Alarm.com Holdings, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ALARM.COM HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 238 ) 79 Consolidated Financial Statements Consolidated Statements of Operations 81 Consolidated Balance Sheets 82 Consolidated Statements of Cash Flows 83 Consolidated Statements of Equity 85 Notes to the Consolidated Financial Statements 86 Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 2022, 2021 and 2020 127 78 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Alarm.com Holdings, Inc. Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Alarm.com Holdings, Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, of equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO. Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for convertible instruments and earnings per share in 2022. Basis for Opinions The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Noonlight, Inc. from its assessment of internal control over financial reporting as of December 31, 2022, because it was acquired by the Company in a purchase business combination during 2022. We have also excluded Noonlight, Inc. from our audit of internal control over financial reporting. Noonlight, Inc. is an 85% owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent less than 1% of the related consolidated financial statement amounts as of and for the year ended December 31, 2022. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit 79 preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue recognition As described in Note 2 to the consolidated financial statements, the Company’s revenue is generated from the sale of cloud-based SaaS services on its integrated Alarm.com platform, the sales of licenses and services on its non-hosted software platform, and the sale of hardware products. Cloud-based SaaS services are billed monthly in advance and revenue is recognized on a monthly basis as the performance obligation is satisfied. Licenses on non-hosted services are billed monthly and revenue is recognized on a monthly basis as the services are performed. Hardware revenue is recognized when the customer obtains control. The Company’s total revenue was $842.6 million for the year ended December 31, 2022. The principal considerations for our determination that performing procedures relating to revenue recognition is a critical audit matter are the significant audit effort in performing procedures and evaluating audit evidence related to the accuracy and occurrence of revenue transactions. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the accuracy and occurrence of revenue transactions. These procedures also included, among others, evaluating, on a test basis, the accuracy and occurrence of transactions recognized as revenue by obtaining and inspecting, where applicable, invoices, customer purchase orders, dealer and license agreements, shipping documents and cash receipts from customers. /s/ PricewaterhouseCoopers LLP Washington, DC February 24, 2023 We have served as the Company’s auditor since 2009. 80 ALARM.COM HOLDINGS, INC. Consolidated Statements of Operations (in thousands, except share and per share data) Year Ended December 31, 2022 2021 2020 Revenue: SaaS and license revenue $ 520,377 $ 460,372 $ 393,257 Hardware and other revenue 322,182 288,597 224,746 Total revenue 842,559 748,969 618,003 Cost of revenue (1) : Cost of SaaS and license revenue 73,897 66,758 53,539 Cost of hardware and other revenue 268,684 239,141 173,889 Total cost of revenue 342,581 305,899 227,428 Operating expenses: Sales and marketing 92,748 86,664 75,967 General and administrative 106,688 87,406 78,643 Research and development 218,635 177,713 152,147 Amortization and depreciation 30,870 29,715 27,520 Total operating expenses 448,941 381,498 334,277 Operating income 51,037 61,572 56,298 Interest expense ( 3,144 ) ( 15,956 ) ( 2,596 ) Interest income 8,759 587 870 Other (expense) / income, net ( 59 ) ( 134 ) 25,588 Income before income taxes 56,593 46,069 80,160 Provision for / (benefit from) income taxes 962 ( 5,106 ) 3,500 Net income 55,631 51,175 76,660 Net loss attributable to redeemable noncontrolling interests 707 1,084 1,193 Net income attributable to common stockholders $ 56,338 $ 52,259 $ 77,853 Per share information attributable to common stockholders: Net income per share: Basic $ 1.13 $ 1.05 $ 1.59 Diluted $ 1.07 $ 1.01 $ 1.53 Weighted average common shares outstanding: Basic 49,926,236 49,869,857 48,950,328 Diluted 54,932,757 51,919,902 50,963,190 _______________ (1) Exclusive of amortization and depreciation shown in operating expenses below. See accompanying notes to the consolidated financial statements. 81 ALARM.COM HOLDINGS, INC. Consolidated Balance Sheets (in thousands, except share and per share data) December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 622,165 $ 710,621 Accounts receivable, net of allowance for credit losses of $ 2,835 and $ 2,168 , respectively, and net of allowance for product returns of $ 1,551 and $ 1,181 , as of December 31, 2022 and 2021, respectively 124,283 105,548 Inventory 115,584 75,276 Other current assets, net of allowance for credit losses of $ 0 and $ 2 , as of December 31, 2022 and 2021, respectively 29,056 26,175 Total current assets 891,088 917,620 Property and equipment, net 57,172 41,713 Intangible assets, net 82,458 91,406 Goodwill 148,183 112,901 Deferred tax assets 84,185 13,547 Operating lease right-of-use assets 28,933 30,479 Other assets, net of allowance for credit losses of $ 2 and $ 78 , as of December 31, 2022 and 2021, respectively 37,356 24,349 Total assets $ 1,329,375 $ 1,232,015 Liabilities, redeemable noncontrolling interests and stockholders’ equity Current liabilities: Accounts payable, accrued expenses and other current liabilities $ 119,657 $ 89,816 Accrued compensation 25,582 23,495 Deferred revenue 7,540 5,697 Operating lease liabilities 12,157 10,331 Total current liabilities 164,936 129,339 Deferred revenue 10,792 9,140 Convertible senior notes, net 490,370 425,345 Operating lease liabilities 27,380 32,591 Other liabilities 13,050 9,545 Total liabilities 706,528 605,960 Commitments and contingencies (Note 13) Redeemable noncontrolling interests 23,988 12,888 Stockholders’ equity Preferred stock, $ 0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding as of December 31, 2022 and 2021 — — Common stock, $ 0.01 par value, 300,000,000 shares authorized; 50,985,454 and 50,406,606 shares issued; and 49,452,709 and 50,259,453 shares outstanding as of December 31, 2022 and 2021, respectively 510 504 Additional paid-in capital 497,199 498,979 Treasury stock, at cost; 1,532,745 and 147,153 shares as of December 31, 2022 and 2021, respectively ( 83,993 ) ( 5,149 ) Retained earnings 185,143 118,833 Total stockholders’ equity 598,859 613,167 Total liabilities, redeemable noncontrolling interests and stockholders’ equity $ 1,329,375 $ 1,232,015 See accompanying notes to the consolidated financial statements. 82 ALARM.COM HOLDINGS, INC. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities: Net income $ 55,631 $ 51,175 $ 76,660 Adjustments to reconcile net income to net cash flows from operating activities: Provision for / (recovery of) credit losses on accounts receivable 1,156 ( 775 ) 2,162 Reserve for product returns 4,746 2,494 1,795 Recovery of credit losses on notes receivable ( 78 ) ( 9 ) ( 359 ) Provision for excess and obsolete inventory — 448 1,451 Amortization on patents and tooling 1,359 1,240 882 Amortization and depreciation 30,870 29,715 27,520 Amortization of debt discount and debt issuance costs 3,126 15,823 108 Amortization of operating leases 10,499 9,692 8,888 Deferred income taxes ( 55,039 ) ( 10,115 ) ( 3,256 ) Change in fair value of contingent liability — — ( 2,595 ) Stock-based compensation 52,654 38,694 29,176 Acquired in-process research and development — — 3,297 Gain on sale of investment — — ( 24,737 ) (Gain on) / impairment of investment or intangible assets ( 140 ) 86 ( 676 ) Loss on early extinguishment of debt — 185 — Changes in operating assets and liabilities (net of business acquisitions): Accounts receivable ( 24,346 ) ( 23,941 ) ( 10,098 ) Inventory ( 40,308 ) ( 31,443 ) ( 10,647 ) Other current and non-current assets ( 8,952 ) ( 11,912 ) ( 2,683 ) Accounts payable, accrued expenses and other current liabilities 32,938 39,418 13,781 Deferred revenue 3,428 2,308 2,031 Operating lease liabilities ( 12,723 ) ( 11,809 ) ( 10,177 ) Other liabilities 2,080 1,883 ( 443 ) Cash flows from operating activities 56,901 103,157 102,080 Cash flows used in investing activities: Business acquisition, net of cash acquired ( 31,730 ) — ( 26,299 ) Additions to property and equipment ( 28,640 ) ( 11,062 ) ( 16,141 ) Purchases of in-process research and development — — ( 3,297 ) Issuances of notes receivable ( 3,000 ) — ( 1,200 ) Receipt of payments on notes receivable 61 59 2,026 Purchase of investment in unconsolidated entity ( 5,150 ) ( 5,000 ) — Proceeds from sale of investment 140 — 25,687 Purchases of patents, patent licenses and developed technology — ( 4,362 ) ( 1,050 ) Cash flows used in investing activities ( 68,319 ) ( 20,365 ) ( 20,274 ) Cash flows (used in) / from financing activities: Proceeds from credit facility — — 50,000 Repayments of credit facility — ( 110,000 ) ( 3,000 ) Proceeds from issuance of convertible senior notes — 500,000 — Payments of debt issuance costs — ( 15,698 ) — Payments of deferred consideration for business acquisitions ( 1,500 ) ( 1,160 ) ( 1,538 ) Purchases of treasury stock ( 78,844 ) — ( 5,149 ) Payments of tax withholdings related to vesting of restricted stock units — ( 4,476 ) — Issuances of common stock from equity-based plans 4,020 5,704 11,711 Cash flows (used in) / from financing activities ( 76,324 ) 374,370 52,024 Net (decrease) / increase in cash, cash equivalents and restricted cash ( 87,742 ) 457,162 133,830 Cash, cash equivalents and restricted cash at beginning of the period 710,621 253,459 119,629 Cash, cash equivalents and restricted cash at end of the period $ 622,879 $ 710,621 $ 253,459 83 ALARM.COM HOLDINGS, INC. Consolidated Statements of Cash Flows — (Continued) (in thousands) Year Ended December 31, 2022 2021 2020 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 622,165 $ 710,621 $ 253,459 Restricted cash included in other current assets and other assets 714 — — Total cash, cash equivalents and restricted cash $ 622,879 $ 710,621 $ 253,459 Supplemental disclosures: Cash paid for interest $ — $ 114 $ 2,427 Cash paid for income taxes, net of refunds 7,453 4,146 7,369 Noncash investing and financing activities: Cash not yet paid for capital expenditures 1,047 1,082 2,020 Cash not yet paid for business and asset acquisitions - holdback 4,833 850 1,017 See accompanying notes to the consolidated financial statements. 84 ALARM.COM HOLDINGS, INC. Consolidated Statements of Equity (in thousands) Redeemable Noncontrolling Interests Preferred Stock Common Stock Additional Paid-In Capital Treasury Stock Retained Earnings / (Accumulated Deficit) Total Stockholders’ Equity Shares Amount Shares Amount Shares Amount Balance as of December 31, 2019 $ 11,210 — $ — 48,701 $ 487 $ 365,627 — $ — $ ( 10,463 ) $ 355,651 Adoption of accounting standard on credit losses — — — — — — — — ( 816 ) ( 816 ) Common stock issued in connection with equity-based plans — — — 930 9 11,702 — — — 11,711 Purchases of treasury stock — — — — — — 147 ( 5,149 ) — ( 5,149 ) Stock-based compensation expense — — — — — 29,176 — — — 29,176 Accretion adjustments of redeemable noncontrolling interest to redemption value 674 — — — — ( 674 ) — — — ( 674 ) Net income / (loss) attributable to common stockholders ( 1,193 ) — — — — — — — 77,853 77,853 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 — — — 776 8 5,696 — — — 5,704 Tax withholding related to vesting of restricted stock units — — — — — ( 4,476 ) — — — ( 4,476 ) Stock-based compensation expense — — — — — 38,694 — — — 38,694 Equity component of convertible senior notes, net — — — — — 56,515 — — — 56,515 Accretion adjustments of redeemable noncontrolling interest to redemption value 3,281 — — — — ( 3,281 ) — — — ( 3,281 ) Net income / (loss) attributable to common stockholders ( 1,084 ) — — — — — — — 52,259 52,259 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 — — — 578 6 4,014 — — — 4,020 Purchases of treasury stock — — — — — — 1,386 ( 78,844 ) — ( 78,844 ) Reclassification of subsidiary long-term incentive plan liability related to modification — — — — — 3,104 — — — 3,104 Stock-based compensation expense — — — — — 52,654 — — — 52,654 Noncontrolling interest assumed through acquisition 6,770 — — — — — — — — — Accretion adjustments of redeemable noncontrolling interest to redemption value 5,037 — — — — ( 5,037 ) — — — ( 5,037 ) Net income / (loss) attributable to common stockholders ( 707 ) — — — — — — — 56,338 56,338 Balance as of December 31, 2022 $ 23,988 — $ — 50,985 $ 510 $ 497,199 1,533 $ ( 83,993 ) $ 185,143 $ 598,859 See accompanying notes to the consolidated financial statements. 85 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements December 31, 2022, 2021 and 2020 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. Our cloud-based platform offers an expansive suite of Internet of Things, or IoT, solutions that address opportunities in the residential, multi-family, small business and enterprise commercial markets. Alarm.com’s solutions include security, video and video analytics, energy management, access control, electric utility grid management, indoor gunshot detection, water management, health and wellness and data-rich emergency response. As of December 31, 2022, 9.1 million homes and businesses around the world depend on our Alarm.com platform or our non-hosted software to intelligently and conveniently secure, automate and manage their 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 11,000 as of December 31, 2022. 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. Summary of Significant Accounting Policies Principles of Consolidation Our consolidated financial statements include our accounts and those of our majority-owned and controlled subsidiaries after elimination of intercompany accounts and transactions. Equity investments over which we are able to exercise significant influence but do not control the investee are accounted for using the equity method. We determine whether we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity, or VIE. Voting interest entities are entities that have sufficient equity and provide equity investor voting rights that give them power to make significant decisions relating to the entity’s operations. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. In VIEs, a controlling financial interest is attained through means other than voting rights and the entities lack one or more of the characteristics of a voting entity. We have unconsolidated equity investments in third-party businesses. Equity investments with readily determinable fair values are recorded at fair value. Equity investments without readily determinable fair values are recorded using the measurement alternative. Under the measurement 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. We make a separate election to use the measurement alternative for each eligible investment, and reassess whether an investment qualifies for the alternative at each reporting period. Adjustments resulting from impairment, fair value or observable price changes are recorded in other (expense) / income, net in our consolidated statements of operations. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or 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. 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. 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, goodwill, intangible assets and other long-lived assets. 