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, 2016 appearing2017 included in our Annual Report on Form 10-K filed with the SEC on March 16, 2017,February 28, 2018, or the 20162017 Annual Report. The condensed consolidated balance sheet as of December 31, 20162017 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, 20172018 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2017.2018.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of our assets and liabilities as ofat 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 is 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.

We updated the following significant accounting policies as a result of acquiring the Connect line of business from Icontrol Networks, Inc., or Icontrol, during the first quarter of 2017: (i) internal-use software, (ii) external software, (iii) revenue recognition and deferred revenue and (iv) cost of revenue. We generate SaaS and license revenue from monthly fees charged to service providers on a per subscriber basis for access to our newly-acquired Connect software platform. The Connect software for interactive security, automation and related solutions is typically deployed and operated by the service provider in its own network operations center. Except for as disclosed herein, there have been no other material changes to our significant accounting policies during the quarterthree and nine months ended September 30, 20172018 from those disclosed in our 20162017 Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 16, 2017 with the SEC.

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 the newly-acquired Connect 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 homeresidential and businesscommercial property owners, who are the service provider partners’ customers,customers. Our subscribers consist of all of the properties maintained by those residential and whomcommercial property owners to which we refer to asare delivering at least one of our subscribers.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.

Our hardware includes cellular radio modules that enable access to our cloud-based platform,platforms, as well as video cameras, image sensors and other peripherals. Our service provider partners may purchase our hardware in anticipation of installing the hardware in a homeresidential or businesscommercial property when they create a new subscriber account, or for use in an existing subscriber’s property.subscriber

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 service provider partner isstand-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 obligateddisclosed the total remaining revenue expected to and may not purchase a platform solutionbe recognized on all contracts or the expected period over which the remaining revenue would be recognized for the hardware sold, and the level and duration of platform solutions, ifcurrent period or any to be provided through the hardware sold cannot be determined.period presented before January 1, 2018.

We recognize revenue with respect to our solutions whenTo determine the transaction price, we analyze all of the following conditions are met:

For our standard service provider partners. If collectibility isagreements, we have used a portfolio approach for purposes of revenue recognition, as each agreement has similar characteristics and we do not reasonably assured, revenue is deferred until collection becomes reasonably assured, which is generally uponexpect the receipteffects of payment.

Under the terms inof our contractual arrangements with our service provider partners, we are entitled to payment and recognize revenue based onbill a monthly fee that is billedto our service provider partners in advance of the month of service.service, with the exception of the initial partial month of service, which is paid in arrears. Due to the limited period of time between receipt of payment and delivery of service, we have not accounted for these advance payments as significant financing components. We typically transfer the promised SaaS services to our customers over time, which is evidenced by the fact that the customers receive and consume the benefits provided by our performance of the services as such services are rendered. As a result, we recognize revenue from SaaS services on a monthly basis as we satisfy our performance obligations. We have demonstrated that we can sell our SaaS offering on a stand-alone basis, as it can be sold separately from hardware and activation services. As there is neither a minimum required initial service term nor a stated renewal term in our contractual arrangements, we recognize revenue over the period of service, which is monthly. Our service provider partners typically incur and pay the same monthly fee per subscriber account for the entire period a subscriber account is active.

We offer multiple service level packages for our platform solutions including a range of solutions and a range of a la carte add-ons for additional features. The fee paid by our service provider partners each month for the delivery of our solutions is based on the combination of packages and add-ons enabled for each subscriber. We utilize tiered pricing plans where our service provider partners may receive prospective pricing discounts driven by volume.

We also generate SaaS and license revenue from the fees paid to us when we license our intellectual property to service provider partners on a per customer basisthird parties for use of our patents. We bill a monthly fee to third parties based on the number of customers that were active during the prior month. We apply the usage-based royalty exception to recognize license revenue because the sole or predominant item to which the royalty relates is the license of intellectual property. Under the usage-based royalty exception, we recognize revenue on a monthly basis over the period of service. In addition, in certain markets our EnergyHub subsidiary sells its demand response software withservice for an annual service fee, with pricing based on the number of subscribers or amount of aggregate electricity demand made available for a utility’s or market’s control.

