
 
Delaware
 
26-4247032
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
8281 Greensboro Drive
Suite 100
Tysons
Virginia
 
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 class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, $0.01 par value per share
 
ALRM
 
The 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 Filer
þ
 
Accelerated 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 April 28, 2020, there were 48,740,865 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 MARCH 31, 2020

TABLE OF CONTENTS
 
Page

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 
 March 31,
 
2020
 
2019
Revenue:
 
 
 
SaaS and license revenue
$
91,950

 
$
80,055

Hardware and other revenue
59,989

 
32,280

Total revenue
151,939

 
112,335

Cost of revenue(1):
 
 
 
Cost of SaaS and license revenue
12,328

 
12,325

Cost of hardware and other revenue
45,652

 
26,625

Total cost of revenue
57,980

 
38,950

Operating expenses:
 
 
 
Sales and marketing
17,075

 
13,228

General and administrative
20,865

 
19,212

Research and development
39,730

 
26,496

Amortization and depreciation
6,422

 
5,228

Total operating expenses
84,092

 
64,164

Operating income
9,867

 
9,221

Interest expense
(645
)
 
(821
)
Interest income
459

 
808

Other income, net
92

 
44

Income before income taxes
9,773

 
9,252

Provision for income taxes
1,202

 
242

Net income
8,571

 
9,010

Net loss attributable to redeemable noncontrolling interest
236

 

Net income attributable to common stockholders
$
8,807

 
$
9,010

 
 
 
 
Per share information attributable to common stockholders:
 
 
 
Net income per share:
 
 
 
Basic
$
0.18

 
$
0.19

Diluted
$
0.18

 
$
0.18

Weighted average common shares outstanding:
 
 
 
Basic
48,725,565

 
48,172,243

Diluted
50,246,987

 
50,172,818

_______________
(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)


 
March 31,
2020
 
December 31,
2019
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
171,732

 
$
119,629

Accounts receivable, net of allowance for credit losses of $4,789 and $2,584, respectively, and net of allowance for product returns of $1,224 and $1,075, respectively
81,894

 
76,373

Inventory, net
36,841

 
34,168

Other current assets, net of allowance for credit losses of $39 and $16, respectively
18,834

 
13,504

Total current assets
309,301

 
243,674

Property and equipment, net
39,467

 
38,548

Intangible assets, net
99,420

 
103,438

Goodwill
104,963

 
104,963

Deferred tax assets
17,964

 
19,137

Operating lease right-of-use assets
34,939

 
30,523

Other assets, net of allowance for credit losses of $77 and $0, respectively
18,021

 
17,516

Total assets
$
624,075

 
$
557,799

Liabilities, redeemable noncontrolling interest and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable, accrued expenses and other current liabilities
$
53,089

 
$
48,727

Accrued compensation
11,739

 
16,342

Deferred revenue
4,028

 
3,043

Operating lease liabilities
8,803

 
7,683

Total current liabilities
77,659

 
75,795

Deferred revenue
8,074

 
7,455

Long-term debt
113,000

 
63,000

Operating lease liabilities
40,264

 
37,199

Other liabilities
7,888

 
7,489

Total liabilities
246,885

 
190,938

Commitments and contingencies (Note 12)

 

Redeemable noncontrolling interest
10,974

 
11,210

Stockholders’ equity
 
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2020 and December 31, 2019.

 

Common stock, $0.01 par value, 300,000,000 shares authorized; 48,807,707 and 48,700,963 shares issued; and 48,660,454 and 48,700,713 shares outstanding as of March 31, 2020 and December 31, 2019, respectively.
488

 
487

Additional paid-in capital
373,349

 
365,627

Treasury stock, at cost; 147,153 and 0 shares as of March 31, 2020 and December 31, 2019, respectively.
(5,149
)
 

Accumulated deficit
(2,472
)
 
(10,463
)
Total stockholders’ equity
366,216


355,651

Total liabilities, redeemable noncontrolling interest and stockholders’ equity
$
624,075

 
$
557,799




See accompanying notes to the condensed consolidated financial statements.