86 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 Reclassifications Certain previously reported amounts in the income taxes footnote for the year ended December 31, 2020 have been reclassified to conform to our current presentation, including the removal of the change in tax rate line of the reconciliation between the federal statutory rate and the effective income tax rate. Cash and Cash Equivalents We consider all highly liquid instruments purchased with an original maturity from the date of purchase of three months or less to be cash equivalents. As of December 31, 2022 and 2021, we have invested $ 510.3 million and $ 679.3 million in cash equivalents in the form of money market funds with one financial institution, respectively. We consider these money market funds to be Level 1 financial instruments (see Note 10). Accounts Receivable Accounts receivable are principally derived from sales to customers located in the United States and Canada. Substantially all of our sales in Canada are transacted in U.S. dollars. Revenue in countries outside of North America accounted for 4 %, 3 % and 3 % of our total revenue for the years ended December 31, 2022, 2021 and 2020, respectively. Accounts receivable balances related to service providers partners outside of North America were 5 % and 4 % as of December 31, 2022 and 2021, respectively. Our accounts receivable are stated at estimated realizable value. 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 December 31, 2022, we had a total of $ 0.7 million of restricted cash, of which less than $ 0.1 million was included in other current assets and $ 0.7 million was included in other assets within our consolidated balance sheets. We had no restricted cash as of December 31, 2021. Notes Receivable Notes receivable are presented net of an allowance for uncollectibility, if any. We accrue interest on notes receivable based on the contractual terms of the note. Outstanding notes receivable that are aged 30 days or more from the contractual payment date are considered past due. Notes receivable are evaluated for impairment at least quarterly. Impairment occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value and the probability of collecting payments when due. See Note 9 for further details on loans provided to one of our distribution partners, technology partners, suppliers and service provider partners. Credit Losses The allowance for credit losses is a valuation account that is deducted from the accounts receivable and notes receivable amortized cost basis to present the net amount expected to be collected. We estimate the allowance balance by applying the loss-rate method using relevant available information from internal and external sources, including historical write-off activity, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in economic conditions, such as changes in unemployment rates. We use projected economic conditions over a period no more than twelve months based on data from external sources. For periods beyond the twelve-month reasonable and supportable forecast period, we revert to historical loss information immediately. The allowance for credit losses is measured on a pooled basis when similar risk characteristics exist. When assessing whether to measure certain financial assets on a pooled basis, we considered various risk characteristics, including the financial asset type, size and the historical or expected credit loss pattern. These risk characteristics are relevant to accounts receivable and notes receivable. We identified the following two portfolio segments for our accounts receivable: (i) outstanding accounts receivable balances within Alarm.com and certain subsidiaries and (ii) outstanding accounts receivable balances within all other subsidiaries. We identified the following two portfolio segments for our notes receivable: (i) loan receivables and (ii) hardware financing receivables. There were no changes to our portfolio segments during the years ended December 31, 2022 and 2021, and no changes to our policies or practices involving the issuance of notes receivable, customer acquisitions or any other factors that influenced our estimate of expected credit losses. Additionally, there were no significant changes in the amount of accounts receivable or notes receivable write-offs during the year ended December 31, 2022 as compared to historical periods other than a partial accounts receivable write-off of $ 0.7 million related to one of our distribution partners' outstanding balance during the year ended December 31, 2021. There were no purchases or sales of financial assets during the years ended December 31, 2022 and 2021. There were no hardware financing receivables outstanding as of December 31, 2022. 87 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 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 years ended December 31, 2022 and 2020 we recorded credit loss expense of $ 0.8 million and $ 1.7 million in general and administrative expense in our consolidated statements of operations, respectively. For the year ended December 31, 2021, we recorded a reduction to credit loss expense of $ 1.0 million in general and administrative expense in our consolidated statements of operations. The contractual term excludes expected extensions, renewals and modifications because extension and renewal options are unconditionally cancelable by us. Write-offs of the amortized cost basis are recorded to the allowance for credit losses. Any subsequent recoveries of previously written off balances are recorded as a reduction to credit loss expense. We do not accrue interest on notes receivable that are considered impaired or are 90 days or greater past due based on their contractual payment terms. Notes receivable that are 90 days or greater past due are placed on nonaccrual status. Notes receivable may be placed on nonaccrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain. After a note receivable has been placed on nonaccrual status, interest will be recognized when cash is received. A note receivable may be returned to accrual status after all of the customer’s delinquent balances of principal and interest have been settled, and collection of all remaining contractual amounts due is reasonably assured. We have elected not to measure an allowance for credit losses for accrued interest receivables . We write-off any accrued interest on notes receivable that are considered impaired or are 90 days or greater past due based on their contractual payment terms by reversing interest income. The accrued interest receivable as of December 31, 2022 and 2021 was less than $ 0.1 million and is reflected in other current assets within our consolidated balance sheets and excluded from the amortized cost basis of the notes receivable . We did not write-off any accrued interest receivable during the years ended December 31, 2022, 2021 and 2020. Inventory Our inventory, which is comprised of raw materials and finished goods, includes materials used to produce our wireless communications network enabled radios, video cameras, video recorders, gunshot detection sensors, home automation system parts and peripherals, is stated at the lower of cost or net realizable value, and is charged to cost of sales primarily on a first in, first out, or FIFO, basis when the inventory is shipped from our manufacturer and received by our service provider partners. We periodically evaluate our inventory quantities for obsolescence based on criteria such as customer demand and changing technology and record an obsolescence write-off when necessary. 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 consolidated balance sheets. We did no t have any finance leases or subleases as of December 31, 2022 and 2021. 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 88 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 not recorded on our 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 years ended December 31, 2022 and 2021. Convertible Senior Notes On January 20, 2021, we issued $ 500.0 million aggregate principal amount of 0 % convertible senior notes due January 15, 2026 in a private placement to qualified institutional buyers, or the 2026 Notes. Prior to the January 1, 2022 adoption of Accounting Standards Update, or 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 ," we separated the 2026 Notes into liability and equity components. In accounting for the issuance of our convertible senior notes, the carrying amount of the liability component was calculated by measuring the fair value of a similar liability that did not have an associated convertible feature, using a discounted cash flow model with a risk adjusted yield. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2026 Notes as a whole. This difference between the aggregate principal amount and the liability component represented a debt discount that was amortized to interest expense using the effective interest method over the term of the notes. Transaction costs attributable to the liability component were netted with the liability component and amortized to interest expense using the effective interest method over the term of the 2026 Notes. Transaction costs attributable to the equity component were netted with the equity component of the notes in additional paid-in capital in the consolidated balance sheets. The equity component was not remeasured as long as it continued to meet the conditions for equity classification. See the Recent Accounting Pronouncements section below within Note 2 for details on the adoption of ASU 2020-06 and the impact the adoption had on our consolidated financial statements. 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 7). 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 values of the of the noncontrolling interest was $ 24.0 million and $ 12.9 million as of December 31, 2022 and 2021. Internal-Use Software We capitalize the costs directly related to the development of internal-use software for our platforms during the application development stage of the projects. Such costs primarily include payroll and payroll-related costs for engineers and product development employees directly associated with the development project. Our internal-use software is reported at cost less accumulated depreciation. Depreciation begins once the project is ready for its intended use, which is usually when the code goes into production in weekly software builds on our platforms. We depreciate the asset on a straight-line basis over a period of three years , which is the estimated useful life. We update our software for our SaaS multi-tenant platforms on a weekly basis utilizing continuous agile development methods, which primarily consists of bug-fixes and user interface changes. We evaluate whether a project should be capitalized if it adds significant functionality to our platforms. Maintenance activities or minor upgrades are expensed in the period performed. External Software Costs incurred in researching and developing a computer software product that will be marketed and sold are charged to expense when incurred until technological feasibility is established. Technological feasibility is established upon completion of a detailed program design or, in its absence, completion of a working model. After technological feasibility is established, certain payroll and payroll-related costs are capitalized for engineers and product development employees directly associated with the development project. Cost capitalization ceases when the product is available for general release. Our non-hosted software is typically developed in an agile environment with frequent revisions to product release features and functions. Agile development results in a short duration between completion of the detailed program design and beta release. Accordingly, as of December 31, 89 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 2022 and 2021, we did not have any capitalized external software due to the shorter development cycle associated with agile development. 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 c ontracts typically have an initial term o f 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. Our hardware includes cellular radio modules that enable access to our cloud-based platforms, as well as video cameras, video recorders, image sensors, gunshot detection sensors and other peripherals. Our service provider partners may purchase our hardware in anticipation of installing the hardware in a residential or commercial property when they create a new subscriber account, or for use in existing subscriber properties. The purchase of hardware occurs in a transaction that is separate and typically in advance of the purchase of our platform services. The performance obligation is primarily satisfied when the hardware is received by our service provider partner or distributor. Service provider partners transact with us to purchase our platform solutions and resell our solutions to a new subscriber, or to upgrade or downgrade the solutions of an existing subscriber, at which time the subscriber’s access to our platform solutions is enabled and the delivery of the services commences. Our performance obligation related to providing our platform solutions is satisfied on a daily basis as the subscriber uses the platform services. The purchase of platform solutions and the purchase of hardware are separate transactions as revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. We generate all of our revenue from contracts with customers. 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. To determine the transaction price, we analyze all of the performance obligations included in the contract. We consider the terms of the contract and our customary business practices, which typically do not include financing components or non-cash consideration. We have variable consideration in the form of retrospective volume discounts, rebate incentives and restocking fees. The significant inputs related to our estimates of variable consideration include the volume and amount of products and services sold historically and expected to be sold in the future, the availability and performance of our services and the historical and expected number of returns. Depending on the type of variable consideration and its predictability, we may apply an "expected value" approach or a "most likely amount" approach. We estimate the variable consideration at the onset of a contract and include the variable consideration within the transaction price if it is probable that a significant reversal of the variable consideration would not occur in the future. When determining whether the amount of variable consideration included in the transaction price should be constrained, we look at the history of hardware purchased and subscribers added by our service provider partners to estimate the likelihood of those service provider partners obtaining the retrospective volume discounts and rebates. At times, our contracts include consideration payable to a customer in the form of fixed discounts or rebates. We record the consideration payable to a customer as a reduction to the transaction price resulting in a reduction to revenue over the service period. If we enter into contracts that contain multiple promised services, we evaluate which of the promised services represent separate performance obligations based on whether or not the promised services are distinct and whether or not the services are separable from other promises in the contract. If these criteria are met, then we allocate the transaction price to the performance obligations using the relative stand-alone selling price method at contract inception. In determining the relative estimated selling prices, we consider market conditions, entity-specific factors and information about the customer or class of customer. Any discount within the contract is allocated proportionately to all of the separate performance obligations in the contract unless the terms of discount relate specifically to the entity’s efforts to satisfy some but not all of the performance obligations. 