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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, 2019
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
 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13183243&doc=10
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: (877389-4033
(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, 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 October 29, 2019, there were 48,572,377 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, 2019

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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
SaaS and license revenue
$
84,924

 
$
74,292

 
$
247,313

 
$
213,248

Hardware and other revenue
42,956

 
37,556

 
114,562

 
95,844

Total revenue
127,880

 
111,848

 
361,875

 
309,092

Cost of revenue(1):
 
 
 
 
 
 
 
Cost of SaaS and license revenue
12,438

 
11,501

 
37,428

 
33,334

Cost of hardware and other revenue
35,085

 
30,491

 
93,601

 
73,523

Total cost of revenue
47,523

 
41,992

 
131,029

 
106,857

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
14,533

 
14,128

 
43,392

 
39,562

General and administrative
18,701

 
43,662

 
51,785

 
77,943

Research and development
29,461

 
22,869

 
84,375

 
64,767

Amortization and depreciation
5,467

 
5,891

 
15,833

 
16,154

Total operating expenses
68,162

 
86,550

 
195,385

 
198,426

Operating income / (loss)
12,195

 
(16,694
)
 
35,461

 
3,809

Interest expense
(715
)
 
(736
)
 
(2,322
)
 
(2,159
)
Interest income
2,703

 
661

 
4,317

 
1,442

Other income, net
6,380

 
56

 
6,468

 
91

Income / (loss) before income taxes
20,563

 
(16,713
)
 
43,924

 
3,183

Provision for / (benefit from) income taxes
2,873

 
(9,061
)
 
3,428

 
(10,413
)
Net income / (loss)
17,690

 
(7,652
)
 
40,496

 
13,596

Income allocated to participating securities

 

 

 
(2
)
Net income / (loss) attributable to common stockholders
$
17,690

 
$
(7,652
)
 
$
40,496

 
$
13,594

 
 
 
 
 
 
 
 
Per share information attributable to common stockholders:
 
 
 
 
 
 
 
Net income / (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.36

 
$
(0.16
)
 
$
0.84

 
$
0.29

Diluted
$
0.35

 
$
(0.16
)
 
$
0.81

 
$
0.27

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
48,518,041

 
47,812,642

 
48,360,927

 
47,494,926

Diluted
50,152,807

 
47,812,642

 
50,238,409

 
49,593,918

_______________
(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,
2019
 
December 31,
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
164,323

 
$
146,061

Accounts receivable, net
64,897

 
49,510

Inventory, net
20,978

 
22,990

Other current assets
13,495

 
9,502

Total current assets
263,693

 
228,063

Property and equipment, net
32,332

 
27,757

Intangible assets, net
68,802

 
79,067

Goodwill
63,591

 
63,591

Deferred tax assets
27,450

 
28,952

Operating lease right-of-use assets
27,520

 

Other assets
17,618

 
13,555

Total assets
$
501,006

 
$
440,985

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable, accrued expenses and other current liabilities
$
33,566

 
$
58,430

Accrued compensation
13,392

 
13,484

Deferred revenue
3,063

 
3,356

Operating lease liabilities
6,684

 

Total current liabilities
56,705

 
75,270

Deferred revenue
6,960

 
7,820

Long-term debt
64,000

 
67,000

Operating lease liabilities
35,291

 

Other liabilities
1,884

 
13,306

Total liabilities
164,840

 
163,396

Commitments and contingencies (Note 12)

 

Stockholders’ equity
 
 
 
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2019 and December 31, 2018.

 

Common stock, $0.01 par value, 300,000,000 shares authorized; 48,572,086 and 48,103,038 shares issued; and 48,571,676 and 48,102,081 shares outstanding as of September 30, 2019 and December 31, 2018, respectively.
486

 
481

Additional paid-in capital
359,178

 
341,139

Accumulated deficit
(23,498
)
 
(64,031
)
Total stockholders’ equity
336,166


277,589

Total liabilities and stockholders’ equity
$
501,006

 
$
440,985




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:
2019
 
2018
Net income
$
40,496

 
$
13,596

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Provision for doubtful accounts
722

 
108

Reserve for product returns
(105
)
 
210

Provision for notes receivable
(3,319
)
 