3

ALARM.COM HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)


 
Three Months Ended March 31,
Cash flows from / (used in) operating activities:
2020
 
2019
Net income
$
8,571

 
$
9,010

Adjustments to reconcile net income to net cash from / (used in) operating activities:
 
 
 
Provision for credit losses on accounts receivable
1,885

 
260

Reserve for product returns
291

 
(120
)
Provision for credit losses on notes receivable
(349
)
 

Amortization on patents and tooling
199

 
167

Amortization and depreciation
6,422

 
5,228

Amortization of debt issuance costs
27

 
27

Amortization of operating leases
2,045

 
1,803

Deferred income taxes
1,327

 
135

Change in fair value of contingent liability
(568
)
 

Stock-based compensation
6,358

 
4,266

Acquired in-process research and development
3,297

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(8,064
)
 
(6,753
)
Inventory
(2,673
)
 
(2,724
)
Other current and non-current assets
(6,108
)
 
(909
)
Accounts payable, accrued expenses and other current liabilities
83

 
(9,987
)
Deferred revenue
1,604

 
360

Operating lease liabilities
(2,259
)
 
(1,908
)
Other liabilities
812

 
(42
)
Cash flows from / (used in) operating activities
12,900

 
(1,187
)
Cash flows used in investing activities:
 
 
 
Additions to property and equipment
(3,719
)
 
(2,962
)
Purchases of in-process research and development
(3,297
)
 

Issuances or purchases of notes receivable

 
(20,061
)
Receipt of payment on notes receivable
3

 

Cash flows used in investing activities
(7,013
)
 
(23,023
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facility
50,000

 

Repayments of credit facility

 
(1,000
)
Purchases of treasury stock
(5,149
)
 

Issuances of common stock from equity-based plans
1,365

 
1,591

Cash flows from financing activities
46,216

 
591

Net increase / (decrease) in cash and cash equivalents
52,103

 
(23,619
)
Cash and cash equivalents at beginning of the period
119,629

 
146,061

Cash and cash equivalents at end of the period
$
171,732

 
$
122,442



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
 
 
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
 
 
Preferred Stock
 
Common Stock
 
 
Treasury Stock
 
 
 
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


 
Redeemable Noncontrolling Interest
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Total Stockholders’ Equity
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of December 31, 2018
$

 
 

 
$

 
48,103

 
$
481

 
$
341,139

 
$
(64,031
)
 
$
277,589

Adoption of accounting standard on leases

 
 

 

 

 

 

 
37

 
37

Common stock issued in connection with equity-based plans

 
 

 

 
147

 
1

 
1,590

 

 
1,591

Vesting of common stock subject to repurchase

 
 

 

 

 

 
2

 

 
2

Stock-based compensation expense

 
 

 

 

 

 
4,267

 

 
4,267

Net income / (loss) attributable to common stockholders

 
 

 

 

 

 

 
9,010

 
9,010

Balance as of March 31, 2019
$

 
 

 
$

 
48,250

 
$
482

 
$
346,998

 
$
(54,984
)
 
$
292,496



See accompanying notes to the condensed consolidated financial statements.

5

ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2020 and 2019
(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 9,000 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, 2019 included in our Annual Report on Form 10-K filed with the SEC on February 26, 2020, or the Annual Report. The condensed consolidated balance sheet as of December 31, 2019 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. Since December 2019, a novel strain of coronavirus, SARS-CoV-2, causing a disease referred to as COVID-19, has spread globally, including to the United States. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic has been disrupting and will continue to disrupt our supply chain and sales channels for an unknown period of time due to the impact of COVID-19 on manufacturing, production and global transportation, as well as to our sales channels due to restrictions on our service providers’ ability to meet with residential and commercial property owners who use our solutions. In addition, the COVID-19 pandemic has resulted in a global slowdown of economic activity that has and for an unknown period of time will likely continue to decrease demand for a broad variety of goods and services. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2020, which is increasingly true in periods of extreme uncertainty, such as the uncertainty caused by the COVID-19 pandemic.

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

Reclassifications

Certain previously reported amounts in the condensed consolidated statements of operations for the three months ended March 31, 2019 have been reclassified to conform to our current presentation to reflect interest income as a separate line item, which was previously included in other income, net. Certain previously reported amounts in the condensed consolidated statements of cash flows for the three months ended March 31, 2019 have been reclassified to conform to our current presentation, including the addition of an operating lease liabilities separate line item, which was previously included in other liabilities and accounts payable, accrued expenses and other current liabilities.


6


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2020 and 2019

Comprehensive Income

Our comprehensive income for the three months ended March 31, 2020 and 2019 was equal to our net income disclosed in the condensed consolidated statements of operations.