90 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 For our standard service provider agreements, we have used a portfolio approach for purposes of revenue recognition, as each agreement has similar characteristics and we do not expect the effects of applying this approach would have a material impact on our financial statements as compared to assessing each agreement individually. SaaS and License Revenue We generate the majority of our SaaS and license revenue primarily from monthly fees charged to our service provider partners sold on a per subscriber basis for access to our cloud-based intelligently connected property platform and related solutions. Our fees per subscriber vary based upon the service plan and features utilized. Under the terms of our contractual arrangements with our service provider partners, we bill a monthly fee to our service provider partners in advance of the month of 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 over the period of service. 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. 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 third 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 service 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. Software License Revenue Our SaaS and license revenue also includes our software license revenue from monthly fees charged to service providers on a per subscriber basis for access to our Software platform. The non-hosted software for interactive security, automation and related solutions is typically deployed and operated by the service provider in its own network operations center. Our agreements for the Software platform solution typically include software and services, such as post-contract customer support, or PCS. Software sales that include multiple elements are typically allocated to the various elements using the relative stand-alone selling price method. We apply the usage-based royalty exception to recognize license revenue associated with software hosted by our customers because the 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 during which the services are expected to be performed. Under the terms of our contractual arrangements with our service provider partners, we are entitled to payment of a monthly fee that is billed per subscriber for the month of service. Our software license revenue during the years ended December 31, 2022, 2021 and 2020 was $ 26.8 million, $ 32.3 million and $ 38.0 million, respectively. Hardware and Other Revenue We generate hardware and other revenue primarily from the sale of video cameras, video recorders and cellular radio modules that provide access to our cloud-based platforms and, to a lesser extent, the sale of other devices, including image sensors, gunshot detection sensors and other 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 primarily 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. Our distributors sell directly to our service provider partners under terms between the two parties. 91 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 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 years ended December 31, 2022, 2021 and 2020, 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. Hist orically, 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 10 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 $ 5.3 million and $ 6.0 million as of December 31, 2022 and 2021, respectively, which combines current and long-term balances. Cost of Revenue Our cost of SaaS and license revenue primarily includes the amounts paid to wireless network providers and, to a lesser extent, the costs of running our network operations centers which are expensed as incurred, as well as patent and royalty costs in connection with technology licensed from third-party providers and amounts paid to distributed energy resource providers. Our cost of SaaS and license revenue also includes our cost of software license revenue, which primarily includes the payroll and payroll-related costs of the department dedicated to providing service exclusively to those service providers that host the Software platform. Our cost of software license revenue during the years ended December 31, 2022, 2021 and 2020 was $ 0.5 million, $ 1.1 million and $ 1.3 million, respectively. Our cost of hardware and other revenue primarily includes cost of raw materials, tooling, freight shipments and amounts paid to our third-party manufacturer for production and fulfillment of our cellular radio modules and image sensors, and procurement costs for our video cameras, video recorders and gunshot detection sensors, which we purchase from an original equipment manufacturer, and other devices. Additionally, our cost of hardware and other revenue includes royalty costs in connection with technology licensed from third-party providers. We record the cost of SaaS and license revenue as expenses are incurred, which corresponds to the delivery period of our services to our subscribers. We record the cost of hardware and other revenue primarily when the hardware and other services are delivered to the service provider partner, which occurs when control of the hardware and other services transfers to the service provider partner. Our cost of revenue excludes amortization and depreciation shown in operating expenses. Contract Asset and Contract Liability Balances 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 92 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 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 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, 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. 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 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. Research and Development Our research and development costs consist primarily of personnel and related expenses for our employees working on our product development and software and device engineering teams, including salaries, bonuses, stock-based compensation, benefits and other personnel costs. Our research and development of new products and services is a multidisciplinary effort across our product management, program management, software engineering, device engineering, quality engineering, configuration management and network operations teams. Also included are non-personnel costs, such as consulting and professional fees paid to third-party development resources as well as acquisition costs of in-process research and development with no alternative future use. We invest substantial resources in research and development to enhance our platforms and applications, support our technology infrastructure, develop new capabilities and conduct quality assurance testing. Fair Value Measurements The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard established a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date; Level 2 - Inputs other than quoted prices included within Level 1 that are observable for similar assets and liabilities, either directly or indirectly; quoted prices in markets that are not active; and Level 3 - Unobservable inputs supported by little or no market activity. The carrying amount of financial assets, including cash and cash equivalents and accounts receivable, as well as accounts payable approximates fair value because of the short maturity and liquidity of those instruments. Assets and Liabilities Measured at Fair Value on a Recurring Basis - In 2022 and 2021, we recorded assets for our money market accounts. In 2021 and prior to the termination of the long-term incentive plan with one of our subsidiaries in May 2022, we recorded liabilities for the long-term incentive plan at fair value on a recurring basis with any changes recorded as a cumulative adjustment. During parts of 2020, we recorded liabilities for a contingent consideration liability related to acquisitions at fair value on a recurring basis. Assets Measured at Fair Value on a Nonrecurring Basis - We measure certain assets, including property and equipment, goodwill and intangible and long-lived assets at fair value on a nonrecurring basis. These assets are recognized at fair value 93 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 when they are deemed to be other-than-temporarily impaired. Additionally, equity investments without readily determinable fair values are recognized at fair value on a nonrecurring basis when observable price changes from orderly transactions for identical or similar investments become available. Concentration of Credit Risk The financial instruments that potentially subject us to concentrations of credit risk consists principally of cash and cash equivalents and accounts receivables. All of our cash and cash equivalents are held at financial institutions that management believes to be of high credit quality. Our cash and cash equivalent accounts may exceed federally insured limits at times. We have not experienced any losses on cash and cash equivalents to date. To manage accounts receivable risk, we evaluate the credit worthiness of our service provider partners and maintain an allowance for credit losses. The majority of our accounts receivable balance is due from our service provider partners in North America. We assess the concentrations of credit risk with respect to accounts receivables based on one industry and one geographic region and believe that our reserve for uncollectible accounts is appropriate based on our history and this concentration. 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 and we record a cumulative adjustment in periods in which there is a change in the estimated number of shares expected to vest. Our equity awards generally vest over five years and are settled in shares of our common stock. During 2022, 2021 and 2020, we recognized compensation expense of $ 52.7 million, $ 38.7 million and $ 29.2 million, respectively, and associated tax windfall benefit from stock-based awards of $ 2.0 million, $ 10.1 million and $ 8.2 million, respectively. We account for stock-based compensation arrangements with non-employees based upon the award’s grant date fair value. 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. Our Employee Stock Purchase Plan, or 2015 ESPP, allows eligible employees to purchase shares of our common stock at 90 % of the fair market value of the closing price on the purchase date. The maximum number of shares of our common stock that a participant may purchase during any calendar year is limited to the lesser of 10 % of the participant's base compensation for that year or the number of shares with a fair market value of $ 15,000 . The 2015 ESPP is considered compensatory for purposes of share-based compensation expense. Compensation expense is recognized for the amount of the discount, net of actual forfeitures, over the six-month purchase period. 401(k) Defined Contribution Plan We adopted the Alarm.com Holdings 401(k) Plan, or the Plan, on April 30, 2009. All of our employees are eligible to participate in the Plan. For the years ended December 31, 2022, 2021 and 2020, our discretionary match was 100 % of employee contributions up to 10 % of salary and up to a $ 5,000 maximum match. We recognized compensation expense of $ 6.4 million, $ 5.5 million and $ 5.0 million for the years ended December 31, 2022, 2021 and 2020, respectively, related to our matching contributions. Business Combinations We are required to allocate the purchase price of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed at the acquisition date based upon their estimated fair values. The net assets and results of operations of an acquired entity are included in our consolidated financial statements from the acquisition date. Acquisition-related costs are expensed as incurred. Goodwill as of the acquisition date represents the excess of the purchase consideration of an acquired business over the fair value of the underlying net tangible and intangible assets acquired net of liabilities assumed. This valuation requires management to apply significant judgment in estimating the fair value of long-lived and intangible assets acquired, which involves the use of significant estimates and assumptions. Significant estimates and assumptions in valuing certain acquired customer relationship intangible assets include estimates about future expected cash flows and discount rates. Significant estimates and assumptions in valuing acquired developed technology intangible assets include estimates about future expected cash flows, obsolescence factors and discount rates. 94 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 Significant estimates and assumptions in valuing acquired trade name intangible assets include estimates about future expected cash flows, royalty rates and discount rates. During the measurement period, we may record adjustments to the assets acquired and liabilities assumed. Any adjustments to provisional amounts that are identified during the measurement period are recorded in the reporting period in which the adjustment amounts are determined. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings. Some acquisitions may include contingent consideration, which is an obligation to make future payments to the seller contingent upon the achievement of future operational or financial targets. We estimated the fair value of the contingent consideration liability by using a Monte Carlo simulation model for determining each of the projected measures by using an expected distribution of potential outcomes. Significant estimates and assumptions in valuing contingent consideration include estimates about future financial results, revenue volatility and the discount rate. The fair value of the contingent consideration is estimated on a quarterly basis and changes in the fair value of the contingent consideration resulting from information that existed subsequent to the acquisition date are recorded in the consolidated statements of operations. On October 21, 2019, we acquired 85 %of the issued and outstanding capital stock of OpenEye. Certain stockholders of OpenEye had the right to receive an earn-out payment of up to an additional $ 11.0 million based upon satisfaction of certain calendar 2020 revenue targets. The 2020 revenue targets were not met and the fair value of the contingent consideration liability related to the potential earn-out payment was zero as of December 31, 2022 and 2021. Goodwill, Intangible Assets and Long-lived Assets Goodwill Goodwill represents the excess of (1) the aggregate of the fair value of consideration transferred in a business combination, over (2) the fair value of assets acquired, net of liabilities assumed. Goodwill is allocated to our reporting units, which are our operating segments or one level below our operating segments. Goodwill is not amortized, but is subject to annual impairment tests. We perform our annual impairment review of goodwill on October 1 and when a triggering event occurs between annual impairment tests. We test our goodwill at the reporting unit level. We perform either a qualitative analysis or a quantitative analysis every year depending on the changes to our goodwill balance as well as changes in our business and the economy. Qualitative factors we consider include, but are not limited to, macroeconomic conditions, industry and market conditions, company specific events, changes in circumstances and market capitalization. The amount of goodwill impairment is calculated as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. For our 2022 annual impairment review, we performed a quantitative assessment for our Alarm.com reporting unit, our only reporting unit with a goodwill balance. Based on the results of our quantitative assessment, we determined that it was not more likely than not that the fair value of our reporting unit was less than its carrying amount, including goodwill. Therefore, we concluded that there was no goodwill impairment as of October 1, 2022. Our assessment was performed as of October 1, 2022, and we have determined there has been no triggering events that resulted in goodwill impairment from our assessment date through December 31, 2022. Intangible Assets and Long-lived Assets Intangible assets are initially valued at fair value using generally accepted valuation methods appropriate for the type of intangible asset. Intangible assets with definite lives are amortized over their estimated useful lives. We evaluate the recoverability of our intangible assets with definite lives and long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of intangible assets with definite lives and long-lived assets are measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. For the years ended December 31, 2022 and 2020, we determined there were no impairments of our intangible assets with definite lives or other long-lived assets. For the year ended December 31, 2021, we determined there was an impairment of $ 0.1 million for an intangible asset acquired in 2014 related to customer relationships that no longer existed after December 31, 2021. There were no impairments of any other long-lived assets for the year ended December 31, 2021. Advertising Costs We expense advertising costs as incurred. Advertising costs totaled $ 6.1 million, $ 9.6 million and $ 11.9 million for the years ended December 31, 2022, 2021 and 2020, respectively. Advertising costs are included within sales and marketing expenses on our consolidated statements of operations. 