UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-37461

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 November 1, 2022, there were 49,910,824 outstanding shares of the registrant's common stock, par value $0.01 per share.

ALARM.COM HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2022

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION	2
Item 1. Financial Statements (Unaudited)	2
Condensed Consolidated Statements of Operations	2
Condensed Consolidated Balance Sheets	3
Condensed Consolidated Statements of Cash Flows	4
Condensed Consolidated Statements of Equity	5
Notes to the Condensed Consolidated Financial Statements	7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3. Quantitative and Qualitative Disclosures About Market Risk	54
Item 4. Controls and Procedures	54
PART II. OTHER INFORMATION	56
Item 1. Legal Proceedings	56
Item 1A. Risk Factors	57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	87
Item 3. Defaults Upon Senior Securities	87
Item 4. Mine Safety Disclosures	87
Item 5. Other Information	87
Item 6. Exhibits	88
Signature	89

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,
	2022		2021		2022		2021
Revenue:
SaaS and license revenue	$	133,126	$	118,059	$	385,826	$	338,628
Hardware and other revenue	83,012		74,265		248,594		215,051
Total revenue	216,138		192,324		634,420		553,679
Cost of revenue(1):
Cost of SaaS and license revenue	18,437		17,425		54,019		49,782
Cost of hardware and other revenue	67,149		62,959		208,990		173,731
Total cost of revenue	85,586		80,384		263,009		223,513
Operating expenses:
Sales and marketing	23,057		22,557		69,182		62,085
General and administrative	28,011		18,689		81,314		64,839
Research and development	55,581		44,143		161,227		130,101
Amortization and depreciation	7,587		7,467		23,123		22,329
Total operating expenses	114,236		92,856		334,846		279,354
Operating income	16,316		19,084		36,565		50,812
Interest expense	(787)		(4,196)		(2,356)		(11,718)
Interest income	2,903		140		4,062		446
Other (expense) / income, net	(76)		53		42		(70)
Income before income taxes	18,356		15,081		38,313		39,470
Provision for / (benefit from) income taxes	246		1,787		472		(2,864)
Net income	18,110		13,294		37,841		42,334
Net loss attributable to redeemable noncontrolling interests	222		244		412		779
Net income attributable to common stockholders	$	18,332	$	13,538	$	38,253	$	43,113
Per share information attributable to common stockholders:
Net income per share:
Basic	$	0.37	$	0.27	$	0.77	$	0.87
Diluted	$	0.35	$	0.26	$	0.73	$	0.83
Weighted average common shares outstanding:
Basic	49,791,465		49,954,565		49,974,925		49,776,578
Diluted	54,832,528		51,836,239		54,988,020		51,879,061

_______________

(1)Exclusive of amortization and depreciation shown in operating expenses below.

See accompanying notes to the condensed consolidated financial statements.

2

ALARM.COM HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)

	September 30, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	621,347	$	710,621
Accounts receivable, net of allowance for credit losses of $3,536 and $2,168, and net of allowance for product returns of $1,535 and $1,181 as of September 30, 2022 and December 31, 2021, respectively	118,833		105,548
Inventory	112,319		75,276
Other current assets, net of allowance for credit losses of zero and $2 as of September 30, 2022 and December 31, 2021, respectively	27,498		26,175
Total current assets	879,997		917,620
Property and equipment, net	59,483		41,713
Intangible assets, net	87,171		91,406
Goodwill	150,808		112,901
Deferred tax assets	69,117		13,547
Operating lease right-of-use assets	30,915		30,479
Other assets, net of allowance for credit losses of $3 and $78 as of September 30, 2022 and December 31, 2021, respectively	32,282		24,349
Total assets	$	1,309,773	$	1,232,015
Liabilities, redeemable noncontrolling interest and stockholders’ equity
Current liabilities:
Accounts payable, accrued expenses and other current liabilities	$	106,653	$	89,816
Accrued compensation	24,585		23,495
Deferred revenue	7,879		5,697
Operating lease liabilities	12,024		10,331
Total current liabilities	151,141		129,339
Deferred revenue	10,556		9,140
Convertible senior notes, net	489,586		425,345
Operating lease liabilities	30,074		32,591
Other liabilities	11,611		9,545
Total liabilities	692,968		605,960
Commitments and contingencies (Note 12)
Redeemable noncontrolling interests	23,029		12,888
Stockholders’ equity
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2022 and December 31, 2021	—		—
Common stock, $0.01 par value, 300,000,000 shares authorized; 50,846,671 and 50,406,606 shares issued; and 49,859,269 and 50,259,453 shares outstanding as of September 30, 2022 and December 31, 2021, respectively	508		504
Additional paid-in capital	483,225		498,979
Treasury stock, at cost; 987,402 and 147,153 shares as of September 30, 2022 and December 31, 2021, respectively	(57,015)		(5,149)
Retained earnings	167,058		118,833
Total stockholders’ equity	593,776		613,167
Total liabilities, redeemable noncontrolling interests and stockholders’ equity	$	1,309,773	$	1,232,015

