Other Assets

3 Months Ended

Mar. 31, 2020

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]

Purchases of Patents and Patent Licenses

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

Loan to a Distribution Partner

In September 2016, we entered into dealer and loan agreements with a distribution partner. The dealer agreement enables the distribution partner to resell our SaaS services and hardware to their subscribers. Under the loan agreements, we agreed to loan the distribution partner up to $4.0 million, collateralized by all assets owned by the distribution partner. The advance period for the loan was amended in August 2017 to begin each year on September 1 and end each year on December 31. Interest on the outstanding principal accrued at a rate per annum equal to the greater of 6.0% or LIBOR, plus 4.0%, as determined on the first date of each annual advance period. The repayment of principal and accrued interest was due in three installments beginning in July and ending in August following the advance period. The maturity date of the loan was August 31, 2019; however, the borrower had the option to extend the term of the loan for two successive terms of one year each.

In May 2018, the loan agreement with our distribution partner was amended to convert the entire $4.0 million note receivable outstanding into a $4.0 million term loan. The term loan matures on July 31, 2022 and requires annual principal repayments of $1.0 million on July 31 of each year, commencing on July 31, 2019. The term loan also requires monthly interest payments, with interest accruing on the outstanding principal balance at a rate per annum equal to 6.0% through June 30, 2018 and a rate per annum equal to the LIBOR rate on the first of any interest period plus 7.0% beginning on July 1, 2018. As of March 31, 2020 and December 31, 2019, $1.0 million of the note receivable balance was included in other current assets in our condensed consolidated balance sheets. As of March 31, 2020 and December 31, 2019, $2.0 million of the note receivable balance was included in other assets in our condensed consolidated balance sheets, respectively.

In April 2017, we entered into a subordinated credit agreement with an affiliated entity of the distribution partner and loaned the affiliated entity $3.0 million, with a maturity date of November 21, 2022. Interest on the outstanding principal balance accrues at a rate of 8.5% per annum and requires monthly interest payments. The $3.0 million loan receivable balance was included in other assets as of March 31, 2020 and December 31, 2019.

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

Loan to and Investment in a Hardware Supplier

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

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

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

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

Allowance for Credit Losses - Notes Receivable

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



	Three Months Ended March 31, 2020
	Loan Receivables			Hardware Financing Receivables
Beginning of period balance, prior to adoption of Topic 326	$	—		$	(16	)
Impact of adopting Topic 326	(434		)	(15		)
Provision for expected credit losses	347			2
Write-offs	—			—
End of period balance, subsequent to adoption of Topic 326	$	(87	)	$	(29	)

We manage our notes receivables using delinquency as a key credit quality indicator. Current and delinquent notes receivable by class of financing receivables and by year of origination as of March 31, 2020 are as follows (in thousands):



Loan Receivables:	2020		2019		2018		2017		2016		Prior		Total
Current	$	—	$	37	$	—	$	3,000	$	3,000	$	—	$	6,037
30-59 days past due	—		—		—		—		—		—		—
60-89 days past due	—		—		—		—		—		—		—
90-119 days past due	—		—		—		—		—		—		—
120+ days past due	—		—		—		—		—		—		—
Total	$	—	$	37	$	—	$	3,000	$	3,000	$	—	$	6,037

Hardware Financing Receivables:
Current	$	—	$	—	$	139	$	17	$	—	$	—	$	156
30-59 days past due	—		113		12		—		—		—		125
60-89 days past due	—		87		—		—		—		—		87
90-119 days past due	—		—		—		40		—		—		40
120+ days past due	—		—		—		15		—		—		15
Total	$	—	$	200	$	151	$	72	$	—	$	—	$	423

The amortized cost of notes receivables placed on nonaccrual status is as follows (in thousands):



	March 31, 2020		December 31, 2019
Loan receivables	$	—	$	—
Hardware financing receivables	55		16
Total	$	55	$	16

During the three months ended March 31, 2020 and 2019, there was no interest income recognized related to notes receivables that were in nonaccrual status.

As of March 31, 2020 and December 31, 2019, there were no notes receivables placed in nonaccrual status for which there was not a related allowance for credit losses that did not return to accrual status due to subsequent collections in April 2020. As of March 31, 2020 and December 31, 2019, there were no notes receivables that were 90 days or greater past due for which we continued to accrue interest income.

Prepaid Expenses

As of March 31, 2020 and December 31, 2019, $11.6 million and $6.1 million of prepaid expenses were included in other current assets, respectively. In February 2020, we made a prepayment of $4.7 million for long lead-time parts related to our inventory.