Significant Accounting Policies

Other than those disclosed herein, there have been no other material changes to our significant accounting policies during the three months ended March 31, 2020 from those disclosed in our Annual Report.

Treasury Stock

We account for treasury stock under the cost method and present treasury stock, including any applicable commissions and fees, as a component of stockholders’ equity in the condensed consolidated balance sheets and statements of equity. Treasury stock held by us may be retired or reissued in the future.

Credit Losses

The allowance for credit losses is a valuation account that is deducted from the accounts receivable and notes receivable amortized cost basis to present the net amount expected to be collected. We estimate the allowance balance by applying the loss-rate method using relevant available information from internal and external sources, including historical write-off activity, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in economic conditions, such as changes in unemployment rates. We use projected economic conditions over a period no more than twelve months based on data from external sources. For periods beyond the twelve-month reasonable and supportable forecast period, we revert to historical loss information immediately.

The allowance for credit losses is measured on a pooled basis when similar risk characteristics exist. When assessing whether to measure certain financial assets on a pooled basis, we considered various risk characteristics, including the financial asset type, size and the historical or expected credit loss pattern. These risk characteristics are relevant to accounts receivable and notes receivable. We identified the following two portfolio segments for our accounts receivable: (i) outstanding accounts receivable balances within Alarm.com and certain subsidiaries and (ii) outstanding accounts receivable balances within all other subsidiaries. We identified the following two portfolio segments for our notes receivable: (i) loan receivables and (ii) hardware financing receivables. There were no changes to our portfolio segments since the adoption of Accounting Standards Update, or ASU, 2016-13, "Financial Instruments - Credit Losses (Topic 326)," or Topic 326, and no changes to our policies or practices involving the issuance of notes receivable, customer acquisitions or any other factors that influenced our estimate of expected credit losses. Additionally, there were no significant changes in the amount of write-offs during the three months ended March 31, 2020 as compared to historical periods. There were no purchases or sales of financial assets during the three months ended March 31, 2020 and 2019.

Expected credit losses are estimated over the contractual term of the financial assets and we adjust the term for expected prepayments when appropriate. For the three months ended March 31, 2020, credit loss expense of $1.4 million was recorded in general and administrative expense in our condensed consolidated statements of operations. The contractual term excludes expected extensions, renewals and modifications because extension and renewal options are unconditionally cancelable by us. Write-offs of the amortized cost basis are recorded to the allowance for credit losses. Any subsequent recoveries of previously written off balances are recorded as a reduction to credit loss expense.

We do not accrue interest on notes receivable that are considered impaired or are 90 days or greater past due based on their contractual payment terms. Notes receivable that are 90 days or greater past due are placed on nonaccrual status. Notes receivable may be placed on nonaccrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain. After a note receivable has been placed on nonaccrual status, interest will be recognized when cash is received. A note receivable may be returned to accrual status after all of the customer’s delinquent balances of principal and interest have been settled, and collection of all remaining contractual amounts due is reasonably assured. We have elected not to measure an allowance for credit losses for accrued interest receivables. We write-off any accrued interest on notes receivable that are considered impaired or are 90 days or greater past due based on their contractual payment terms by reversing interest income. The accrued interest receivable as of March 31, 2020 and December 31, 2019 was less than $0.1 million and is reflected in other current assets within our condensed consolidated balance sheets and excluded from the amortized cost basis of the notes receivable. We did not write-off any accrued interest receivable during the three months ended March 31, 2020 and 2019.

7


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2020 and 2019


Recent Accounting Pronouncements

Adopted

On June 16, 2016, the Financial Accounting Standards Board, or FASB, issued Topic 326 which provides guidance designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. From November 2018 to February 2020, amendments to Topic 326 were issued to clarify numerous accounting topics. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment was effective for us beginning on January 1, 2020.

On January 1, 2020, we adopted Topic 326 by applying the modified retrospective approach to our trade receivables and our notes receivable that were outstanding as of that date, which required us to record the initial effect of Topic 326 as a cumulative-effect adjustment to retained earnings on January 1, 2020.

The adoption of Topic 326 resulted in the recording of the following amounts on our condensed consolidated balance sheets (in thousands):
Balance Sheet Caption
 
 As of January 1, 2020
Accumulated deficit
 
$
816

Accounts receivable, net
 
(367
)
Other current assets
 
(83
)
Other assets
 
(366
)


The adoption of Topic 326 did not materially impact our condensed consolidated statements of operations, condensed consolidated statement of equity or our condensed consolidated statements of cash flows.