95 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 Accounting for Income Taxes We account for income taxes under the asset and liability method as required by accounting standards codification, or ASC 740, " Income Taxes ," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that are included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. Due to the uncertainty of realization of certain deferred tax assets related to our Canadian net operating losses and research and development tax credits, we established a valuation allowance of $ 0.3 million during the second quarter of 2019, which remained at $ 0.3 million as of December 31, 2021 and, due to evidence indicating it was more likely than not that the Canadian tax attributes would be realized prior to expiration, the Canadian valuation allowance was reduced to zero as of December 31, 2022. During 2020, we established a valuation allowance of $ 1.3 million for state research and development tax credit carryforwards, which increased to $ 1.9 million as of December 31, 2021 and increased to $ 2.6 million as of December 31, 2022. We are subject to income taxes in the United States and foreign jurisdictions based upon our business operations in those jurisdictions. Significant judgment is required in evaluating uncertain tax positions. We record uncertain tax positions in accordance with ASC 740-10 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and (2) with respect to those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. We record interest and penalties as a component of our income tax provision. Treasury Stock We account for treasury stock under the cost method and present treasury stock, including any applicable commissions and fees, as a component of stockholders’ equity in the consolidated balance sheets and statements of equity. Treasury stock held by us may be retired or reissued in the future. Comprehensive Income Our comprehensive income for each of the years ended December 31, 2022, 2021 and 2020 was equal to our net income disclosed in the consolidated statements of operations. Earnings per Share Our basic net income per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Our diluted net income per share attributable to common stockholders is calculated by giving effect to all potentially dilutive common stock when determining the weighted-average number of common shares outstanding. For purposes of the diluted net income per share calculation, restricted stock units, options to purchase common stock and unvested shares issued upon the early exercise of options that are subject to repurchase are considered to be potential common stock. On January 20, 2021, we issued the 2026 Notes. Prior to the adoption of ASU 2020-06, since we expected to settle the principal amount on our outstanding 2026 Notes in cash and any excess in cash or shares of our common stock, we used the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread had a dilutive impact on diluted net income per share of common stock when the average market price of our common stock for a given period exceeded the conversion price of $ 147.19 per share for the 2026 Notes. Upon adoption of ASU 2020-06 on January 1, 2022, we began using the if-converted method when calculating the dilutive impact of the 2026 Notes on net income per share. As a result, we included 3,396,950 shares related to the 2026 Notes within the weighted average shares outstanding when calculating the diluted net income per share. Additionally, we included debt issuance cost amortization, net of tax, within the numerator of the diluted net income per share. Our redeemable noncontrolling interests are related to our 85 % equity ownership interest in OpenEye and Noonlight. When calculating net income attributable to the common stockholders, net loss attributable to our redeemable noncontrolling interests should be excluded from net income. As a result, net income attributable to the common stockholders is equal to the net income less (i) dividends paid on unvested shares with any remaining earnings allocated in accordance with the bylaws between the 96 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 outstanding common and preferred stock and (ii) net loss attributable to redeemable noncontrolling interests as of the end of each period. Recent Accounting Pronouncements Adopted On August 5, 2020, the Financial Accounting Standards Board, or FASB, issued 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 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 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 $ 8.1 million during the three and twelve months ended December 31, 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 twelve months ended December 31, 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 $ 0.16 per share and an increase to diluted net income attributable to common stockholders of $ 0.03 and $ 0.13 per share during the three and twelve months ended December 31, 2022, respectively. See Note 16 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 9 as there were no write-offs of notes receivable during the year ended December 31, 2022. 97 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 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 consolidated financial statements during the year ended December 31, 2022. Any future financial impact will be dependent on the magnitude and nature of future business combinations. Note 3. Revenue from Contracts with Customers Contract Assets Our assets related to costs incurred to obtain a contract consist of capitalized commission costs and upfront payments made to customers. The current portion of capitalized commission costs and upfront payments made to customers is included in other current assets within our consolidated balance sheets. The non-current portion of capitalized commission costs and upfront payments made to customers is reflected in other assets within our 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 no t record an impairment loss on our contract assets during the years ended December 31, 2022, 2021 and 2020. The changes in our contract assets are as follows (in thousands): Year Ended December 31, 2022 2021 2020 Beginning of period balance $ 4,520 $ 4,306 $ 4,578 Commission costs and upfront payments to a customer capitalized in period 14,270 3,779 3,262 Amortization of contract assets ( 4,815 ) ( 3,565 ) ( 3,534 ) End of period balance $ 13,975 $ 4,520 $ 4,306 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. The changes in our contract liabilities are as follows (in thousands): Year Ended December 31, 2022 2021 2020 Beginning of period balance $ 14,837 $ 12,529 $ 10,498 Revenue deferred and acquired in period 18,617 13,947 12,247 Revenue recognized from amounts included in contract liabilities ( 15,122 ) ( 11,639 ) ( 10,216 ) End of period balance $ 18,332 $ 14,837 $ 12,529 The revenue recognized from amounts included in contract liabilities primarily relates to prepayment contracts with customers as well as payments of activation fees. 98 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 Note 4. Accounts Receivable, Net The components of accounts receivable, net are as follows (in thousands): December 31, 2022 2021 Accounts receivable $ 128,669 $ 108,897 Allowance for credit losses ( 2,835 ) ( 2,168 ) Allowance for product returns ( 1,551 ) ( 1,181 ) Accounts receivable, net $ 124,283 $ 105,548 For the years ended December 31, 2022 and 2020, we recorded a provision for credit losses on our accounts receivable of $ 1.2 million and $ 2.2 million, respectively. For the year ended December 31, 2021, we recorded a reduction to the provision for credit losses on our accounts receivable of $ 0.8 million. For the years ended December 31, 2022, 2021 and 2020, we recorded a $ 4.7 million, $ 2.5 million and $ 1.8 million reserve for product returns in our hardware and other revenue, respectively. Historically, we have not experienced write-offs for uncollectible accounts or sales returns that have differed significantly from our estimates. Allowance for Credit Losses - Accounts Receivable The changes in our allowance for credit losses for accounts receivable are as follows (in thousands): Year Ended December 31, 2022 Year Ended December 31, 2021 Alarm.com and Certain Subsidiaries All Other Subsidiaries Alarm.com and Certain Subsidiaries All Other Subsidiaries Beginning of period balance $ ( 2,035 ) $ ( 133 ) $ ( 4,442 ) $ ( 254 ) (Provision for) / recovery of expected credit losses ( 1,199 ) 43 860 ( 85 ) Write-offs 479 10 1,547 206 End of period balance $ ( 2,755 ) $ ( 80 ) $ ( 2,035 ) $ ( 133 ) Note 5. Inventory The components of inventory are as follows (in thousands): December 31, 2022 2021 Raw materials $ 38,098 $ 15,823 Finished goods 77,486 59,453 Total inventory $ 115,584 $ 75,276 Note 6. Property and Equipment, Net Furniture, fixtures and office equipment, computer software and hardware, leasehold improvements and real property and improvements are recorded at cost and presented net of depreciation. We record land at historical cost. During the application development phase, we record capitalized development costs in our construction in progress account and then reclassify the asset to internal-use software when the project is ready for its intended use, which is usually when the code goes into production. Furniture, fixtures and office equipment and computer software and hardware are depreciated on a straight-line basis over lives ranging from three to five years . Internal-use software is amortized on a straight-line basis over a three-year period. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease terms or the asset lives. Real property is amortized on a straight-line basis over lives ranging from 15 to 39 years and the improvements related to real property are amortized on a straight-line basis over the shorter of the life of the underlying real property or the asset lives. 99 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 The components of property and equipment, net are as follows (in thousands): December 31, 2022 2021 Furniture, fixtures and office equipment $ 9,078 $ 8,124 Computer software and hardware 32,560 29,490 Internal-use software 8,949 8,957 Construction in progress 1,864 2,059 Leasehold improvements 31,532 30,219 Real property and improvements 10,495 9,252 Land 22,502 1,398 Total property and equipment 116,980 89,499 Accumulated depreciation ( 59,808 ) ( 47,786 ) Property and equipment, net $ 57,172 $ 41,713 Depreciation expense related to property and equipment for the years ended December 31, 2022, 2021 and 2020 was $ 11.6 million, $ 10.4 million and $ 8.3 million, respectively. Amortization expense related to internal-use software of $ 0.6 million, $ 2.0 million and $ 2.4 million was included in those expenses for the years ended December 31, 2022, 2021 and 2020, respectively. We had no disposals and write-offs of property and equipment that impacted the consolidated statements of operations during the years ended December 31, 2022, 2021 and 2020. Note 7. Acquisitions Acquisition of a Business – Noonlight On September 23, 2022, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired 85 % of the issued and outstanding shares of capital stock of Noonlight. Noonlight provides a connected safety and event management software and services platform that enables new applications and provides enhanced emergency response capabilities. We believe the acquisition of Noonlight will enhance our comprehensive suite of interactive cloud-based services and allow us to expand markets for emergency response services as well as accelerate innovation in those services. In consideration for the purchase of 85 % of the issued and outstanding shares of capital stock of Noonlight, we paid $ 31.9 million in cash on September 23, 2022, after deducting $ 1.5 million related to an outstanding loan issued to Noonlight during May of 2022 and $ 4.9 million related to agreed holdback provisions. See Note 9 for further details on the loan to Noonlight, including the settlement of the outstanding principal and interest. Pursuant to the terms of the stock purchase agreement, following the preliminary determination of the working capital of Noonlight as of the closing date, the purchase price decreased by less than $ 0.1 million. The working capital adjustment is expected to be finalized by the first quarter of 2023 and $ 0.3 million of the holdback is expected to be paid to the stockholders of Noonlight at that time. The remaining amount of the holdback of $ 4.6 million is expected to be paid to the stockholders of Noonlight by the end of the first q uarter of 2024, subject to offset for any indemnification obligations. As a result of the acquisition of Noonlight, we recorded approximately $ 0.8 million in acquisition-related costs for the year ended December 31, 2022. These costs include expenses directly related to acquiring Noonlight, are expensed as incurred and are included in general and administrative expense in our consolidated statements of operations. We recorded a measurement period adjustment related to changes in working capital, which resulted in an increase to the purchase consideration by $ 0.2 million, a decrease to accounts payable of $ 0.1 million, a decrease accrued expenses by less than $ 0.1 million and an increase to other current assets of less than $ 0.1 million. Additionally, we recorded a measurement period adjustment related to the assessment of the net operating losses acquired, which resulted in us recording a deferred tax asset of $ 2.6 million, which is presented net of the deferred tax liability of $ 2.3 million previously recorded in the acquisition, and a decrease to goodwill of $ 2.6 million. The purchase price allocation was not finalized as of December 31, 2022 and is pending the final determination of the working capital adjustment as well as potential future tax adjustments. 