Amortization on patents and tooling
506

 
701

Amortization and depreciation
15,833

 
16,154

Amortization of debt issuance costs
81

 
81

Amortization of operating lease right-of-use assets
4,296

 

Deferred income taxes
1,502

 
(9,108
)
Stock-based compensation
14,721

 
9,670

Gain on notes receivable
(6,931
)
 

Acquired in-process research and development
850

 

Impairment of investment
605

 

Disposal of property and equipment

 
285

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(16,004
)
 
(15,145
)
Inventory
2,012

 
(2,729
)
Other current and non-current assets
(6,813
)
 
(5,072
)
Accounts payable, accrued expenses and other current liabilities
(22,959
)
 
28,472

Deferred revenue
(1,153
)
 
(804
)
Operating lease liabilities
(681
)
 

Other liabilities
188

 
(1,441
)
Cash flows from operating activities
23,847

 
34,978

Cash flows used in investing activities:
 
 
 
Additions to property and equipment
(10,660
)
 
(9,317
)
Purchases of in-process research and development
(850
)
 

Issuances or purchases of notes receivable
(26,074
)
 

Receipt of payment on notes receivable
31,695

 

Cash flows used in investing activities
(5,889
)
 
(9,317
)
Cash flows from financing activities:
 
 
 
Repayments of credit facility
(3,000
)
 
(3,000
)
Repurchases of common stock

 
(1
)
Issuances of common stock from equity-based plans
3,304

 
5,254

Cash flows from financing activities
304

 
2,253

Net increase in cash and cash equivalents
18,262

 
27,914

Cash and cash equivalents at beginning of the period
146,061

 
96,329

Cash and cash equivalents at end of the period
$
164,323

 
$
124,243



See accompanying notes to the condensed consolidated financial statements.

4

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

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

 
$

 
48,102

 
$
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

 

 

 

 

 
9,010

 
9,010

Balance as of March 31, 2019

 

 
48,249

 
482

 
346,998

 
(54,984
)
 
292,496

Common stock issued in connection with equity-based plans

 

 
232

 
3

 
698

 

 
701

Vesting of common stock subject to repurchase

 

 

 

 
2

 

 
2

Stock-based compensation expense

 

 

 

 
5,433

 

 
5,433

Net income

 

 

 

 

 
13,796

 
13,796

Balance as of June 30, 2019

 

 
48,481

 
485

 
353,131

 
(41,188
)
 
312,428

Common stock issued in connection with equity-based plans

 

 
90

 
1

 
1,011

 

 
1,012

Vesting of common stock subject to repurchase

 

 
1

 

 
2

 

 
2

Stock-based compensation expense

 

 

 

 
5,034

 

 
5,034

Net income

 

 

 

 

 
17,690

 
17,690

Balance as of September 30, 2019

 
$

 
48,572

 
$
486

 
$
359,178

 
$
(23,498
)
 
$
336,166


 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of December 31, 2017

 
$

 
47,202

 
$
472

 
$
321,032

 
$
(88,677
)
 
$
232,827

Adoption of accounting standard on revenue recognition

 

 

 

 

 
3,122

 
3,122

Common stock issued in connection with equity-based plans

 

 
86

 
1

 
995

 

 
996

Vesting of common stock subject to repurchase

 

 
3

 

 
14

 

 
14

Stock-based compensation expense

 

 

 

 
2,784

 

 
2,784

Net income

 

 

 

 

 
10,515

 
10,515

Balance as of March 31, 2018

 

 
47,291

 
473

 
324,825

 
(75,040
)
 
250,258

Common stock issued in connection with equity-based plans

 

 
397

 
4

 
1,558

 

 
1,562

Vesting of common stock subject to repurchase

 

 
4

 

 
14

 

 
14

Stock-based compensation expense

 

 

 

 
3,631

 

 
3,631

Net income

 

 

 

 

 
10,733

 
10,733

Balance as of June 30, 2018

 

 
47,692

 
477

 
330,028

 
(64,307
)
 
266,198

Common stock issued in connection with equity-based plans

 

 
306

 
3

 
2,693

 

 
2,696

Vesting of common stock subject to repurchase

 

 
2

 

 
13

 

 
13

Stock-based compensation expense

 

 

 

 
3,486

 

 
3,486

Net loss

 

 

 

 

 
(7,652
)
 
(7,652
)
Balance as of September 30, 2018

 
$

 
48,000

 
$
480

 
$
336,220

 
$
(71,959
)
 
$
264,741



See accompanying notes to the condensed consolidated financial statements.