See accompanying notes to the condensed consolidated financial statements.

3

ALARM.COM HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended September 30,
Cash flows from operating activities:	2022		2021
Net income	$	37,841	$	42,334
Adjustments to reconcile net income to net cash flows from operating activities:
Provision for / (recovery of) credit losses on accounts receivable	1,606		(238)
Reserve for product returns	3,721		1,628
Recovery of credit losses on notes receivable	(77)		(10)
Provision for excess and obsolete inventory	—		374
Amortization on patents and tooling	1,037		947
Amortization and depreciation	23,123		22,329
Amortization of debt discount and debt issuance costs	2,342		11,590
Amortization of operating leases	7,767		7,173
Deferred income taxes	(42,566)		(5,918)
Stock-based compensation	38,053		27,362
Gain on investment	(140)		—
Loss on early extinguishment of debt	—		185
Changes in operating assets and liabilities (net of business acquisitions):
Accounts receivable	(18,321)		(8,689)
Inventory	(37,043)		(12,619)
Other current and non-current assets	(7,443)		(8,368)
Accounts payable, accrued expenses and other current liabilities	17,803		10,672
Deferred revenue	3,531		3,548
Operating lease liabilities	(9,390)		(8,745)
Other liabilities	611		(361)
Cash flows from operating activities	22,455		83,194
Cash flows used in investing activities:
Business acquisition, net of cash acquired	(31,730)		—
Additions to property and equipment	(28,084)		(8,939)
Issuances of notes receivable	(3,000)		—
Receipt of payments on notes receivable	49		42
Purchase of investment in unconsolidated entity	—		(5,000)
Proceeds from sale of investment	140		—
Cash flows used in investing activities	(62,625)		(13,897)
Cash flows (used in) / from financing activities:
Repayments of credit facility	—		(110,000)
Proceeds from issuance of convertible senior notes	—		500,000
Payments of debt issuance costs	—		(15,698)
Payments of deferred consideration for business acquisitions	—		(1,160)
Purchases of treasury stock	(51,866)		—
Issuances of common stock from equity-based plans	3,391		4,409
Cash flows (used in) / from financing activities	(48,475)		377,551
Net (decrease) / increase in cash, cash equivalents and restricted cash	(88,645)		446,848
Cash, cash equivalents and restricted cash at beginning of the period	710,621		253,459
Cash, cash equivalents and restricted cash at end of the period	$	621,976	$	700,307
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	621,347	$	700,307
Restricted cash included in other current assets and other assets	629		—
Total cash, cash equivalents and restricted cash	$	621,976	$	700,307

See accompanying notes to the condensed consolidated financial statements.

4

ALARM.COM HOLDINGS, INC.

Condensed Consolidated Statements of Equity

(in thousands)

(unaudited)

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

5

ALARM.COM HOLDINGS, INC.

Condensed Consolidated Statements of Equity — (Continued)

(in thousands)

(unaudited)