100 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 The table below sets forth the purchase consideration and the preliminary allocation used to estimate the fair value of the tangible and intangible net assets acquired (in thousands): September 23, 2022 Calculation of Purchase Consideration: Cash paid, net of working capital adjustment $ 31,840 Outstanding principal and interest of loan provided to Noonlight 1,537 Holdback consideration 4,910 Total consideration $ 38,287 Estimated Tangible and Intangible Net Assets: Cash $ 188 Accounts receivable 291 Other current and non-current assets 200 Property and equipment 45 Deferred tax assets 272 Developed technology 9,335 Trade names 150 Accounts payable ( 321 ) Accrued expenses and other current liabilities ( 318 ) Deferred revenue ( 67 ) Redeemable noncontrolling interest ( 6,770 ) Goodwill 35,282 Total tangible and intangible net assets $ 38,287 Goodwill of $ 35.3 million reflects the value of acquired workforce and synergies we expect to achieve from integrating Noonlight's suite of emergency response cloud-managed application program interfaces into our existing comprehensive suite of interactive cloud-based services. None of the goodwill recognized is expected to be deductible for income tax purposes in future periods. We allocate goodwill to reporting units based on expected benefit from synergies and have allocated the goodwill to the Alarm.com segment. Fair Value of Net Assets Acquired and Intangibles The acquired activities and assets in the purchase of Noonlight constituted a business and with the exception of contract liabilities accounted for under Topic 606, in accordance with ASC 805, " Business Combinations ," the assets and liabilities were recorded at their respective fair values as of September 23, 2022. We developed our estimate of the fair value of intangible net assets using a multi-period excess earnings method for developed technology and the relief from royalty method for the trade name. Developed Technology Developed technology primarily consists of intellectual property of proprietary software that is marketed for sale. We valued the developed technology using the multi-period excess earnings method, an income approach. The significant assumptions used in the income approach include estimates about future expected cash flows from the developed technology, the obsolescence factor and the discount rate. We are amortizing the Noonlight developed technology, valued at $ 9.3 million, on an attribution method based on the discounted cash flows of the model over an estimated useful life of seven years . Trade Names We valued the trade names acquired using a relief from royalty method. The significant assumptions used in the income approach include future expected cash flows from the trade name, the royalty rate and the discount rate. We are amortizing the trade names, valued at $ 0.2 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of five years . 101 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 Redeemable Noncontrolling Interests Our redeemable noncontrolling interest relates to our 85 % equity ownership interest in Noonlight. The Noonlight stockholder agreement contains a put option that gives the minority Noonlight stockholders the right to sell their remaining 15 % equity ownership interest to us based on the fair value of the shares and also contains a call option that gives us the right to purchase the remaining Noonlight shares from the minority Noonlight stockholders based on the fair value of the shares. The put and call options can each be exercised beginning in the first quarter of 2026. The redeemable noncontrolling interest was recorded at fair value on September 23, 2022, by applying the income approach using unobservable inputs for projected cash flows, including projected financial results and a discount rate, which are considered Level 3 inputs. This redeemable noncontrolling interest is considered temporary equity and we report it between liabilities and stockholders’ equity in the consolidated balance sheets. The redemption value of the Noonlight noncontrolling interest was $ 6.8 million as of September 23, 2022 and $ 6.6 million as of December 31, 2022. Business Combinations in Operations - Noonlight The operations of the Noonlight business combination discussed above were included in the consolidated financial statements as of the acquisition date. The pro forma information as well as the revenue and net losses of the business combination were not material to the consolidated financial statements for the year ended December 31, 2022. Acquisition of a Business - Shooter Detection Systems On December 14, 2020, Alarm.com Incorporated acquired 100 % of the issued and outstanding ownership interest units of Shooter Detection Systems, LLC, or SDS. SDS provides an indoor gunshot detection solution through the Guardian Indoor Active Shooter Detection System, which uses a combination of acoustic and infrared sensors and proprietary algorithms to detect gunshots and communicate shooting incident details to building occupants and security teams. The acquisition of SDS expands our commercial solutions and helps our partners outfit commercial and enterprise customers with the indoor gunshot detection solution. In consideration for the purchase of 100 % of the issued and outstanding ownership interest units of SDS, we paid $ 26.6 million in cash on December 14, 2020. Pursuant to the terms of the unit purchase agreem ent, following the preliminary determination of the working capital of SDS as of the closing date, the purchase price decreased by $ 0.1 million. The purchase price allocation was finalized during the second quarter of 2021, including the working capital adjustment, resulting in a measurement period adjustment to increase the purchase consideration by $ 0.1 million and to increase goodwill by $ 0.1 million. 102 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 The table below sets forth the purchase consideration and the fair value allocation of the tangible and intangible net assets acquired (in thousands): December 14, 2020 Calculation of Purchase Consideration: Cash paid, net of working capital adjustment $ 26,577 Total consideration $ 26,577 Tangible and Intangible Net Assets: Cash $ 311 Accounts receivable 1,179 Inventory 917 Other current assets 240 Property and equipment 77 Operating lease right-of-use assets 384 Other assets 348 Customer relationships 2,362 Developed technology 13,522 Trade name 512 Accounts payable ( 19 ) Accrued expenses ( 111 ) Operating lease current liabilities ( 51 ) Operating lease liabilities ( 333 ) Goodwill 7,239 Total tangible and intangible net assets $ 26,577 Goodwill of $ 7.2 million reflects the value of acquired workforce and synergies we expect to achieve from expanding our commercial solutions through SDS's indoor gunshot detection solution. The goodwill recognized is expected to be deductible for income tax purposes in future periods. We allocate goodwill to reporting units based on expected benefit from synergies and have allocated the goodwill to the Alarm.com segment. Fair Value of Net Assets Acquired and Intangibles In accordance with ASC 805, SDS constituted a business and the assets and liabilities were recorded at their respective fair values as of December 14, 2020. We developed our estimate of the fair value of intangible net assets using the with-and-without method for customer relationships, the multi-period excess earnings method for the developed technology and the relief-from-royalty method for the trade name. Customer Relationships We recorded the customer relationships intangible separately from goodwill based on determination of the length, strength and contractual nature of the relationship that SDS shared with its customers. We valued the single group of customer relationships using the with-and-without method, an income approach. The significant assumptions used in the with-and-without method include estimates about future expected cash flows from customer contracts and the discount rate. We are amortizing the customer relationships, valued at $ 2.4 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of six years . Developed Technology Developed technology primarily consists of intellectual property of proprietary software that is marketed for sale. We valued the developed technology by applying the multi-period excess earnings method, an income approach. The significant assumptions used in the multi-period excess earnings method include estimates about future expected cash flows from the developed technology, the obsolescence factor and the discount rate. We are amortizing the SDS developed technology, valued at $ 13.5 million, on an attribution method based on the discounted cash flows of the model over an estimated useful life of seven years . 103 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 Trade Name We valued the trade names acquired using a relief from royalty method. The significant assumptions used in relief from royalty method include future expected cash flows from the trade name, the royalty rate and the discount rate. We are amortizing the trade names, valued at $ 0.5 million, on an attribution basis derived from the discounted cash flows of the model over an estimated useful life of five years . Unaudited Pro Forma Information - SDS The following unaudited pro forma data is presented as if SDS were included in our historical consolidated statements of operations beginning January 1, 2019. These pro forma results do not necessarily represent what would have occurred if all the business combination had taken place on January 1, 2019, 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 SDS business combination with the following adjustments: (i) we adjusted the pro forma amounts for income taxes, (ii) we adjusted for amortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2019, and (iii) we adjusted for transaction fees incurred and reclassified them to January 1, 2019. 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, except per share data): Pro Forma Year Ended December 31, 2020 2019 Revenue $ 626,080 $ 508,662 Net income attributable to common stockholders 75,258 52,999 Net income attributable to common stockholders per share - basic $ 1.54 $ 1.08 Net income attributable to common stockholders per share - diluted $ 1.48 $ 1.04 Business Combinations in Operations - SDS The operations of the SDS business combination discussed above were included in the consolidated financial statements as of the acquisition date. The following table presents the revenue and losses of the business combination in the year of acquisition as reported within the consolidated financial statements (in thousands): Year Ended December 31, 2020 Revenue $ 334 Net loss ( 413 ) Asset Acquisitions On December 16, 2021, EnergyHub, Inc., one of our wholly-owned subsidiaries, acquired certain assets of an unrelated third party. Substantially all of the acquired assets consisted of developed technology. We believe the acquisition of the developed technology will continue to advance our load-shaping energy management solution allowing additional devices to participate in utility programs that reduce or shift power consumption during peak demand periods. In consideration for the purchase of the developed technology, we paid $ 4.2 million in cash in December 2021, with the remaining $ 0.9 million expected to be paid 18 months following the acquisition date, subject to offset for any indemnification obligations. Additionally, we incurred $ 0.2 million in direct transaction costs related to legal fees during 2021 that were capitalized as a component of the consideration transferred. The combined $ 5.3 million consideration related to developed technology was recorded as an intangible asset at the time of the asset acquisition and is being amortized on a straight-line basis over an estimated useful life of seven years . On March 31, 2020, Alarm.com Incorporated acquired certain assets of an unrelated third party. Substantially all of the acquired assets consisted of in-process research and development, or IPR&D. We believe the acquisition of the IPR&D will continue to further our commitment to make significant investments in innovative research and development in the intelligently connected property market to broaden our suite of solutions. 104 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 In consideration for the purchase of the IPR&D, we paid $ 2.1 million in cash on March 31, 2020, $ 0.1 million in December 2019 and the remaining $ 0.7 million in April 2021. The $ 2.9 million consideration related to IPR&D was expensed at the time of the asset acquisition and was included in research and development expense in our consolidated statements of operations during 2020, as the IPR&D had no alternative future use. On March 12, 2020, Alarm.com Incorporated acquired certain assets of an unrelated third party. Substantially all of the acquired assets consisted of IPR&D. We believe the acquisition of the IPR&D will continue to strengthen our smart intercom capability, including building access security and convenience within the multiple dwelling unit market for residents, guests and deliveries. In consideration for the purchase of the IPR&D, we paid $ 1.2 million in cash on March 12, 2020 and the remaining $ 0.3 million in September 2021. The $ 1.5 million consideration related to IPR&D was expensed at the time of the asset acquisition and was included in research and development expense in our consolidated statements of operations during 2020, as the IPR&D had no alternative future use. Note 8. 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, 2021 $ 112,838 $ — $ 112,838 Goodwill acquired — — — Measurement period adjustment 63 — 63 Balance as of December 31, 2021 112,901 — 112,901 Goodwill acquired - initial measurement 37,907 — 37,907 Measurement period adjustment ( 2,625 ) — ( 2,625 ) Balance as of December 31, 2022 $ 148,183 $ — $ 148,183 On September 23, 2022, we acquired 85 % of the issued and outstanding shares of capital stock of Noonlight and initially recorded $ 37.9 million of goodwill in the Alarm.com segment. Additionally, we recorded a measurement period adjustment related to the assessment of the net operating losses acquired, which resulted in us recording a decrease to goodwill of $ 2.6 million. There were no impairments of goodwill recorded during the years ended December 31, 2022, 2021 or 2020. As of December 31, 2022, the accumulated balance of goodwill impairments was $ 4.8 million, which is related to our acquisition of EnergyHub in 2013. 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, 2021 $ 72,670 $ 28,223 $ 2,366 $ 103,259 Intangible assets acquired — 5,307 — 5,307 Impairment of intangible assets ( 86 ) — — ( 86 ) Amortization ( 13,158 ) ( 3,373 ) ( 543 ) ( 17,074 ) Balance as of December 31, 2021 59,426 30,157 1,823 91,406 Intangible assets acquired — 9,335 150 9,485 Amortization ( 11,904 ) ( 5,939 ) ( 590 ) ( 18,433 ) Balance as of December 31, 2022 $ 47,522 $ 33,553 $ 1,383 $ 82,458 We recorded $ 18.4 million, $ 17.1 million and $ 16.6 million of amortization related to our intangible assets for the years ended December 31, 2022, 2021 and 2020, respectively. There were no impairments of long-lived intangible assets during the years ended December 31, 2022 and 2020. We determined there was an impairment of $ 0.1 million for the remaining value of an intangible asset in the Alarm.com segment that was acquired in 2014 related to customer relationships that no longer existed after December 31, 2021, which was included in other (expense) / income, net in our consolidated statements of operations for the year ended December 31, 2021. During the year ended December 31, 2022, we wrote-off $ 0.7 million in fully amortized intangible assets in the Alarm.com segment that were acquired in 2014 related to customer relationships, developed technology, trade name and other intangible assets that no longer existed as of January 1, 2022. 