5

ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 2019 and 2018
(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, monitor and manage their residential and commercial properties. Our solutions are delivered through an established network of over 8,000 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 the 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, 2018 included in our Annual Report on Form 10-K filed with the SEC on March 1, 2019, or the Annual Report. The condensed consolidated balance sheet as of December 31, 2018 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. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2019.

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. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. Estimates are used when accounting for revenue recognition, allowances for doubtful accounts, 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 and nine months ended September 30, 2018 have been reclassified to conform to our current presentation to reflect interest income separately, which was previously included in other income, net.

Significant Accounting Policies

Except for as disclosed herein, there have been no other material changes to our significant accounting policies during the three and nine months ended September 30, 2019 from those disclosed in our Annual Report.


6


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2019 and 2018

Leases

We determine if an arrangement contains a lease at the inception of the arrangement. As part of the lease determination process, we assess several factors, including, but not limited to, whether we have the right to control and direct the use of the asset and whether the other party has a substantive substitution right. If we enter into leases that contain multiple components, we identify separate lease components based on whether or not the right to use the underlying assets is distinct and either highly dependent or highly interrelated with other rights in the contract. We also evaluate whether there are any non-lease components in the arrangement. For certain classes of underlying assets, such as data centers, we have elected not to separate non-lease components from lease components. For all other classes of underlying assets, if separate lease and non-lease components are identified, we allocate the consideration in the contract to the lease and non-lease components using the relative stand-alone selling price method at the lease inception.

Many of our leases include options to renew at our sole discretion. We also have several leases that provide us an option to terminate the lease prior to the end of the lease term. These renewal and termination options are included in the lease term at the commencement date when we are reasonably certain the options will be exercised. When assessing the likelihood of electing these options, we consider the length of the renewal period, market conditions, our expansion plans, the existence of a termination penalty, as well as other factors. Our lease agreements do not contain any material residual value guarantees, restrictive covenants or variable lease payments.

Right-of-use, or ROU, assets represent our right to use an underlying asset for the term of the lease and lease liabilities represent our obligation to make lease payments throughout the term of the lease. ROU assets and lease liabilities are recognized as of the commencement date of the lease based on the present value of contractual lease payments due over the term of the lease. We use our incremental borrowing rate to determine the present value of the lease payments, as our leases do not state the rate implicit in the lease. Our incremental borrowing rate is determined on a collateralized basis at the commencement date of the lease.

ROU assets and lease liabilities resulting from operating leases are recorded on our condensed consolidated balance sheets. We did not have any finance leases or subleases as of September 30, 2019 and December 31, 2018.

Lease expense is recognized on a straight-line basis over the term of the lease and is recorded in general and administrative expense. Some of our leases include tenant improvement allowances, which are recorded when we are reasonably certain to utilize the allowance and are amortized on a straight-line basis over the shorter of the lease terms or the asset lives. Leases with an initial lease term of twelve months or less are considered short-term leases. Short-term leases are not recorded on our condensed consolidated balance sheets. Expenses associated with short-term leases are recognized on a straight-line basis over the term of the lease and are recorded in general and administrative expense. Short-term lease costs were immaterial for the three and nine months ended September 30, 2019.

Recent Accounting Pronouncements

Adopted

On February 25, 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2016-02, “Leases (Topic 842)” or Topic 842, which requires lessees to recognize operating and financing lease liabilities and corresponding ROU assets on the balance sheet. The update also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. In July 2018, the FASB amended the update to allow entities to apply the transition requirements of Topic 842 at the adoption date rather than at the beginning of the earliest comparative period presented. Accordingly, the amendments in Topic 842 were effective for us beginning January 1, 2019.
 