We generate hardware and other revenue primarily from the sale of video cameras and cellular radio modules that provide access to our cloud-based platform, from the sale of video camerasplatforms and, fromto a lesser extent, the sale of other devices, including image sensors and peripherals. We primarily transfer hardware to our customers upon delivery to the customer, which corresponds with the time at which the customer obtains control of the hardware. As a result, we recognize hardware and other revenue as we satisfy our performance obligations, which occurs when the hardware is received by our service provider partner or distributor, net of a reserve for estimated returns. There are a few contracts in which we provide shipping and handling services to the customer after control of the hardware transfers to the customer. In these instances, we have elected to account for shipping and handling costs as activities performed to fulfill the promise to transfer hardware to the customer and not as a separate promised service.

Amounts due from the sale of hardware are payable in accordance with the terms of our agreements with our service provider partners or distributors, and are not contingent on resale to end-users, or to service provider partners in the case of sales of hardware to distributors. Payment for our hardware is typically due within 30 days from shipment, with the exception of certain hardware finance arrangements, which are paid over a 36-month period. Our terms for hardware sales sold directly to either service provider partners or distributors typically allow for the return of hardware up to one year past the date of sale. Our distributors sell directly to our service provider partners under terms between the two parties.

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 each of the twelve months ended September 30, 2018 and 2017, our reserve against revenue for hardware returns which was 2.2% and 2.3%2% of hardware and other revenue for the three and nine months ended September 30, 2017, respectively.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. In general, we provide assurance-type warranties related to the intended functionality of the products and services provided. These warranties were not identified as separate performance obligations.

Hardware and other revenue also includes activation fees charged to service provider partners for activation of a new subscriber account on our platform,platforms, as well as fees paid by service provider partners for our marketing services. Our service provider partners use services on our platform,platforms, such as support tools and applications, to assist in the installation of our solutions in a subscriber’s property.subscriber properties. This installation marks the beginning of the service period on our platformplatforms 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 platform.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

The adoption of this standard had the following impact onchanges in our financial statements:contract assets are as follows (in thousands):

Tax windfall benefits or deficiencies from stock-based awardsContract liabilities include payments received in advance of performance under the contract, and are now recorded in provision for income taxesrealized with the associated revenue recognized under the contract. All of the deferred revenue presented in the period incurred, whereas previous guidance requiredbalance sheet represents contract liabilities resulting from advance cash receipts from customers or amounts billed in advance to customers from the tax windfall benefitssale of services. Changes in deferred revenue are due to be recorded in additional paid-in-capital. This change hasour performance under the contract as well as to cash received from new contracts for which services have not been applied prospectively.provided.

We adopted this guidance prospectivelyrecognize 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. Based on the first quarterpolicy above, we capitalize a portion of 2017. Our goodwill impairment testour 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 performed annually asconsistent 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 October 1st, therefore the adoption had no impacthistorical enhancements and upgrades to our financial statements.products and services. We applied the portfolio approach to account for the amortization of contract costs as each contract has similar characteristics.

We have developed a project planOn January 1, 2018, we adopted Topic 606 by applying the modified retrospective transition method to all of our contracts. Comparative information has not been restated and continues to be reported under the accounting standards in effect for the periods presented. The adoption of Topic 606 focused first on our standard service provider partner agreements. Based on our assessment to date, we dodid not believe Topic 606 will have a material impact on our revenue recognition policies, associated with our standard service provider partner agreements. In addition, we continue to evaluate our 17 largest non-standard service provider partner agreements, including distributorshowever, as a result of our hardware and licensees of our intellectual property. These service provider partners accounted for 61% of our revenue for the nine months ended September 30, 2017. While we have not finalized our review of these 17 non-standard service provider partners, based on our assessment to date, we have not identified any changes to date that we believe would result in a material impact on our revenue recognition policies associated with our largest non-standard service provider partners. Additionally, in the third quarter of 2017, we began assessing the impact of the adoption of Topic 606 on our subsidiaries’ service provider partner agreements.

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

For the three and nine months ended September 30, 2018, we recorded a provision for doubtful accounts of less than $0.1 million and $0.1 million, respectively. For each of the three and nine months ended September 30, 2017, we recorded a reduction to the provision for doubtful accounts of $0.4 million. For the three and nine months ended September 30, 2016, we recorded a provision for doubtful accounts of $0.2 million and $0.4 million, respectively.