105 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 The following tables reflect the weighted-average remaining life and carrying value of finite-lived intangible assets (in thousands, except weighted-average remaining life): December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Carrying Value Weighted- Average Remaining Life (in years) Customer relationships $ 125,885 $ ( 78,363 ) $ 47,522 7.0 Developed technology 58,478 ( 24,925 ) 33,553 5.8 Trade name 3,937 ( 2,554 ) 1,383 2.4 Total intangible assets $ 188,300 $ ( 105,842 ) $ 82,458 6.5 December 31, 2021 Gross Carrying Amount Impairment of Intangible Assets Accumulated Amortization Net Carrying Value Weighted- Average Remaining Life (in years) Customer relationships $ 126,093 $ ( 86 ) $ ( 66,581 ) $ 59,426 7.9 Developed technology 49,371 — ( 19,214 ) 30,157 6.5 Trade name 3,815 — ( 1,992 ) 1,823 3.1 Other 234 — ( 234 ) — 0.0 Total intangible assets $ 179,513 $ ( 86 ) $ ( 88,021 ) $ 91,406 7.4 The following table reflects the future estimated amortization expense for intangible assets (in thousands): Year Ended December 31, Amortization 2023 $ 17,722 2024 15,477 2025 14,438 2026 12,909 2027 10,651 2028 and thereafter 11,261 Total future amortization expense $ 82,458 Note 9. Other Assets Purchases of Patents and Patent Licenses From time to time, we enter into agreements to purchase patents or patent licenses. In April 2020, we purchased 30 patents for $ 0.9 million and in October 2020, we purchased one patent for $ 0.2 million. The carrying value, net of amortization, of our purchased patents and patent licenses was $ 1.6 million and $ 2.2 million as of December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, $ 0.5 million and $ 0.6 million of patent costs were included in other current assets and $ 1.1 million and $ 1.6 million of patent costs were included in other assets, respectively. We have $ 7.0 million of historical cost in purchased patents and patent licenses as of December 31, 2022. We are amortizing the patent costs over the estimated useful lives of the patents, which range from three years to 18 years. Patent amortization cost of $ 0.3 million, $ 0.4 million and $ 0.4 million was included in cost of SaaS and license revenue in our consolidated statements of operations for each of the years ended December 31, 2022, 2021 and 2020. Patent amortization cost of $ 0.3 million, $ 0.3 million and $ 0.2 million was included in amortization and depreciation in our consolidated statements of operations for the year ended December 31, 2022, 2021 and 2020, respectively. 106 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 Loan to a Distribution Partner In June 2020, we amended an existing term loan with our distribution partner and also amended an existing subordinated credit agreement with the affiliated entity of the distribution partner. At the time of the amended term loan and subordinated credit agreement in June 2020, the outstanding balance of the term loan was $ 3.0 million and the outstanding balance of the subordinated credit agreement was $ 3.0 million. Under the amended terms, the distribution partner paid us $ 2.0 million in principal for the term loan on June 9, 2020 and the remaining $ 1.0 million was transferred to the amended subordinated credit agreement with the affiliated entity of the distribution partner. As of December 31, 2022 and 2021, there was no remaining amount outstanding related to the amended term loan. In December 2022, we amended the subordinated credit agreement with the affiliated entity of the distribution partner. The amended subordinated credit agreement matures on June 18, 2027 and interest on the outstanding principal balance accrues at a rate of 12.0 % per annum and is payable in kind. Under the amended terms, the distribution partner paid us $ 1.0 million in paid-in-kind interest in December 2022. As of December 31, 2022 and 2021, $ 4.0 million and $ 4.6 million of the notes receivable balance related to the subordinated credit agreement was included in other assets in our consolidated balance sheets, respectively. For the years ended December 31, 2022, 2021 and 2020, we recognized $ 2.7 million, $ 3.0 million and $ 2.4 million of revenue from the distribution partner associated with these loans, respectively. Loan to a Service Provider Partner In July 2020, we entered into a loan agreement with a service provider partner, under which we agreed to loan the service provider partner up to $ 2.5 million , collateralized by the assets of the service provider partner. Interest on the outstanding principal accrues at a rate per annum equal to 9.0 % and monthly interest and principal payments began in April 2021. The maturity date of the loan is July 24, 2025. As of December 31, 2022 and 2021, $ 1.1 million and $ 1.2 million of principal was outstanding from the service provider partner under the loan agreement, respectively. For the years ended December 31, 2022, 2021 and 2020, we recognized $ 0.2 million, $ 0.2 million and $ 0.1 million of revenue from the service provider partner associated with this loan, respectively. Loan to Noonlight In May 2022, we entered into an agreement with Noonlight, under which we agreed to loan Noonlight $ 1.5 million, collateralized by the assets of Noonlight. Interest on the outstanding principal accrued at a rate per annum equal to 7.0 %. The outstanding interest and principal balances were previously included in other current assets in our consolidated balance sheet and were used to reduce the payment we made on September 23, 2022 to acquire 85 % of the issued and outstanding shares of capital stock of Noonlight. As of December 31, 2022, no principal or interest was outstanding from Noonlight under the loan agreement. Prior to the acquisition of Noonlight on September 23, 2022, for the years ended December 31, 2022, 2021 and 2020, we did no t record any revenue from Noonlight. Loan to a Technology Partner In June 2022, we entered into a convertible promissory note with a technology partner, under which we agreed to loan the technology partner $ 1.5 million. Interest on the outstanding principal accrues at a rate per annum equal to 6.5 %, starting one year from the effective date of the loan. Interest and principal payments are due on the maturity date of the loan, which is June 27, 2029, unless the loan is converted prior to the maturity date, which may occur upon a qualified financing event, as defined in the convertible promissory note, upon a sale of the technology partner or upon our election on the maturity date of the loan. As of December 31, 2022, $ 1.5 million of principal was outstanding from the technology partner under the convertible promissory note. For the years ended December 31, 2022, 2021 and 2020, we did not record any revenue from the technology partner associated with this convertible promissory note. Investment in a Hardware Supplier In October 2018, we entered into a subordinate convertible promissory note with one of our hardware suppliers. In July 2019, we converted the outstanding notes receivable balance of $ 5.6 million 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 107 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 from orderly transactions for identical or similar investments. As of December 31, 2022 and 2021, our investment in the hardware supplier was $ 5.6 million. Investments in Technology Partners In December 2016, we paid $ 0.3 million for a convertible promissory note with a technology partner. In April 2018, the $ 0.3 million convertible promissory note converted into 135,135 shares of Series A-1 Preferred Stock. At the time of conversion, we determined there was no value related to the Series A-1 Preferred Stock. Based on observable price changes from orderly transactions for similar investments, we increased the amount of our investment by $ 0.7 million and recorded a gain within other (expense) / income, net , in our consolidate d statements of operations during the year ended December 31, 2020. In February 2021, we paid $ 5.0 million in cash to purchase 1,000,000 shares of Series B-2 Preferred Stock from the same technology partner as part of a financing round that included other investors. The $ 5.0 million equity investment, which is included in the Alarm.com segment, does not meet the criteria for consolidation and is accounted for using the measurement alternative. Under the measurement 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. Our investment in the technology partner was $ 5.7 million as of December 31, 2022 and 2021, respectively. In December 2022, we paid $ 5.1 million in cash to another technology partner to purchase 4,231,717 shares of its Series A Preferred Stock. The $ 5.1 million equity investment, which is included in the Alarm.com segment, does not meet the criteria for consolidation and is accounted for using the measurement alternative. As of December 31, 2022, our investment in the technology partner supplier was $ 5.1 million. Investment in a Platform Partner On July 31, 2020, a platform partner, in which we held 3,548,820 shares of common stock of the platform partner, was acquired by an unrelated third party. As a result of the sale, we received proceeds of $ 25.7 million in exchange for our shares of the platform partner's common stock and we recorded a gain of $ 24.7 million within other (expense) / income, net, in ou r consolidate d statements of operations during the year ended December 31, 2020. As of December 31, 2022 and 2021 , our investment in the platform partner was zero . Allowance for Credit Losses - Notes Receivable The changes in our allowance for credit losses for notes receivable are as follows (in thousands): Year Ended December 31, 2022 Year Ended December 31, 2021 Loan Receivables Hardware Financing Receivables Loan Receivables Hardware Financing Receivables Beginning of period balance $ ( 79 ) $ ( 1 ) $ ( 73 ) $ ( 16 ) Recovery of / (provision for) expected credit losses 77 1 ( 6 ) 15 Write-offs — — — — End of period balance $ ( 2 ) $ — $ ( 79 ) $ ( 1 ) We manage our notes receivables using delinquency as a key credit quality indicator. The following tables reflect the current and delinquent notes receivable by class of financing receivables and by year of origination (in thousands): December 31, 2022 Loan Receivables: 2022 2021 2020 2019 2018 Prior Total Current $ 1,500 $ — $ 1,093 $ 1 $ — $ 4,015 $ 6,609 30-59 days past due — — — — — — — 60-89 days past due — — — — — — — 90-119 days past due — — — — — — — 120+ days past due — — — — — — — Total $ 1,500 $ — $ 1,093 $ 1 $ — $ 4,015 $ 6,609 108 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 December 31, 2021 Loan Receivables: 2021 2020 2019 2018 2017 Prior Total Current $ — $ 1,151 $ 7 $ — $ 4,602 $ — $ 5,760 30-59 days past due — — — — — — — 60-89 days past due — — — — — — — 90-119 days past due — — — — — — — 120+ days past due — — — — — — — Total $ — $ 1,151 $ 7 $ — $ 4,602 $ — $ 5,760 Hardware Financing Receivables: Current $ — $ — $ 4 $ — $ — $ — $ 4 30-59 days past due — — 6 — — — 6 60-89 days past due — — 11 — — — 11 90-119 days past due — — — — — — — 120+ days past due — — — — — — — Total $ — $ — $ 21 $ — $ — $ — $ 21 There were no notes receivable placed on nonaccrual status as of December 31, 2022 and 2021. During the years ended December 31, 2022, 2021 and 2020, there was no interest income recognized related to notes receivables that were in nonaccrual status. As of December 31, 2022 and 2021, there were no notes receivables placed in nonaccrual status for which there was not a related allowance for credit losses. As of December 31, 2022 and 2021, 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 December 31, 2022 and 2021, $ 14.5 million and $ 17.7 million of prepaid expenses were included in other current assets, respectively, primarily related to software licenses, long lead-time parts related to our inventory and insurance. Note 10. Fair Value Measurements The following tables present our assets and liabilities measured at fair value on a recurring basis (in thousands): Fair Value Measurements on a Recurring Basis Level 1 Level 2 Level 3 Total Assets: Money market accounts as of December 31, 2022 $ 510,326 $ — $ — $ 510,326 Money market accounts as of December 31, 2021 679,278 — — 679,278 Liabilities: Subsidiary long-term incentive plan as of December 31, 2022 $ — $ — $ — $ — Subsidiary long-term incentive plan as of December 31, 2021 — — 3,351 3,351 109 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 The following table summarizes the change in fair value of the Level 3 liabilities for the subsidiary long-term incentive plan with significant unobservable inputs (in thousands): Year Ended December 31, 2022 2021 Beginning of period balance $ 3,351 $ 1,000 Changes in fair value included in earnings ( 247 ) 2,351 Reclassification to additional paid in capital upon modification ( 3,104 ) — End of period balance $ — $ 3,351 As of December 31, 2022, $ 509.6 million of our money market accounts was included in cash and cash equivalents and $ 0.7 million was included in other assets in our consolidated balance sheets. As of December 31, 2021, $ 679.3 million of our money market accounts was included in cash and cash equivalents in our consolidated balance sheets. Our money market accounts are valued using quoted prices in active markets. See Note 13 for the carrying amount and estimated fair value of the 2026 Notes as of December 31, 2022 and 2021. The liability for the subsidiary long-term incentive plan consisted of the potential cash payment contingent upon meeting certain financial milestones related to the agreement established with certain employees of one of our subsidiaries. This incentive plan was established in November 2017 and the amount of compensation awarded to employees depended on the fair market value of the subsidiary, which was determined in part by the subsidiary’s projected financial results. We accounted for the subsidiary long-term incentive plan using fair value and established liabilities for the future payments under the terms of the incentive plan based on estimating revenue, EBITDA and EBITDA margin of the subsidiary over the period of the incentive plan through the anticipated achievement of the milestones. We estimated the fair value of the liability by using a Monte Carlo simulation model which involves several Level 3 unobservable inputs. The significant unobservable inputs used in the valuation included a weighted average revenue volatility and the revenue risk adjustment. The revenue volatility was weighted using revenue volatility results from the subsidiary’s peer group as well as market transaction metrics. The revenue risk adjustment was calculated using capital structure allocations from the subsidiary’s peer group, market transaction metrics as well as United States Treasury yields. In May 2022, we terminated the subsidiary long-term incentive plan. The fair value of the liability related to the subsidiary long-term incentive plan as of the termination date was consistent with the liability as of March 31, 2022. Concurrent with the termination of the subsidiary long-term incentive plan, we granted performance-based restricted stock units to those employees who previously participated in the subsidiary long-term incentive plan. We accounted for the termination of the subsidiary long-term incentive plan and concurrent grant of performance-based restricted stock units as a modification of the original subsidiary long-term incentive plan. As a result, we reclassified the $ 3.1 million liability related to the subsidiary long-term incentive plan to additional paid-in capital during the three months ended June 30, 2022. Additionally, we recorded $ 1.2 million in incremental compensation costs as additional stock-based compensation expense to the applicable operating expense category based on the respective employee’s function (sales and marketing, general and administrative or research and development) during the three months ended June 30, 2022. The incremental compensation costs represented the excess of the fair value of the performance-based restricted stock units over the fair value of the subsidiary long-term incentive plan as of the modification date of the subsidiary long-term incentive plan. The contingent consideration liability consisted of the potential earn-out payment related to our acquisition of 85 % of the issued and outstanding capital stock of OpenEye on October 21, 2019. The earn-out payment was contingent on the satisfaction of certain calendar 2020 revenue targets and had a maximum potential payment of up to $ 11.0 million. During parts of 2019 and 2020, we accounted for the contingent consideration using fair value and established a liability for the future earn-out payment based on an estimation of revenue attributable to perpetual licenses and subscription licenses over the 2020 calendar year. The contingent consideration liability was valued with significant unobservable inputs, including the revenue volatility and the discount rate. Selecting another revenue volatility or discount rate within an acceptable range would not have resulted in a significant change to the fair value of the contingent consideration liability. As of October 21, 2019, the fair value of the liability was $ 2.8 million. At each reporting date until December 31, 2020, we remeasured the liability, using the same valuation approach. Changes in the fair value resulting from information that existed subsequent to the acquisition date were recorded in general and administrative expense in our consolidated statements of operations. As of December 31, 2020, the 2020 revenue targets were not met and the fair value of the contingent consideration related to the potential earn-out payment decreased to zero as compared to the initial liability recorded at the acquisition date, primarily due to OpenEye's 2020 actual revenue being less than the projected revenue. All contingencies related to the contingent consideration liability were resolved as of December 31, 2020 and no further estimates were necessary as of December 31, 2022 . There were no transfers into Level 3 or reclassifications between levels of the fair value hierarchy during the years ended December 31, 2022, 2021 and 2020. 