	Redeemable Noncontrolling Interests		Preferred Stock			Common Stock			Additional Paid-In Capital		Treasury Stock			Retained Earnings		Total Stockholders’ Equity
			Shares	Amount		Shares	Amount				Shares	Amount
Balance as of December 31, 2020	$	10,691	—	$	—	49,631	$	496	$	405,831	147	$	(5,149)	$	66,574	$	467,752
Common stock issued in connection with equity-based plans	—		—	—		173	2		1,987		—	—		—		1,989
Stock-based compensation expense	—		—	—		—	—		7,888		—	—		—		7,888
Equity component of convertible senior notes, net	—		—	—		—	—		56,515		—	—		—		56,515
Accretion adjustments of redeemable noncontrolling interest to redemption value	473		—	—		—	—		(473)		—	—		—		(473)
Net income / (loss) attributable to common stockholders	(280)		—	—		—	—		—		—	—		14,830		14,830
Balance as of March 31, 2021	$	10,884	—	$	—	49,804	$	498	$	471,748	147	$	(5,149)	$	81,404	$	548,501
Common stock issued in connection with equity-based plans	—		—	—		237	2		876		—	—		—		878
Stock-based compensation expense	—		—	—		—	—		10,056		—	—		—		10,056
Accretion adjustments of redeemable noncontrolling interest to redemption value	743		—	—		—	—		(743)		—	—		—		(743)
Net income / (loss) attributable to common stockholders	(255)		—	—		—	—		—		—	—		14,745		14,745
Balance as of June 30, 2021	$	11,372	—	$	—	50,041	$	500	$	481,937	147	$	(5,149)	$	96,149	$	573,437
Common stock issued in connection with equity-based plans	—		—	—		133	1		1,541		—	—		—		1,542
Stock-based compensation expense	—		—	—		—	—		9,418		—	—		—		9,418
Accretion adjustments of redeemable noncontrolling interest to redemption value	761		—	—		—	—		(761)		—	—		—		(761)
Net income / (loss) attributable to common stockholders	(244)		—	—		—	—		—		—	—		13,538		13,538
Balance as of September 30, 2021	$	11,889	—	$	—	50,174	$	501	$	492,135	147	$	(5,149)	$	109,687	$	597,174

See accompanying notes to the condensed consolidated financial statements.

6

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

September 30, 2022 and 2021

Note 1. Organization

Alarm.com Holdings, Inc. (referred to herein as Alarm.com, the Company, or we) is the leading platform for the intelligently connected property. We offer a comprehensive suite of cloud-based solutions for the smart residential and commercial property, including interactive security, video monitoring, intelligent automation and energy management. Millions of property owners depend on our technology to intelligently secure, automate and manage their residential and commercial properties. Our solutions are delivered through an established network of trusted service provider partners, who are experts at selling, installing and supporting our solutions. The number of our service provider partners exceeded 10,900 in 2021. We derive revenue from the sale of our cloud-based Software-as-a-Service, or SaaS, services, license fees, software, hardware, activation fees and other revenue. Our fiscal year ends on December 31.

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include our accounts and those of our majority-owned and controlled subsidiaries after elimination of intercompany accounts and transactions.

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all the information and footnotes required by GAAP for annual financial statements. They should be read together with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2021 included in our Annual Report on Form 10-K filed with the SEC on February 24, 2022, or the Annual Report. The condensed consolidated balance sheet as of December 31, 2021 was derived from our audited financial statements but does not include all disclosures required by GAAP for annual financial statements.

In the opinion of management, these condensed consolidated financial statements include all normal recurring adjustments necessary for a fair statement of the results of operations, financial position and cash flows for the periods presented. However, the global economy, credit markets and financial markets have and may continue to experience significant volatility as a result of significant worldwide events, including public health crises, such as the COVID-19 pandemic, and geopolitical upheaval, such as Russia’s incursion into Ukraine (collectively, the Macroeconomic Conditions). These Macroeconomic Conditions have and may continue to create supply chain disruptions, inventory disruptions, and fluctuations in economic growth, including fluctuations in employment rates, inflation, energy prices and consumer sentiment. In particular, the COVID-19 pandemic also disrupted and may intermittently continue to disrupt our sales channels due to restrictions imposed from time to time on our service providers’ ability to meet with residential and commercial property owners who use our solutions. It remains difficult to assess or predict the ultimate duration and economic impact of the Macroeconomic Conditions including, the path of the COVID-19 pandemic, the evolution of COVID-19 variants or the emergence of other public health crises. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2022, which is increasingly true in periods of extreme uncertainty, such as the uncertainty caused by the Macroeconomic Conditions. Prolonged uncertainties could cause further economic slowdown or cause other unpredictable events, each of which could adversely affect our business, results of operations or financial condition.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. As of the date of issuance of these financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, assumptions and judgments or revise the carrying value of our assets or liabilities. However, our estimates, judgments and assumptions are continually evaluated based on available information and experience and may change as new events occur and additional information is obtained. Because of the use of estimates inherent in the financial reporting process and in light of the continuing uncertainty arising from the Macroeconomic Conditions, actual results could differ from those estimates and any such differences may be material. Estimates are used when accounting for revenue recognition, allowances for credit losses, allowance for hardware returns, estimates of obsolete inventory, long-term incentive compensation, the lease term and incremental borrowing rates for leases, stock-based compensation, income taxes, legal reserves, fair value of the debt component of convertible notes and goodwill and intangible assets.