For the three and nine months ended September 30, 2017,2018, we recorded a reserve for product returns in our hardware and other revenue of $0.6less than $0.1 million and $1.7$0.2 million, respectively, as compared to $0.5$0.6 million and $1.5$1.7 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.

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

On March 8, 2017, in accordance with the asset purchase agreement we entered into with Icontrol Networks, Inc., or Icontrol, on June 23, 2016, we acquired certain assets and assumed certain liabilities of the Connect line of business and all of the outstanding equity interests of the two subsidiaries through which Icontrol conducted its Piper line of business, or the Acquisition. Connect provides an interactive security and home automation platform for service providers. Piper designs, produces and sellsprovides an all-in-one video and home automation hub. We expect the addition of new technology infrastructure, talent, key relationships and hardware devices to help accelerate our development of intelligent, data-driven smart homeresidential and business commercial property

The cash consideration was $148.5 million, after the estimated working capital adjustment, of which $14.5 million was deposited in escrow and was released in accordance with the asset purchase agreement for indemnificationsupon the finalization of indemnification obligations of Icontrol stockholders and the final determination of closing working capital. We used $81.5 million of cash on hand and drew $67.0 million under our senior line of credit with Silicon Valley Bank, or SVB, and a syndicate of lenders to fund the Acquisition.

The table below sets forth the purchase consideration and the fair value allocation of the tangible and intangible net assets acquired (in thousands):

In accordance with ASC 805, the business units acquired in the Acquisition constituted a business and the assets and liabilities were recorded at their respective fair values as of March 8, 2017. 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.

We recorded the customer relationships intangible separately from goodwill based on determination of the length, strength and contractual nature of the relationship that Connect shared with its customers. We valued two groups of customer relationships using the multi-period excess earnings method, an income approach. We used several assumptions in the income approach, including attrition and renewal rate, margin and discount rate. We are amortizing the first customer relationship, valued at $92.5 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of twelve years and the second group of customer relationships, valued at $0.8 million, on the same basis, over an estimated useful life of four years.

Developed technology primarily consists of intellectual property of proprietary software that is marketed for sale. The Connect platform is software for interactive security, automation and related solutions that wasis typically deployed and operated by the service provider in its own network operations center. We valued the developed technology by applying the relief from royalty method, an income approach. We used several assumptions in the relief from royalty method, which included royalty rate and discount rate. We are amortizing the Connect developed technology, valued at $4.4 million, on an attribution method based on the discounted cash flows of the model over an estimated useful life of three years. Other developed technologies, valued at $0.3 million, were also acquired.

The table below sets forth the purchase consideration and the fair value allocation of the tangible and intangible net assets acquired (in thousands):

Goodwill of $2.3 million reflects the value of acquired workforce and expected synergies from pairing ObjectVideo Labs' video analytics capabilities with our offerings. The goodwill will be deductible for tax purposes.

In accordance with ASC 805, the assets and liabilities of ObjectVideo Labs we acquired were recorded at their respective fair values as of January 1, 2017, the date of the acquisition. We developed our estimate of the fair value of intangible assets using the replacement cost method for the developed technology.

Developed technology recorded separately from goodwill consists of intellectual property such as proprietary software used internally for revenue producing activities. ObjectVideo Labs proprietary software consists of source code and video analytics testing programs used internally to provide video analytics consulting services and research and development to customers and for the SaaS Alarm.com platform. We valued the developed technology by applying the replacement cost method. We used several assumptions in this cost approach, which included analyzing costs that a company would expect to incur to recreate an asset of equivalent utility. We are amortizing the developed technology, valued at $3.8 million, on a straight-line basis over an estimated useful life of two years which coincides with the rapidly developing technology of video analytics.

The following unaudited pro forma data is presented as if the Acquisition and ObjectVideo Labs were included in our historical consolidated statements of operations beginning January 1, 2016. These pro forma results do not necessarily represent what would have occurred if all the business combinations had taken place on January 1, 2016, nor do they represent the results that may occur in the future.