On August 28, 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which provides guidance designed to improve the effectiveness of fair value measurement disclosures in notes to the financial statements. The update removes several existing disclosure requirements, including, but not limited to: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) the policy for timing of transfers between levels and (iii) the valuation processes for Level 3 fair value measurements. The update also adds additional disclosure requirements for public companies, including but not limited to: (i) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The update also modifies and clarifies several existing disclosure requirements. The amendment in this update was effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. On January 1, 2020, we adopted Topic 820 and updated our fair value measurement disclosures (see Note 9). This pronouncement did not have a material impact on our condensed consolidated financial statements or disclosures.

On January 16, 2020, the FASB issued ASU 2020-1, "Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815," which provides guidance on the interaction between accounting standards related to equity securities, equity method investments and certain derivatives. This amendment clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative immediately before applying, or upon discontinuing, the equity method. The amendment also clarifies that an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method or the fair value option in accordance with the financial instruments guidance. The amendment in this update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. On January 1, 2020, we adopted this amendment on a prospective basis and the adoption did not have a material impact on our consolidated financial statements.

Not Yet Adopted

On December 18, 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes," which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The update also simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance to improve consistent

8


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2020 and 2019

application. The amendment in this update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the impact this pronouncement may have on our consolidated financial statements.

On March 12, 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued such as the Eurodollar Base Rate, or LIBOR. The update allows entities to elect not to apply certain modification accounting requirements to contracts affected by the discontinuation of a reference rate if certain criteria are met. The amendment was effective beginning March 12, 2020 and will continue to be effective through December 31, 2022. We are currently assessing the 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 March 31, 2020 and 2019, our reserve against revenue for hardware returns was 1%. We evaluate our hardware reserve on a quarterly basis or if there is an indication of significant changes in return experience. 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 these warranties are not separate performance obligations as they cannot be purchased separately and do not provide a service in addition to an assurance the hardware will function as expected.

Our hardware and other revenue also includes our revenue from the sale of perpetual licenses that provide our customers in the commercial market the right to use our OpenEye video surveillance software for an indefinite period of time in exchange for a one-time license fee, which is generally paid at contract inception. Our perpetual licenses provide a right to use intellectual property that is functional in nature and has significant stand-alone functionality. Accordingly, for perpetual licenses of functional intellectual property, revenue is recognized at the point-in-time when control has been transferred to the customer, which occurs once the software has been made available to the customer.

Hardware and other revenue may also include activation fees charged to some of our service provider partners for activation of a new subscriber account on our platforms, as well as fees paid by service provider partners for our marketing services. Our service provider partners use services on our platforms, such as support tools and applications, to assist in the installation of our solutions in subscriber properties. This installation marks the beginning of the service period on our platforms and, on occasion, we earn activation revenue for fees charged for this service. The activation fee is non-refundable, separately negotiated and specified in our contractual arrangements with our service provider partners and is charged to the service provider partner for each subscriber activated on our platforms. The decision whether to charge an activation fee is based in part on the expected number of subscribers to be added by our service provider partners and as a result, many of our largest service provider partners do not pay an activation fee. Activation fees are not offered on a stand-alone basis separate from our SaaS offering and are billed and received at the beginning of the arrangement. We record activation fees initially as deferred revenue and we recognize these fees ratably over the expected term of the subscribers’ account which we estimate is ten years based on our annual attrition rate. The portion of these activation fees included in current and long-term deferred revenue as of our balance sheet date represents the amounts that will be recognized ratably as revenue over the following twelve months, or longer as appropriate, until the ten-year expected term is complete. The balance of deferred revenue for activation fees was $7.8 million and $8.1 million as of March 31, 2020 and December 31, 2019, 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

9


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2020 and 2019

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 balance sheet represent unconditional rights to consideration. We do not have any assets from contracts containing conditional rights and we do not have any assets from satisfied performance obligations that have not been invoiced.