On January 1, 2019, we adopted Topic 842 by applying the modified retrospective approach to all of our leases in effect as of that date. We used the optional transition method, which required us to record the initial effect of Topic 842 as a cumulative-effect adjustment to retained earnings on January 1, 2019. Additionally, we elected to use the package of practical expedients for the adoption of Topic 842, which allowed us not to reassess: (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any existing leases qualify for capitalization under Topic 842. We also used the hindsight practical expedient when determining the lease term and assessing impairment of ROU assets.


7


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2019 and 2018

The adoption of Topic 842 resulted in the recording of the following amounts on our condensed consolidated balance sheets (in thousands):
Balance Sheet Caption
 
 As of January 1, 2019
Property and equipment, net
 
$
1,057

Operating lease right-of-use assets
 
28,432

Operating lease liabilities (current)
 
5,699

Operating lease liabilities (noncurrent)
 
36,957

Accounts payable, accrued expenses and other current liabilities
 
(1,548
)
Other liabilities
 
(11,656
)
Accumulated deficit
 
37



The adoption of Topic 842 did not materially impact our condensed consolidated statements of operations, condensed consolidated statement of equity and condensed consolidated statements of cash flows.

Not Yet Adopted

On June 16, 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (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 May 2019, 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 is effective on a modified retrospective basis for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for fiscal years and interim periods beginning after December 15, 2018. To date, we have assessed the manner in which we currently estimate the allowance for doubtful accounts on our trade receivables, the composition of our notes receivable and our historical credit loss activity. We are currently assessing forecasted market conditions and the impact this pronouncement may have on our consolidated financial statements. This pronouncement will require additional disclosures within our notes to the consolidated financial statements.

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 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The additional disclosure requirements and one of the modifications to an existing disclosure requirement should be applied prospectively while all other disclosure changes should be applied retrospectively to all periods presented upon the effective date. Early adoption is permitted. We are currently assessing the impact this pronouncement may have on our fair value measurement disclosures; however, this pronouncement is not expected to have a material impact 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 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.

8


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2019 and 2018


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, 2019, our reserve against revenue for hardware returns was 1%, as compared to 2% for the same period in the prior year. 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 assurance-type 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. These warranties were not identified as separate performance obligations.

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 $8.4 million and $9.2 million as of September 30, 2019 and December 31, 2018, 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 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 a customer 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 a customer is reflected in other assets within our condensed consolidated balance sheets. Our amortization

9


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2019 and 2018

of contract assets during the three and nine months ended September 30, 2019 was $0.6 million and $1.8 million, respectively, as compared to $0.5 million and $1.5 million during the same periods in the prior year.

We review the capitalized costs for impairment at least annually. Impairment exists if the carrying amount of the asset recognized from contract costs exceeds the remaining amount of consideration we expect to receive in exchange for providing the goods and services to which such asset 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, 2019 and 2018.

The changes in our contract assets are as follows (in thousands):    
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
Beginning of period balance
$
3,849

 
$
2,879

 
$
2,881

 
$

Commission costs and upfront payments to a customer capitalized in period
333

 
489

 
2,438

 
4,344

Amortization of contract assets
(613
)
 
(490
)
 
(1,750
)
 
(1,466
)
End of period balance
$
3,569

 
$
2,878

 
$
3,569

 
$
2,878



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 balance sheet 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,
 
2019
 
2018
 
2019
 
2018
Beginning of period balance
$
10,980

 
$
11,971

 
$
11,176

 
$
12,678

Revenue deferred in period
542

 
1,225

 
3,013

 
2,706

Revenue recognized from amounts included in contract liabilities
(1,499
)
 
(1,322
)
 
(4,166
)
 
(3,510
)
End of period balance
$
10,023

 
$
11,874

 
$
10,023

 
$
11,874



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

Note 4. Accounts Receivable, Net

The components of accounts receivable, net are as follows (in thousands):
    
 
September 30,
2019
 
December 31,
2018
Accounts receivable
$
68,123

 
$
52,850

Allowance for doubtful accounts
(2,100
)
 
(1,425
)
Allowance for product returns
(1,126
)
 
(1,915
)
Accounts receivable, net
$
64,897

 
$
49,510



For the three and nine months ended September 30, 2019, we recorded a provision for doubtful accounts of $0.2 million and $0.7 million, respectively, as compared to less than $0.1 million and $0.1 million for the same periods in the prior year.