This pro forma financial information includes our historical financial statements and those of our business combinations with the following adjustments: (i) we adjusted the pro formforma amounts for income taxes, (ii) we applied interest expense as if the additional borrowing for the acquisitions were as of January 1, 2016, (iii) we adjusted for amortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2016, and (iv) we adjusted for transaction fees incurred and reclassified them to January 1, 2016.

The pro forma adjustments were based on available information and upon assumptions that we believe are reasonable to reflect the impact of these acquisitions on our historical financial information on a supplemental pro forma basis, as follows (in thousands):

The operations of each of the business combinations discussed above were included in the condensed consolidated financial statements as of each of their respective acquisition dates. The following table presents the revenue and earnings of the business combinations in the year of acquisition as reported within the condensed consolidated financial statements for the nine months ended September 30, 2017 (in thousands):

For the Acquisition, we included the results of Connect's operations since its acquisition date in the Alarm.com segment and the results of Piper's operations since its acquisition date in the Other segment. We included the results of ObjectVideo Labs operations since its acquisition date in the Alarm.com segment.

The changes in goodwill by reportable segment are outlined below (in thousands):

On January 1, 2017, we acquired ObjectVideo Labs and recorded $2.3 million of goodwill in the Alarm.com segment. On March 8, 2017, in connection with the Acquisition, we recorded $36.6 million of goodwill in the Alarm.com segment. There were no impairments of goodwill during the three and nine months ended September 30, 20172018 and 2016.2017.

The following table reflects changes in the net carrying amount of the components of intangible assets (in thousands):

We recorded $3.7$3.8 million and $8.7$11.4 million of amortization related to our intangible assets for the three and nine months ended September 30, 2017,2018, respectively, as compared to $0.4$3.7 million and $1.4$8.7 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, 20172018 and 2016.2017.

The following tables reflect the weighted average remaining life and carrying value of finite-lived intangible assets (in thousands):

From time to time, we enter into agreements to license patents. The carrying value, net of amortization, was $2.6$2.0 million and $3.2$2.4 million as of September 30, 20172018 and December 31, 20162017, respectively. As of September 30, 2018 and wasDecember 31, 2017, $0.4 million and $0.5 million of patent licenses were included in other assets.current assets and $1.6 million and $1.9 million of patent licenses were included in other assets, respectively. We have $4.9 million of

The following table presents our assets and liabilities measured at fair value on a recurring basis (in thousands):

The following table summarizes the change in fair value of the Level 3 liabilities for subsidiary unit awards and contingent consideration liability from acquisitionwith significant unobservable inputs (in thousands):

The money market account is included in our cash and cash equivalents in our condensed consolidated balance sheets. Our money market assets are valued using quoted prices in active markets.

The liability for the subsidiary unit awards relates to agreements established with two employees of our subsidiaries for cash awards contingent upon the subsidiary companies meeting certain financial milestones such as revenue, working capital, EBITDA and EBITDA margin. We account for these subsidiary awards using fair value and establish liabilities for the future payment for the repurchase of subsidiary units under the terms of the agreements based on estimating revenue, working capital,

We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. There were no transfers between Levels 1, 2 or 3 during the three and nine months ended September 30, 20172018 and 2016.2017. We also monitor the value of the investments for other than temporaryother-than-temporary impairment on a quarterly basis. No other-than-temporary impairments occurred during the three and nine months ended September 30, 20172018 and 2016.2017.

The components of accounts payable, accrued expenses and other current liabilities are as follows (in thousands):

The components of other liabilities are as follows (in thousands):

The debt, commitments and contingencies described below would require us, or our subsidiaries, to make payments to third parties under certain circumstances.

The outstanding principal balance ofon the 2017 Facility accrues interest at a rate equal to, at our option, either (1) LIBOR, plus an applicable margin based on our consolidated leverage ratio, or (2) the highest of (a) the Wall Street Journal prime rate, (b) the Federal Funds rate plus 0.50%, or (c) LIBOR plus 1.0%,1.00% plus an applicable margin based on our consolidated leverage

The carrying value of the 2017 Facility was $68.0 million and $71.0 million as of September 30, 2018 and December 31, 2017, respectively. The 2017 Facility includes a variable interest rate that approximates market rates and, as such, we classified the liability as Level 2 within the fair value hierarchy and determined that the carrying amount of the 2017 Facility approximated its fair value as of September 30, 2018 and December 31, 2017. The 2017 Facility contains various financial and other covenants that require us to maintain a maximum consolidated leverage ratio not to exceed 3.50:1.00 and a consolidated fixed charge coverage ratio of 3.50:at least 1.25:1.00. As of September 30, 2018, we were in compliance with all financial and non-financial covenants and there were no events of default.