We recognize an asset related to the costs incurred to obtain a contract only if we expect to recover those costs and we would not have incurred those costs if the contract had not been obtained. We recognize an asset from the costs incurred to fulfill a contract if the costs (i) are specifically identifiable to a contract, (ii) enhance resources that will be used in satisfying performance obligations in future and (iii) are expected to be recovered. Our contract assets consist of capitalized commission costs and upfront payments made to a customer. Based on the policy above, we capitalize a portion of our commission costs as an incremental cost of obtaining a contract. When calculating the incremental cost of obtaining a contract, we exclude any commission costs related to metrics that could be satisfied without obtaining a contract, including training-related metrics. We amortize our commission costs over a period of three years, which is consistent with the period over which the products and services related to the commission are transferred to the customer. The three-year period was determined based on our review of historical enhancements and upgrades to our products and services. We applied the portfolio approach to account for the amortization of contract costs as each contract has similar characteristics. Upfront payments made to a customer are capitalized and amortized over the expected period of benefit and are recorded as a reduction to revenue.

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. Our amortization of contract assets during the three months ended March 31, 2020 was $0.8 million, as compared to $0.5 million during the same period in the prior year.

We review the capitalized costs for impairment at least annually. Impairment exists if the carrying amount of the asset recognized from contract costs exceeds the remaining amount of consideration we expect to receive in exchange for providing the goods and services to which such asset 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 months ended March 31, 2020 and 2019.

The changes in our contract assets are as follows (in thousands):    
 
Three Months Ended 
 March 31,
 
2020
 
2019
Beginning of period balance
$
4,578

 
$
2,881

Commission costs and upfront payments to a customer capitalized in period
1,165

 
716

Amortization of contract assets
(811
)
 
(514
)
End of period balance
$
4,932

 
$
3,083



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)
March 31, 2020 and 2019

The changes in our contract liabilities are as follows (in thousands):
 
Three Months Ended 
 March 31,
 
2020
 
2019
Beginning of period balance
$
10,498

 
$
11,176

Revenue deferred in period
3,520

 
1,555

Revenue recognized from amounts included in contract liabilities
(1,916
)
 
(1,195
)
End of period balance
$
12,102

 
$
11,536



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):
 
March 31,
2020
 
December 31,
2019
Accounts receivable
$
87,907

 
$
80,032

Allowance for credit losses
(4,789
)
 
(2,584
)
Allowance for product returns
(1,224
)
 
(1,075
)
Accounts receivable, net
$
81,894

 
$
76,373



For the three months ended March 31, 2020, we recorded a provision for credit losses of $1.9 million on our accounts receivable, as compared to $0.3 million for the same period in the prior year.

For the three months ended March 31, 2020, we recorded a reserve for product returns of $0.3 million, as compared to a reduction to the reserve for product returns of $0.1 million recorded for the same period in the prior year. Historically, we have not experienced write-offs for uncollectible accounts or sales returns that have differed significantly from our estimates.

Allowance for Credit Losses - Accounts Receivable

The changes in our allowance for credit losses for accounts receivable are as follows (in thousands):
 
Three Months Ended 
 March 31, 2020
 
 Alarm.com
and Certain
Subsidiaries
 
All Other
Subsidiaries
Beginning of period balance, prior to adoption of Topic 326
$
(2,500
)
 
$
(84
)
Impact of adopting Topic 326
(212
)
 
(155
)
Provision for expected credit losses
(1,886
)
 
1

Write-offs
43

 
4

End of period balance, subsequent to adoption of Topic 326
$
(4,555
)

$
(234
)


Note 5. Inventory, Net

The components of inventory, net are as follows (in thousands):
 
March 31,
2020
 
December 31,
2019
Raw materials
$
9,101

 
$
8,921

Finished goods
27,740

 
25,247

Total inventory, net
$
36,841

 
$
34,168



11


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2020 and 2019


Note 6. Acquisitions

Acquisition of a Business - OpenEye

On October 21, 2019, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired 85% of the issued and outstanding capital stock of PC Open Incorporated, a Washington corporation, doing business as OpenEye. OpenEye provides cloud-managed video surveillance solutions for the enterprise commercial market. We believe the acquisition of OpenEye will provide a key element to our comprehensive suite of interactive cloud-based services spanning video, access control, intrusion and automation for domestic and international commercial enterprises.

In consideration for the purchase of 85% of the issued and outstanding capital stock of OpenEye, we paid $61.2 million in cash on October 21, 2019, after deducting $2.8 million related to an agreed holdback. Pursuant to the terms of the stock purchase agreement, following the preliminary determination of the working capital of OpenEye as of the closing date, the purchase price increased by $0.2 million. The working capital adjustment is expected to be finalized and paid to the stockholders of OpenEye in the second quarter of 2020 along with a portion of the holdback. The remaining amount of the holdback is expected to be paid to the stockholders of OpenEye by the fourth quarter of 2022, subject to offset for any indemnification obligations. An earn-out of up to an additional $11.0 million is payable if certain calendar 2020 revenue targets are met, of which contingent consideration of $2.8 million was recorded at October 21, 2019. The purchase price allocation, which is pending the final determination of the working capital and tax adjustments, was not finalized as of the filing date of this Quarterly Report on Form 10-Q.