For the three and nine months ended September 30, 2019, we recorded a reduction to the reserve for product returns of $0.1 million, as compared to less than $0.1 million and $0.2 million reserve recorded for the same periods in the prior year.

10


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2019 and 2018

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

Note 5. Inventory, Net

The components of inventory, net are as follows (in thousands):
    
 
September 30,
2019
 
December 31,
2018
Raw materials
$
7,530

 
$
6,396

Finished goods
13,448

 
16,594

Total inventory, net
$
20,978

 
$
22,990



Note 6. Acquisitions

Asset Acquisition

On September 18, 2019, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party and 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 comprehensive suite of cloud-based solutions.

In consideration for the purchase of the IPR&D, we paid $0.9 million in cash on September 18, 2019, with the remaining $0.1 million expected to be paid 18 months following the acquisition date, pending any indemnification obligations. The $1.0 million consideration related to IPR&D was expensed at the time of the asset acquisition, as the IPR&D had no alternative future use.

Subsequent Event - Acquisition of a Business

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 commercial market. We believe the acquisition of OpenEye will provide us with a 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 $61.3 million in cash on October 21, 2019, after deducting $2.8 million related to an agreed holdback. The purchase price is subject to certain post-closing adjustments including the final determination of closing working capital, in accordance with the terms of the stock purchase agreement. An earn-out of up to an additional $11.0 million is payable if certain calendar 2020 targets are met. The purchase price allocation was not finalized as of the filing date of this Quarterly Report on Form 10-Q.

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, 2019
$
63,591

 
$

 
$
63,591

Goodwill acquired

 

 

Balance as of September 30, 2019
$
63,591

 
$

 
$
63,591



There were no impairments of goodwill during the three and nine months ended September 30, 2019 and 2018.

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, 2019
$
77,264

 
$
1,678

 
$
125

 
$
79,067

Amortization
(9,276
)
 
(926
)
 
(63
)
 
(10,265
)
Balance as of September 30, 2019
$
67,988

 
$
752

 
$
62

 
$
68,802



11


ALARM.COM HOLDINGS, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)
September 30, 2019 and 2018


We recorded $3.4 million and $10.3 million of amortization related to our intangible assets for the three and nine months ended September 30, 2019, respectively, as compared to $3.8 million and $11.4 million for the same periods in the prior year. There were no impairments of long-lived intangible assets during the three and nine months ended September 30, 2019 and 2018.

The following tables reflect the weighted average remaining life and carrying value of finite-lived intangible assets (in thousands, except weighted-average remaining life):
    
 
September 30, 2019
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Weighted-
Average
Remaining Life
Customer relationships
$
103,926

 
$
(35,938
)
 
$
67,988

 
9.2

Developed technology
13,959

 
(13,207
)
 
752

 
2.3

Trade name
1,084

 
(1,022
)
 
62

 
2.0

Other
234

 
(234
)
 

 

Total intangible assets
$
119,203

 
$
(50,401
)
 
$
68,802

 
 
    
 
December 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Value
 
Weighted-
Average
Remaining Life
Customer relationships
$
103,926

 
$
(26,662
)
 
$
77,264

 
9.9

Developed technology
13,959

 
(12,281
)
 
1,678

 
2.1

Trade name
1,084

 
(959
)
 
125

 
2.4

Other
234

 
(234
)
 

 

Total intangible assets
$
119,203

 
$
(40,136
)
 
$
79,067

 
 


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 $2.6 million and $2.9 million as of September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019 and December 31, 2018, $0.5 million of patent costs were included in other current assets and $2.1 million and $2.4 million of patent costs were included in other assets, respectively. We have $5.9 million of historical cost in purchased patents and patent licenses. We are amortizing the patent costs over the estimated useful lives of the patents, which range from three years to twelve years. Patent cost amortization of $0.1 million and $0.3 million for the three and nine months ended September 30, 2019, respectively, as compared to $0.1 million and $0.4 million for the same periods in the prior year, 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 and $0.1 million was included in amortization and depreciation in our condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively. There was no amortization of patent costs included in amortization and depreciation during the three and nine months ended September 30, 2018.

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 the Eurodollar Base Rate, 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 term 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.


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ALARM.COM HOLDINGS, INC.