In 2011, we formed a subsidiary that offers to professional residential property management and vacation rental management companies technology solutions for remote monitoring and control of properties, including access control and energy management. Since its formation, we granted an award of subsidiary stock to the founder and president. The vesting of the award is based upon the subsidiary meeting certain minimum financial targets from the date of commercial availability, which was determined to be June 1, 2013, until the fourth anniversary. In 2016, we amended the term of the award, extending the valuation date for the first payment in cash to December 31, 2017, amending the financial targets and allowing for payments in cash from 2018 through 2020 based on the future collection of financed customer receivables from 2018 to 2020 that existed as of the valuation date. During the nine months ended September 30, 2018, we settled $2.8 million of the liability related to the subsidiary unit awards. We recorded a liability of $2.7$0.2 million in accounts payable, accrued expenses and other current liabilities and $0.4$0.2 million in other liabilities related to this commitment in our condensed consolidated balance sheet as of September 30, 2017.2018. We recorded a liability of $2.5$2.8 million in accounts payable, accrued expenses and other current liabilities and a liability of $0.3$0.4 million in other liabilities related to this commitment in our condensed consolidated balance sheet as of December 31, 2016.2017.

At each reporting date until the respective payment dates, we will remeasure these liabilities, and we will record any changes in fair value in general and administrative expense (see Note 9)8).

We lease office space and office equipment under non-cancelable operating leases with various expiration dates through 2026. We recognize rent expense for lease payments on a straight-line basis over the expected lease term and amortize tenant improvement allowances over the term of the lease. In August 2014, we signed a lease for new office space in Tysons, Virginia, where we relocated our headquarters in February 2016. ThisThe lease term ends in 2026 and includes a five-year renewal option, an $8.0 million tenant improvement allowance and scheduled rent increases. During 2016, we entered into amendments to this lease which provided for 30,662 square feet of additional office space and an additional $1.7 million in tenant improvement allowance. We took possession of the additional space in February 2017 and we were allowed to utilize the tenant improvement allowance for design prior to moving into the space.

For the three and nine months ended September 30, 2017,2018, rent expense was $1.1 million and $4.5 million, respectively, as compared to $1.2$1.6 million and $3.8$4.5 million for the same periods in the prior year.

We have various agreements that may obligate us to indemnify the other party to the agreement with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business. Although we cannot predict the maximum potential amount of future payments that may become due under these indemnification agreements, we do not believe any potential liability that might arise from such indemnity provisions is probable or material.

Stock-based compensation expense is included in the following line items in the accompanying condensed consolidated statements of operations (in thousands):

The following table summarizes the components of non-cash stock-based compensation expense (in thousands):

We granted 8,050an aggregate of 4,000 and 245,600180,500 stock options pursuant to our 2015 Equity Incentive Plan, or 2015 Plan, during the three and nine months ended September 30, 2017,2018, respectively, as compared to 12,600an aggregate of 8,050 and 588,900245,600 stock options for the same periods in the prior year. There were 425,376281,709 and 943,797721,573 stock options exercised during the three and nine months ended September 30, 2017,2018, respectively, as compared to 241,165425,376 and 321,286943,797 stock options for the same periods in the prior year. We granted 40,150an aggregate of 54,300 and 367,350266,470 restricted stock units during the three and nine months ended September 30, 2017,2018, respectively, as compared to 25,640an aggregate of 40,150 and 367,350 restricted stock units for each of the same periods in the prior year. There were 8,168 and 21,714 restricted stock units that vested during the three and nine months ended September 30, 2018, respectively. No restricted stock units vested during the three and nine months ended September 30, 2017.

The components of basic and diluted earnings (loss) per share, or EPS, are as follows (in thousands, except share and per share amounts):