The table below sets forth the purchase consideration and the preliminary allocation to estimate the fair value of the tangible and intangible net assets acquired (in thousands):
 
October 21, 2019
Calculation of Purchase Consideration:
 
Cash paid, net of working capital adjustment
$
61,403

Holdback consideration
2,820

Contingent consideration
2,793

Total consideration
$
67,016

Estimated Tangible and Intangible Net Assets:
 
Cash
$
2,352

Accounts receivable
5,742

Inventory
4,687

Other current assets
216

Property and equipment
296

Customer relationships
19,805

Developed technology
16,583

Trade name
2,219

Accounts payable
(2,746
)
Accrued expenses
(1,017
)
Other current liabilities
(1,683
)
Deferred tax liability
(8,510
)
Deferred revenue
(889
)
Redeemable noncontrolling interest
(11,411
)
Goodwill
41,372

Total estimated tangible and intangible net assets
$
67,016



Goodwill of $41.4 million reflects the value of acquired workforce and synergies we expect to achieve from integrating OpenEye's cloud-managed video surveillance solutions into our existing comprehensive suite of interactive cloud-based services for domestic and international commercial enterprises. None of the goodwill recognized is expected to be deductible for income tax purposes in future periods. We allocate goodwill to reporting units based on expected benefit from synergies and have preliminarily allocated the goodwill to the Alarm.com segment.

12


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2020 and 2019


Fair Value of Net Assets Acquired and Intangibles

In accordance with ASC 805, OpenEye constituted a business and the assets and liabilities were recorded at their respective fair values as of October 21, 2019. We developed our estimate of the fair value of intangible net assets using a multi-period excess earnings method for customer relationships, the relief from royalty method for the developed technology and the relief-from-royalty method for the trade name.

Customer Relationships

We recorded the customer relationships intangible separately from goodwill based on determination of the length, strength and contractual nature of the relationship that OpenEye shared with its customers. We valued the single group of customer relationships using the multi-period excess earnings method, an income approach. The significant assumptions used in the income approach include estimates about future expected cash flows from customer contracts, the attrition rate and the discount rate. We are amortizing the customer relationships, valued at $19.8 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of 13 years.

Developed Technology

Developed technology primarily consists of intellectual property of proprietary software that is marketed for sale. We valued the developed technology by applying the relief from royalty method, an income approach. The significant assumptions used in the relief from royalty method include estimates about future expected cash flows from the developed technology, the royalty rate, the obsolescence factor and the discount rate. We are amortizing the OpenEye developed technology, valued at $16.6 million, on an attribution method based on the discounted cash flows of the model over an estimated useful life of nine years.

Trade Name

We valued the trade names acquired using a relief from royalty method. The significant assumptions used in the income approach include future expected cash flows from the trade name, the royalty rate and the discount rate. We are amortizing the trade names, valued at $2.2 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of five years.

Redeemable Noncontrolling Interests

Our redeemable noncontrolling interest relates to our 85% equity ownership interest in OpenEye. The OpenEye stockholder agreement contains a put option that gives the minority OpenEye stockholders the right to sell their remaining 15% equity ownership interest to us based on the fair value of the shares. The OpenEye stockholder agreement also contains a call option that gives us the right to purchase the remaining OpenEye shares from the minority OpenEye stockholders based on the fair value of the shares. The put and call options can each be exercised beginning in the first quarter of 2023. The redeemable noncontrolling interest was recorded at fair value on October 21, 2019, by applying the income approach using unobservable inputs for projected cash flows, including projected financial results and a discount rate, which are considered Level 3 inputs. This redeemable noncontrolling interest is considered temporary equity and we report it between liabilities and stockholders’ equity in the condensed consolidated balance sheets. The redemption value of the noncontrolling interest was $11.4 million as of October 21, 2019, and decreased to $11.0 million as of March 31, 2020.