Comprehensive Income

Our comprehensive income for the three and nine months ended September 30, 2022 and 2021 was equal to our net income disclosed in the condensed consolidated statements of operations.

7

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2022 and 2021

Significant Accounting Policies

Other than those disclosed herein, there have been no other material changes to our significant accounting policies during the three and nine months ended September 30, 2022 from those disclosed in our Annual Report.

Restricted Cash

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

Redeemable Noncontrolling Interests

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

Stock-Based Compensation

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

Recent Accounting Pronouncements

Adopted

On August 5, 2020, the Financial Accounting Standards Board, or FASB, issued ASU 2020-06, "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity," or ASU 2020-06, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The new guidance eliminates two of the three models in Subtopic 470-20 that require separating embedded conversion features from convertible instruments. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation. The amendment in this update is effective for fiscal years beginning after December 15, 2021.

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

8

ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2022 and 2021

discount and adjusted the temporary difference between the book and tax treatment of the debt issuance costs of the convertible senior notes. The adoption resulted in the recording of the following increases / (decreases) on our condensed consolidated balance sheets (in thousands):

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

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

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

On October 28, 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 606): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts. Generally, this should result in an acquirer recognizing and measuring the acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements, if the acquiree prepared financial statements in accordance with GAAP. The amendment in this update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We adopted this guidance during the three months ended September 30, 2022 and the adoption did not have a material impact on our condensed consolidated financial statements during the three and nine months ended September 30, 2022. Any future financial impact will be dependent on the magnitude and nature of future business combinations.

Note 3. Revenue from Contracts with Customers

Revenue Recognition

We derive our revenue from three primary sources: the sale of cloud-based SaaS services on our integrated Alarm.com platform, the sale of licenses and services on our non-hosted software platform, or Software platform, and the sale of hardware products. We sell our platform and hardware solutions to service provider partners that resell our solutions and hardware to residential and commercial property owners, who are the service provider partners’ customers. Our subscribers consist of all of the properties maintained by those residential and commercial property owners to which we are delivering at least one of our solutions. We also sell our hardware to distributors who resell the hardware to service provider partners. We enter into contracts with our service provider partners that establish pricing for access to our platform solutions and for the sale of hardware. These service provider contracts typically have an initial term of one year, with subsequent renewal terms of one year. Our service provider partners have indicated that they typically have three to five-year service contracts with residential and commercial property owners who use our solutions.

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ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2022 and 2021

When determining the amount of consideration we expect to be entitled to for the sale of our hardware, we estimate the variable consideration associated with customer returns. We record a reserve against revenue for hardware returns based on historical returns. For the twelve months ended September 30, 2022 and 2021, our reserve against revenue for hardware returns was approximately 1% of hardware and other revenue. We evaluate our hardware reserve on a quarterly basis or if there is an indication of significant changes in return experience. Historically, our returns of hardware have not significantly differed from our estimated reserve. Additionally, we provide warranties related to the intended functionality of the products and services provided and those warranties typically allow for the return of hardware up to one year past the date of sale. We determined that these warranties are not separate performance obligations as they cannot be purchased separately and do not provide a service in addition to an assurance the hardware will function as expected.

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

Hardware and other revenue may also include activation fees charged to some of our service provider partners for activation of a new subscriber account on our platforms, as well as fees paid by service provider partners for our marketing services. Our service provider partners use services on our platforms, such as support tools and applications, to assist in the installation of our solutions in subscriber properties. This installation marks the beginning of the service period on our platforms and, on occasion, we earn activation revenue for fees charged for this service. The activation fee is non-refundable, separately negotiated and specified in our contractual arrangements with our service provider partners and is charged to the service provider partner for each subscriber activated on our platforms. The decision whether to charge an activation fee is based in part on the expected number of subscribers to be added by our service provider partners and as a result, many of our largest service provider partners do not pay an activation fee. Activation fees are not offered on a stand-alone basis separate from our SaaS offering and are billed and received at the beginning of the arrangement. We record activation fees initially as deferred revenue and we recognize these fees ratably over the expected term of the subscribers’ account which we estimate is ten years based on our annual attrition rate. The portion of these activation fees included in current and long-term deferred revenue as of our balance sheet date represents the amounts that will be recognized ratably as revenue over the following twelve months, or longer as appropriate, until the ten-year expected term is complete. The balance of deferred revenue for activation fees was $5.5 million and $6.0 million as of September 30, 2022 and December 31, 2021, respectively, which combines current and long-term balances.