Contingent Consideration

We account for the contingent consideration related to the potential earn-out payment using fair value and establish a liability for the future earn-out payment based on an estimation of revenue attributable to perpetual licenses and subscription licenses over the 2020 calendar year. As of October 21, 2019, the fair value of the liability was $2.8 million. See Note 9 for details on the significant unobservable inputs used in the fair value estimate and post-acquisition accounting.

Asset Acquisitions

On March 12, 2020, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party. Substantially all of the acquired assets consisted of in-process research and development, or IPR&D. We believe the acquisition of the IPR&D will strengthen our smart intercom capability, including building access security and convenience within the multiple dwelling unit market for residents, guests and deliveries.

In consideration for the purchase of the IPR&D, we paid approximately $1.2 million in cash on March 12, 2020, with the remaining $0.3 million expected to be paid 18 months following the acquisition date, subject to offset for any indemnification obligations. The $1.5 million consideration related to IPR&D was expensed at the time of the asset acquisition, as the IPR&D had no alternative future use.

13


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2020 and 2019


On March 31, 2020, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party. Substantially all of the acquired assets consisted of IPR&D. We believe the acquisition of the IPR&D will further our commitment to make significant investments in innovative research and development in the intelligently connected property market to broaden our suite of solutions.

In consideration for the purchase of the IPR&D, we paid $2.1 million in cash on March 31, 2020 and $0.1 million in December 2019, with the remaining $0.7 million expected to be paid the later of approximately 12 months following the acquisition date or upon resolution of any pending indemnification claims, subject to offset for any indemnification obligations. The $2.9 million consideration related to IPR&D was expensed at the time of the asset acquisition, as the IPR&D had no alternative future use.

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, 2020
$
104,963

 
$

 
$
104,963

Goodwill acquired

 

 

Balance as of March 31, 2020
$
104,963

 
$

 
$
104,963



Due to the current uncertainty in the financial markets resulting from the global COVID-19 pandemic, we assessed our goodwill for indicators of impairment during the three months ended March 31, 2020. We elected to perform a qualitative assessment as of March 31, 2020 and determined there was no impairment of goodwill during the three months ended March 31, 2020. There was also no impairment of goodwill during the three months ended March 31, 2019.

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, 2020
$
84,396

 
$
16,820

 
$
2,222

 
$
103,438

Amortization
(3,471
)
 
(457
)
 
(90
)
 
(4,018
)
Balance as of March 31, 2020
$
80,925

 
$
16,363

 
$
2,132

 
$
99,420



We recorded $4.0 million of amortization related to our intangible assets for the three months ended March 31, 2020, as compared to $3.5 million for the same period in the prior year. There were no impairments of long-lived intangible assets during the three months ended March 31, 2020 and 2019.


14


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2020 and 2019

The following tables reflect the weighted average remaining life and carrying value of finite-lived intangible assets (in thousands, except weighted-average remaining life):
 
March 31, 2020
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Weighted-
Average
Remaining Life
Customer relationships
$
123,731

 
$
(42,806
)
 
$
80,925

 
9.6

Developed technology
30,542

 
(14,179
)
 
16,363

 
8.4

Trade name
3,304

 
(1,172
)
 
2,132

 
4.5

Other
234

 
(234
)
 

 

Total intangible assets
$
157,811

 
$
(58,391
)
 
$
99,420

 
 
 
December 31, 2019
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Weighted-
Average
Remaining Life
Customer relationships
$
123,731

 
$
(39,335
)
 
$
84,396

 
9.8

Developed technology
30,542

 
(13,722
)
 
16,820

 
8.7

Trade name
3,304

 
(1,082
)
 
2,222

 
4.8

Other
234

 
(234
)
 

 

Total intangible assets
$
157,811

 
$
(54,373
)
 
$
103,438

 
 


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 $2.3 million and $2.4 million as of March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020 and December 31, 2019, $0.5 million of patent costs were included in other current assets and $1.8 million and $1.9 million of patent costs were included in other assets, respectively. We have $5.9 million of historical cost in purchased patents and patent licenses as of March 31, 2020. We are amortizing the patent costs over the estimated useful lives of the patents, which range from three years to twelve years. Patent cost amortization of $0.1 million for the three months ended March 31, 2020 and 2019 was included in cost of SaaS and license revenue in our condensed consolidated statements of operations. Patent cost amortization of less than $0.1 million was included in amortization and depreciation in our condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019. In April 2020, we purchased 30 patents for $0.9 million, which increased our historical patent costs related to purchased patents and patent licenses to $6.8 million.

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 matures on July 31, 2022 and requires annual principal repayments of $1.0 million on July 31 of each year, commencing on July 31, 2019. The term loan also requires 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. As of March 31, 2020 and December 31, 2019, $1.0 million of the note receivable balance was included in other current assets in our condensed consolidated balance sheets. As of March 31, 2020 and December 31, 2019, $2.0 million of the note receivable balance was included in other assets in our condensed consolidated balance sheets, respectively.

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ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2020 and 2019


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 accrues at a rate of 8.5% per annum and requires monthly interest payments. The $3.0 million loan receivable balance was included in other assets as of March 31, 2020 and December 31, 2019.

For the three months ended March 31, 2020 and 2019, we recognized $0.4 million of revenue from the distribution partners associated with these loans.

Loan to and Investment in a Hardware Supplier

In October 2018, we entered into a subordinate convertible promissory note with one of our hardware suppliers, or the October 2018 Promissory Note, which was subsequently amended. In March 2019, we entered into a separate secured promissory note with the same hardware supplier, which, together with the October 2018 Promissory Note, we refer to as the Promissory Notes. Under the Promissory Notes, we agreed to provide the hardware supplier loans of up to $7.4 million, collateralized by all assets owned by the supplier.

In March 2019, we also purchased and acquired a secured promissory note, or the Acquired Promissory Note, that matured on March 30, 2019 and was originally executed between our hardware supplier and another third-party secured creditor. The Acquired Promissory Note had an outstanding balance of $26.6 million as of December 31, 2018, including interest. We paid $16.4 million to the third-party secured creditor in exchange for all of the rights associated with the Acquired Promissory Note, including a security interest and a right to enforce that interest against all assets owned by the hardware supplier. We also paid an additional $6.0 million to the third-party secured creditor in September 2019 based on the outcome of certain contingencies measured as of May 4, 2019. The fair value of the Acquired Promissory Note at the date of purchase was $22.4 million, which represented the initial cash consideration paid in March 2019 and the contingent consideration paid in September 2019.

On June 24, 2019, we received a payment of $7.4 million from the supplier for the partial satisfaction of amounts due under the Promissory Notes and the Acquired Promissory Note. On July 15, 2019, we received an additional payment of $25.0 million from the supplier and converted the remaining $5.6 million outstanding notes receivable balance into 9,520,832 shares of Series B preferred stock in the hardware supplier. We concluded that the $5.6 million equity investment, which is included in the Alarm.com segment, does not meet the criteria for consolidation and will be accounted for using the measurement alternative. Under the alternative, we measure investments without readily determinable fair values at cost, less impairment, adjusted for observable price changes from orderly transactions for identical or similar investments. As a result of the payments received, we reversed the $3.3 million reserve related to the October 2018 Promissory Note that was previously recorded during the three months ended December 31, 2018. The reversal of the reserve was recorded as a reduction to general and administrative expense in our condensed consolidated statements of operations during the three months ended June 30, 2019.

As a result of the $25.0 million payment received and conversion of the $5.6 million outstanding notes receivable balance into an equity investment on July 15, 2019, we recorded interest of $1.7 million within interest income and a gain of $6.9 million within other income, net, in our condensed consolidated statements of operations during the three and nine months ended September 30, 2019, related to the Promissory Notes and the Acquired Promissory Note. As of September 30, 2019, there was no remaining outstanding balance of the Promissory Notes and the Acquired Promissory Note. The total equity investment in the hardware supplier was $5.6 million as of March 31, 2020 and December 31, 2019.

Allowance for Credit Losses - Notes Receivable

The changes in our allowance for credit losses for notes receivable are as follows (in thousands):
 
Three Months Ended 
 March 31, 2020
 
Loan
Receivables
 
Hardware
Financing
Receivables
Beginning of period balance, prior to adoption of Topic 326
$

 
$
(16
)
Impact of adopting Topic 326
(434
)
 
(15
)
Provision for expected credit losses
347

 
2

Write-offs

 

End of period balance, subsequent to adoption of Topic 326
$
(87
)

$
(29
)



16


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
March 31, 2020 and 2019

We manage our notes receivables using delinquency as a key credit quality indicator. Current and delinquent notes receivable by class of financing receivables and by year of origination as of March 31, 2020 are as follows (in thousands):
Loan Receivables:
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Total
Current
$