SaaS and license revenue associated with our contracts is invoiced and revenue is recognized at an amount that corresponds directly with the value of the performance completed to date. Additionally, the consideration received from hardware sales corresponds directly with the stand-alone selling price of the hardware. As a result, we have elected to use the practical expedient related to the amount of transaction price allocated to the unsatisfied performance obligations and therefore, we have not disclosed the total remaining revenue expected to be recognized on all contracts or the expected period over which the remaining revenue would be recognized.

Contract Assets

At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each distinct promise to transfer a good or service, or bundle of goods or services. To identify the performance obligations, we consider all of the goods or services promised in the contract, whether explicitly stated or implied based on customary business practices. We record a contract asset when we satisfy a performance obligation by transferring a promised good or service. Contract assets can be conditional or unconditional depending on whether another performance obligation must be satisfied before payment can be received. We receive payments from our service provider partners based on the billing schedule established in our contracts. All of the accounts receivable presented in the condensed consolidated balance sheets represent unconditional rights to consideration. We do not have any assets from contracts containing conditional rights and we do not have any assets from satisfied performance obligations that have not been invoiced.

We recognize an asset related to the costs incurred to obtain a contract only if we expect to recover those costs and we would not have incurred those costs if the contract had not been obtained. We recognize an asset from the costs incurred to fulfill a contract if the costs (i) are specifically identifiable to a contract, (ii) enhance resources that will be used in satisfying performance obligations in future and (iii) are expected to be recovered. Our assets related to costs incurred to obtain a contract consist of capitalized commission costs and upfront payments made to a customer. Based on the policy above, we capitalize a portion of our commission costs as an incremental cost of obtaining a contract. When calculating the incremental cost of obtaining a contract, we exclude any commission costs related to metrics that could be satisfied without obtaining a contract,

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ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2022 and 2021

including training-related metrics. We amortize our commission costs over a period of three years, which is consistent with the period over which the products and services related to the commission are transferred to the customer. The three-year period was determined based on our review of historical enhancements and upgrades to our products and services. We applied the portfolio approach to account for the amortization of contract costs for those contracts that have similar characteristics. Upfront payments made to a customer are capitalized and amortized over the expected period of benefit and are recorded as a reduction to revenue.

The current portion of capitalized commission costs and upfront payments made to customers is included in other current assets within our condensed consolidated balance sheets. The non-current portion of capitalized commission costs and upfront payments made to customers is reflected in other assets within our condensed consolidated balance sheets.

We review the capitalized costs for impairment at least annually. Impairment exists if the carrying amount of the asset recognized from contract costs exceeds the remaining amount of consideration we expect to receive in exchange for providing the goods and services to which such asset relates, less the costs that relate directly to providing those good and services and that have not been recognized as an expense. We did not record an impairment loss on our contract assets during the three and nine months ended September 30, 2022 and 2021.

The changes in our contract assets are as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Beginning of period balance	$	7,415	$	4,771	$	4,520	$	4,306
Commission costs and upfront payments to a customer capitalized in period	5,253		540		9,980		2,697
Amortization of contract assets	(1,369)		(899)		(3,201)		(2,591)
End of period balance	$	11,299	$	4,412	$	11,299	$	4,412

Contract Liabilities

Contract liabilities include payments received in advance of performance under the contract and are realized with the associated revenue recognized under the contract. All of the deferred revenue presented in the condensed consolidated balance sheets represents contract liabilities resulting from advance cash receipts from customers or amounts billed in advance to customers from the sale of services. Changes in deferred revenue are due to our performance under the contract as well as to cash received from new contracts for which services have not been provided.

The changes in our contract liabilities are as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Beginning of period balance	$	17,241	$	15,019	$	14,837	$	12,529
Revenue deferred and acquired in period	4,373		3,682		13,750		11,131
Revenue recognized from amounts included in contract liabilities	(3,179)		(2,624)		(10,152)		(7,583)
End of period balance	$	18,435	$	16,077	$	18,435	$	16,077

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

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ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2022 and 2021

Note 4. Accounts Receivable, Net

The components of accounts receivable, net are as follows (in thousands):

	September 30, 2022		December 31, 2021
Accounts receivable	$	123,904	$	108,897
Allowance for credit losses	(3,536)		(2,168)
Allowance for product returns	(1,535)		(1,181)
Accounts receivable, net	$	118,833	$	105,548

For the three and nine months ended September 30, 2022, we recorded a provision for credit losses of $1.1 million and $1.6 million on our accounts receivable, respectively. For the three and nine months ended September 30, 2021, we recorded a reduction to the provision for credit losses of $0.4 million and $0.2 million on our accounts receivable, respectively.

For the three and nine months ended September 30, 2022, we recorded a reserve for product returns of $2.0 million and $3.7 million, respectively, as compared to $0.5 million and $1.6 million for the same periods in the prior year. Historically, we have not experienced write-offs for uncollectible accounts or sales returns that have differed significantly from our estimates.

Allowance for Credit Losses - Accounts Receivable

The allowance for credit losses is a valuation account that is deducted from the accounts receivable and notes receivable amortized cost basis (see Note 8) to present the net amount expected to be collected. We estimate the allowance balance by applying the loss-rate method using relevant available information from internal and external sources, including historical write-off activity, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in economic conditions, such as changes in unemployment rates. We use projected economic conditions over a period no more than twelve months based on data from external sources. For periods beyond the twelve-month reasonable and supportable forecast period, we revert to historical loss information immediately.

The allowance for credit losses is measured on a pooled basis when similar risk characteristics exist. When assessing whether to measure certain financial assets on a pooled basis, we considered various risk characteristics, including the financial asset type, size and the historical or expected credit loss pattern. We identified the following two portfolio segments for our accounts receivable: (i) outstanding accounts receivable balances within Alarm.com and certain subsidiaries and (ii) outstanding accounts receivable balances within all other subsidiaries. There were no changes to our portfolio segments for our accounts receivable during the three and nine months ended September 30, 2022, and no changes to our policies or practices that influenced our estimate of expected credit losses for accounts receivable. Additionally, there were no significant changes in the amount of accounts receivable write-offs during the three and nine months ended September 30, 2022, as compared to historical periods other than a partial write-off of $0.7 million related to one of our distribution partners' outstanding balance during the nine months ended September 30, 2021, upon the distributor being acquired by a third party.

Expected credit losses are estimated over the contractual term of the financial assets and we adjust the term for expected prepayments when appropriate. For the three and nine months ended September 30, 2022, we recorded credit loss expense for accounts receivable and notes receivable of $1.0 million and $1.3 million, respectively, in general and administrative expense in our condensed consolidated statements of operations. For the three and nine months ended September 30, 2021, we recorded a reduction of credit loss expense of $0.4 million, in general and administrative expense in our condensed consolidated statements of operations. The contractual term excludes expected extensions, renewals and modifications because extension and renewal options are unconditionally cancelable by us. Write-offs of the amortized cost basis are recorded to the allowance for credit losses. Any subsequent recoveries of previously written off balances are recorded as a reduction to credit loss expense.

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ALARM.COM HOLDINGS, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued)

September 30, 2022 and 2021

The changes in our allowance for credit losses for accounts receivable are as follows (in thousands):

	Three Months Ended September 30, 2022				Three Months Ended September 30, 2021				Nine Months Ended September 30, 2022				Nine Months Ended September 30, 2021
	Alarm.com and Certain Subsidiaries		All Other Subsidiaries		Alarm.com and Certain Subsidiaries		All Other Subsidiaries		Alarm.com and Certain Subsidiaries		All Other Subsidiaries		Alarm.com and Certain Subsidiaries		All Other Subsidiaries
Beginning of period balance	$	(2,450)	$	(58)	$	(3,443)	$	(131)	$	(2,035)	$	(133)	$	(4,442)	$	(254)
(Provision for) / recovery of expected credit losses	(1,057)		(2)		415		(27)		(1,676)		70		268		(30)
Write-offs	30		1