110 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 Note 11. Leases We lease office space, data centers and office equipment under non-cancelable operating leases with various expiration dates through 2031. In August 2014, we signed a lease for office space in Tysons, Virginia, where we relocated our headquarters to in February 2016. We have subsequently entered into amendments to this lease to provide us with additional office space. The lease term ends in 2026, includes a five-year renewal option and a cumulative tenant improvement allowance of $ 12.1 million. Supplemental information related to leases is presented in the table below (in thousands, except weighted-average term and discount rate): Year Ended December 31, 2022 2021 2020 Operating lease cost $ 10,499 $ 9,692 $ 8,888 Cash paid for amounts included in the measurement of operating lease liabilities 12,723 11,809 10,177 Operating lease right-of-use assets obtained in exchange for new operating lease liabilities 7,474 5,158 10,073 December 31, 2022 December 31, 2021 Weighted-average remaining lease term — operating leases 3.4 years 4.2 years Weighted-average discount rate — operating leases 3.9 % 3.6 % Maturities of lease liabilities are as follows (in thousands): Year Ended December 31, Operating Leases (1) 2023 $ 13,446 2024 12,105 2025 9,915 2026 5,713 2027 805 2028 and thereafter 283 Total lease payments 42,267 Less: imputed interest (2) 2,730 Present value of lease liabilities $ 39,537 _______________ (1) Operating lease payments exclude $ 5.9 million of legally binding minimum lease payments for leases executed but not yet commenced and includes $ 0.4 million for options to extend lease terms that were reasonably certain of being exercised. (2) Imputed interest was calculated using the incremental borrowing rate applicable for each lease. 111 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 Note 12. Liabilities The components of accounts payable, accrued expenses and other current liabilities are as follows (in thousands): December 31, 2022 December 31, 2021 Accounts payable $ 53,121 $ 64,751 Accrued expenses 17,539 19,894 Income taxes payable 43,576 — Other current liabilities 5,421 5,171 Accounts payable, accrued expenses and other current liabilities $ 119,657 $ 89,816 The components of other liabilities are as follows (in thousands): December 31, 2022 December 31, 2021 Holdback liability from asset acquisition and business combination $ 4,560 $ 850 Subsidiary long-term incentive plan — 3,351 Other liabilities 8,490 5,344 Other liabilities $ 13,050 $ 9,545 Note 13. Debt, Commitments and Contingencies The debt, commitments and contingencies described below would require us, or our subsidiaries, to make payments to third parties under certain circumstances. Convertible Senior Notes On January 20, 2021, we issued $ 500.0 million aggregate principal amount of 0 % convertible senior notes due January 15, 2026 in a private placement to qualified institutional buyers. The terms of the 2026 Notes are governed by an Indenture, or the Indenture, by and between Alarm.com Holdings, Inc. and U.S. Bank National Association, as trustee. The 2026 Notes are senior unsecured obligations that do not bear regular interest and the principal amount of the 2026 Notes will not accrete. The 2026 Notes may bear special interest under specified circumstances related to our failure to comply with our reporting obligations under the Indenture. Special interest, if any, will be payable semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2021. We received proceeds from the issuance of the 2026 Notes of $ 484.3 million, net of $ 15.7 million of transaction fees and other debt issuance costs. We may not redeem the 2026 Notes prior to January 20, 2024. We may redeem for cash, all or any portion of the 2026 Notes, at our option, on or after January 20, 2024, at a redemption price equal to 100 % of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date, if the last reported sale price of our common stock has been at least 130 % of the conversion price for the 2026 Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. No sinking fund is provided for the 2026 Notes. The 2026 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding August 15, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2021 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price for the 2026 Notes on each applicable trading day; (2) during the 5 business day period immediately after any 10 consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of 2026 Notes for such trading day was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate for the 2026 Notes on each such trading day; (3) if we call any or all of the 2026 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the 2026 Notes called (or deemed called) for redemption; or (4) upon the occurrence of specified corporate events as set forth in the Indenture. On or after August 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date of the 2026 Notes, holders of the 2026 Notes may convert all or any portion of their 2026 Notes at any time, 112 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 regardless of the foregoing conditions. Upon conversion, we may satisfy our conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. It is our current intent to settle the principal amount of the 2026 Notes with cash. The initial conversion rate for the 2026 Notes is 6.7939 shares of our common stock per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of $ 147.19 per share of our common stock, subject to adjustment under certain circumstances in accordance with the terms of the Indenture. In addition, following certain corporate events that occur prior to the maturity date of the 2026 Notes or if we deliver a notice of redemption in respect of the 2026 Notes, we will, under certain circumstances, increase the conversion rate of the 2026 Notes for a holder who elects to convert its 2026 Notes (or any portion thereof) in connection with such a corporate event or convert its 2026 Notes called (or deemed called) for redemption during the related redemption period (as defined in the Indenture), as the case may be. If we undergo a fundamental change (as defined in the Indenture), subject to certain exceptions and except as described in the Indenture, holders may require us to repurchase for cash all or any portion of their 2026 Notes at a fundamental change repurchase price equal to 100 % of the principal amount of the 2026 Notes to be repurchased, plus accrued and unpaid special interest, if any, to, but excluding, the fundamental change repurchase date. The Indenture includes customary covenants and sets forth certain events of default after which the 2026 Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of default involving us after which the 2026 Notes become automatically due and payable. We used some of the proceeds to repay the $ 110.0 million outstanding principal balance under our credit facility and also used some of the proceeds to pay accrued interest, fees and expenses related to our credit facility (see the section titled "2017 Facility" below). We are using the remaining net proceeds from the issuance of the 2026 Notes for working capital and other general corporate purposes, which may include acquisitions or strategic investments in complementary businesses or technologies. As discussed in Note 2, we adopted 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 " effective January 1, 2022, using a modified retrospective adoption method. Prior to the adoption of the standard, the 2026 Notes were separated into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that did not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2026 Notes. The equity component was recorded in additional paid-in capital and was not remeasured as it continued to meet the conditions for equity classification. The debt discount for conversion option, debt issuance costs and net carrying amount of the equity component was $ 77.2 million, $ 2.4 million and $ 74.8 million, respectively, as of December 31, 2021. The excess of the principal amount of the liability component over its carrying amount was amortized to interest expense over the contractual term of the 2026 Notes at an effective interest rate of 4.0 %. Prior to the adoption of ASU 2020-06, the difference between the book and tax treatment of the debt discount and debt issuance costs of the 2026 Notes resulted in a difference between the carrying amount and tax basis of the 2026 Notes. This taxable temporary difference resulted in the recognition of a $ 18.3 million net deferred tax liability which was recorded as an adjustment to additional paid-in capital during the three months ended March 31, 2021. Upon adoption of ASU 2020-06 on January 1, 2022, we recombined the liability and equity components of the 2026 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 2026 Notes and are amortized to interest expense using the effective interest method over the contractual term of the 2026 Notes at a rate of 0.6 %. Upon adoption of ASU 2020-06 on January 1, 2022, we also removed the temporary difference between the book and tax treatment of the debt discount and adjusted the temporary difference between the book and tax treatment of the debt issuance costs of the 2026 Notes. As of December 31, 2022 and 2021, the fair value of our 2026 Notes was $ 411.5 million and $ 452.5 million, respectively. The fair value was determined based on the quoted price of the 2026 Notes in an inactive market on the last traded day of the quarter and has been classified as Level 2 in the fair value hierarchy. Based on the closing price of our common stock of $ 49.48 on the last trading day of the quarter, the if-converted value of the 2026 Notes did not exceed the principal amount of $ 500.0 million as of December 31, 2022. 113 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 The net carrying amount of the liability component of the 2026 Notes is as follows (in thousands): December 31, 2022 December 31, 2021 Principal $ 500,000 $ 500,000 Unamortized debt discount — ( 63,520 ) Unamortized debt issuance costs ( 9,630 ) ( 11,135 ) Net carrying amount $ 490,370 $ 425,345 Interest expense related to the 2026 Notes is as follows (in thousands): Year Ended December 31, 2022 2021 2020 Amortization of debt discount $ — $ 13,678 $ — Amortization of debt issuance costs 3,126 2,139 — Total interest expense $ 3,126 $ 15,817 $ — 2017 Facility On October 6, 2017, we entered into a $ 125.0 million senior secured revolving credit facility, or the 2017 Facility, with Silicon Valley Bank, or SVB, as administrative agent, PNC Bank, National Association, as documentation agent, and a syndicate of lenders. Upon entry into the 2017 Facility, we borrowed $ 72.0 million, which was used to repay the previously outstanding balance under our previous credit facility. The 2017 Facility was set to mature in October 2022 and included an option to further increase the borrowing capacity to $ 175.0 million with the consent of the lenders. Costs incurred in connection with the 2017 Facility were capitalized and were being amortized as interest expense over the term of the 2017 Facility. The 2017 Facility was secured by substantially all of our assets, including our intellectual property. On March 25, 2020, we borrowed $ 50.0 million under the 2017 Facility as a precautionary measure in order to provide financial flexibility in light of current uncertainty in the financial markets resulting from the COVID-19 pandemic. On January 20, 2021, we repaid the entire outstanding principal balance of $ 110.0 million of the 2017 Facility with proceeds from the 2026 Notes. The 2017 Facility was terminated on January 20, 2021 and we recognized an extinguishment loss of $ 0.2 million in other (expense) / income, net in our consolidated statements of operations during the year ended December 31, 2021 for previously capitalized debt issuance costs related to the 2017 Facility that were unamortized at the time of the termination of the 2017 Facility. There were no amounts outstanding under the 2017 Facility as of December 31, 2022 and 2021 as a result of the termination of the 2017 Facility on January 20, 2021. The outstanding principal balance on the 2017 Facility accrued 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 1.00 % plus an applicable margin based on our consolidated leverage ratio. During 2021, until the termination of the 2017 Facility on January 20, 2021, we elected for the outstanding principal balance to accrue interest at LIBOR plus 1.50 %, LIBOR plus 1.75 %, LIBOR plus 2.00 %, and LIBOR plus 2.50 % when our consolidated leverage ratio is less than 1.00 :1.00, greater than or equal to 1.00 :1.00 but less than 2.00 :1.00, greater than or equal to 2.00 :1.00 but less than 3.00 :1.00 and greater than or equal to 3.00 :1.00, respectively. The 2017 Facility also carried an unused line commitment fee of 0.20 %. Commitments and Contingencies Indemnification Agreements 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. 114 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 Legal Proceedings On June 2, 2015, Vivint, Inc., or Vivint, filed a lawsuit against us in U.S. District Court, District of Utah, alleging that our technology directly and indirectly infringes six patents that Vivint purchased. Vivint is seeking permanent injunctions, enhanced damages and attorneys' fees. We answered the complaint on July 23, 2015. Among other things, we asserted defenses based on non-infringement and invalidity of the patents in question. In 2017 and 2019, the U.S. Patent Trial and Appeal Board, or PTAB, issued final written decisions in inter partes reviews finding all or some of the claims in five of the asserted patents unpatentable. These decisions were affirmed on appeal. Discovery closed on October 29, 2021. Vivint has moved for partial summary judgment and Alarm.com has moved for summary judgment; both motions are pending decision. Vivint has also moved to assert previously abandoned claims from two of the patents in a new proceeding. We have opposed the motion. No trial date has been set. Should Vivint prevail in proving Alarm.com infringes one or more of its patent claims, we could be required to pay damages of Vivint’s lost profits and/or a reasonable royalty for sales of our solution. Since all remaining patent claims in the litigation have expired, Vivint shall not be entitled to injunctive relief as a remedy in this matter. While we believe we have valid defenses to Vivint’s claims, any of these outcomes could result in a material adverse effect on our business. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time. Further related to Vivint, on October 27, 2022, we filed a demand for arbitration of a dispute arising under the Patent Cross License Agreement between Alarm.com and Vivint executed in November 2013. Vivint has stopped paying license fees to Alarm.com under the agreement. Vivint has paid the required license fees to Alarm.com since the agreement was executed in November 2013. Alarm.com disputes Vivint's refusal of payment and is seeking continued payments of license fees in the arbitration, as well as interest and declaratory relief. There can be no assurance that Alarm.com will be successful in the arbitration proceedings. As a result of Vivint’s refusal to pay license fees under the agreement, which began during the fourth quarter of 2022, SaaS and license revenue and total revenue will decrease by approximately $ 6.0 million on a quarterly basis. We also believe that quarterly earnings and cash flow will be impacted by the aforementioned $ 6.0 million estimate, plus additional legal fees. We also filed a lawsuit against Vivint on January 4, 2023 in U.S. District Court, Eastern District of Texas, alleging that Vivint infringes 15 of our patents. The case is docketed as No. 2:23-CV-0004-JRG-RSP (E.D. Tex.). We are seeking compensatory and enhanced damages, a permanent injunction and other relief. Vivint’s response to the complaint is due February 27, 2023. On January 10, 2022, EcoFactor, Inc., or EcoFactor, filed a lawsuit against us in U.S. District Court, District of Oregon, alleging Alarm.com’s products and services directly and indirectly infringe five U.S. patents owned by EcoFactor. EcoFactor is seeking permanent injunctions, enhanced damages and attorneys' fees. We moved to dismiss the case for failure to state a claim on March 28, 2022. EcoFactor had previously asserted two of the same patents against us in an October 2019 complaint with the U.S. International Trade Commission, or ITC. In July 2021, the ITC found in favor of Alarm.com. EcoFactor appealed the decision but withdrew its appeal in December 2021. Two of the other three asserted patents are currently in ex parte reexamination proceedings at the PTO, and all claims of the third were found unpatentable by the PTAB in inter partes review on April 18, 2022. Also on April 18, 2022, the district court stayed the case at the request of the parties pending the disposition of other proceedings involving the asserted patents, including the reexamination proceedings. Should EcoFactor prevail in its lawsuit we could be required to pay damages and/or a reasonable royalty for sales of our solution, we could be enjoined from making, using and selling our solution if a license or other right to continue selling such elements is not made available to us, and we could be required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us. While we believe we have valid defenses to EcoFactor’s claims, the outcome of these legal claims cannot be predicted with certainty and any of these outcomes could result in an adverse effect on our business. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time. On July 22, 2021, Causam Enterprises, Inc., or Causam, filed a lawsuit against us in U.S. District Court, Western District of Texas, alleging that Alarm.com’s smart thermostats infringe four U.S. patents owned by Causam. Causam is seeking preliminary and permanent injunctions, enhanced damages and attorneys’ fees. We have not yet responded to the complaint. On September 3, 2021, the court issued an order staying the lawsuit until the ITC investigation described below is finally resolved. On July 28, 2021, Causam filed a complaint with the ITC naming Alarm.com Incorporated, Alarm.com Holdings, Inc., and EnergyHub, Inc., among others, as proposed respondents. The complaint alleges infringement of the same four patents Causam asserted in district court. Causam is seeking a permanent limited exclusion order and permanent cease and desist order. On August 27, 2021, the ITC instituted an investigation into Causam’s allegations naming Alarm.com Incorporated, Alarm.com Holdings, Inc., EnergyHub Inc. and others as respondents. We answered the complaint on October 4, 2021. Among other things, we asserted defenses based on non-infringement and invalidity of the patents in question. An evidentiary hearing in the investigation was held from June 28, 2022 through July 1, 2022. On February 16, 2023, the ITC issued a final decision in favor of Alarm.com and EnergyHub. Causam has until April 17, 2023 to file an appeal of the decision in federal court. 115 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 Should Causam prevail in its district court lawsuit we could be required to pay damages and/or a reasonable royalty for sales of our solution, we could be enjoined from making, using and selling our solution if a license or other right to continue selling such elements is not made available to us, and we could be required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us. While we believe we have valid defenses to Causam’s claims, the outcome of these legal claims cannot be predicted with certainty, and any of these outcomes could result in an adverse effect on our business. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time. In addition to the matters described above, we may be required to provide indemnification to certain of our service provider partners for certain claims regarding our solutions. For example, we are incurring costs associated with the indemnification of our service provider ADT, LLC in ongoing patent infringement suits. On February 25, 2021, Vivint filed a lawsuit against ADT LLC a/k/a ADT LLC of Delaware d/b/a ADT Security Services in U.S. District Court, District of Utah, alleging that ADT Pulse, Control, and Blue each infringe one or more patents owned by Vivint. Vivint is seeking damages and attorneys’ fees. Vivint filed a second amended complaint on March 8, 2022. ADT answered the second amended complaint on March 22, 2022, asserted defenses based on non-infringement and invalidity of all five asserted patents and counterclaimed for declaratory judgement of invalidity of all five asserted patents. Two of the asserted patents are under inter partes review at the PTAB. On June 17, 2022, the court entered an order staying the case in view of the pending proceedings before the PTAB, with the exception of certain discovery of source code. Should Vivint prevail on the claims that one or more elements of ADT’s products infringe, we could be required to indemnify ADT for damages in the form of a reasonable royalty or ADT could be enjoined from making, using and selling our solution if a license or other right to continue selling our technology is not made available or we are unable to design around such patents, and required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us. The outcome of these legal claims cannot be predicted with certainty. We believe there are valid defenses to the claims made by Vivint. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time. Further, on November 4, 2022 and January 13, 2023, IOT Innovations LLC sued our service provider Monitronics International, Inc. d/b/a Brinks in U.S. District Court, Eastern District of Texas, alleging patent infringement of certain products and services sold by Monitronics. Monitronics filed a Motion to Dismiss the first-filed case on January 24, 2023. The cases are in the preliminary stages and the extent of Alarm.com’s indemnify obligations to Monitronics has not yet been determined, however should IOT Innovations prevail on the claims that one or more elements of Monitronics’ products or services infringe, we could be required to indemnify Monitronics for damages in the form of a reasonable royalty or Monitronics could be enjoined from making, using and selling our solution if a license or other right to continue selling our technology is not made available or we are unable to design around such patents, and required to pay ongoing royalties and comply with unfavorable terms if such a license is made available to us. The outcome of these legal claims cannot be predicted with certainty. Based on currently available information, we have determined a loss is not probable or reasonably estimable at this time. We may also be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Other than the preceding matters, we are not a party to any lawsuit or proceeding that, in the opinion of management, is reasonably possible or probable of having a material adverse effect on our financial position, results of operations or cash flows. We reserve for contingent liabilities based on ASC 450, " Contingencies ," when it is determined that a liability, inclusive of defense costs, is probable and reasonably estimable. Litigation is subject to many factors that are difficult to predict, so there can be no assurance that, in the event of a material unfavorable result in one or more claims, we will not incur material costs. Note 14. Stockholders' Equity Authorized shares We are authorized to issue two classes of stock, common stock and preferred stock. On June 9, 2015, the board of directors amended and restated our Amended and Restated Certificate of Incorporation, effective upon the closing of our initial public offering, or IPO, on July 1, 2015, and authorized us to issue up to 300,000,000 shares of common stock and 10,000,000 shares of undesignated preferred stock. Common and Preferred Stock As of December 31, 2022 and 2021, there were 50,985,454 and 50,406,606 shares of common stock issued, and 49,452,709 and 50,259,453 shares of common stock outstanding, respectively. As of December 31, 2022 and 2021, there were no preferred shares issued and outstanding. Each outstanding share of common stock is entitled to one vote per share. 116 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 Stock Repurchase Programs On November 29, 2018, our board of directors authorized a stock repurchase program, under which we were authorized to purchase up to an aggregate of $ 75.0 million of our outstanding common stock during the two-year period that ended on November 29, 2020. On December 3, 2020, our board of directors authorized a stock repurchase program, under which we are authorized to purchase up to an aggregate of $ 100.0 million of our outstanding common stock during the three-year period ending December 3, 2023. During the years ended December 31, 2022, 2021 and 2020, we repurchased 1,385,592 , zero , and 147,153 shares of our common stock under this program for $ 78.8 million, zero and $ 5.1 million, respectively, which includes applicable commissions and fees. On February 15, 2023, our board of directors authorized, to be effective February 23, 2023, the cancellation of the balance under the stock repurchase program ending December 3, 2023 and also authorized a stock repurchase program, under which we are authorized to purchase up to an aggregate of $ 100.0 million of our outstanding common stock during the two-year period ending February 23, 2025. Shares Withheld As permitted under the terms of the 2015 Plan, in 2021 the Compensation Committee authorized the withholding of shares of common stock in connection with the vesting of restricted stock unit awards issued to employees to satisfy applicable tax withholding requirements. These withheld shares are not issued or considered common stock repurchases under our stock repurchase program. We paid $ 4.5 million of tax withholdings related to vesting of restricted stock units during the year ended December 31, 2021. No tax withholdings related to the vesting of restricted stock units were paid during the year ended December 31, 2022. Prior to using the withholding method to satisfy applicable tax withholding requirements for employees, we utilized the sell-to-cover method in which shares of our restricted stock unit awards were sold into the market on behalf of the employee upon vesting to cover tax withholding liabilities. We may utilize either the withholding method or sell-to-cover method in the future. Note 15. Stock-Based Compensation Stock-based compensation expense is included in the following line items in the consolidated statements of operations (in thousands): Year Ended December 31, 2022 2021 2020 Sales and marketing $ 4,342 $ 4,432 $ 3,025 General and administrative 15,037 9,941 7,996 Research and development 33,275 24,321 18,155 Total stock-based compensation expense $ 52,654 $ 38,694 $ 29,176 The following table summarizes the components of non-cash stock-based compensation expense (in thousands): Year Ended December 31, 2022 2021 2020 Stock options and assumed options $ 3,654 $ 3,707 $ 3,406 Restricted stock units 48,798 34,799 25,605 Employee stock purchase plan 202 188 165 Total stock-based compensation expense $ 52,654 $ 38,694 $ 29,176 Tax windfall benefit from stock-based awards $ 2,022 $ 10,063 $ 8,202 2015 Equity Incentive Plan We issue stock options pursuant to our 2015 Plan. The 2015 Plan allows for the grant of stock options to employees and for the grant of nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, or RSUs, performance-based stock awards, and other forms of equity compensation to our employees, directors and non-employee directors and consultants. 117 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 In June 2015, our board of directors adopted and our stockholders approved our 2015 Plan pursuant to which we initially reserved a total of 4,700,000 shares of common stock for issuance under the 2015 Plan, which included shares of our common stock previously reserved for issuance under our Amended and Restated 2009 Stock Incentive Plan, or the 2009 Plan. The number of shares of common stock reserved for issuance under the 2015 Plan will automatically increase on January 1 each year, for a period of not more than 10 years, commencing on January 1, 2016 through January 1, 2024, by 5.0 % of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the board of directors. As a result of the adoption of the 2015 Plan, no further grants may be made under the 2009 Plan. As of December 31, 2022, 7,620,703 shares remained available for future grant under the 2015 Plan. In November 2022, our board of directors determined that the January 1, 2023 increase in the number of shares reserved for issuance under the 2015 Plan would be 5.0 % of the total number of shares of common stock outstanding on December 31, 2022, or 2,472,635 shares. In December 2021, our board of directors determined that the January 1, 2022 increase in the number of shares reserved for issuance under the 2015 Plan would be 5.0 % of the total number of shares of common stock outstanding on December 31, 2021, or 2,512,972 shares. There was no increase to the number of shares of common stock reserved for issuance under the 2015 Plan in the year ended December 31, 2020. Stock Options Stock options under the 2015 Plan have been granted at exercise prices based on the closing price of our common stock on the date of grant. Stock options under the 2009 Plan were granted at exercise prices as determined by the board of directors to be the fair market value of our common stock. Our stock options generally vest over a five-year period and each option, if not exercised or forfeited, expires on the ten th anniversary of the grant date. Certain stock options granted under the 2015 Plan and previously granted under the 2009 Plan may be exercised before the options have vested. Unvested shares issued as a result of early exercise are subject to repurchase by us upon termination of employment or services at the original exercise price. The proceeds from the early exercise of stock options are initially recorded as a current liability and are reclassified to common stock and additional paid-in capital as the awards vest and our repurchase right lapses. There were no unvested shares of common stock outstanding subject to our right of repurchase as of December 31, 2022 and 2021. We did not repurchase any unvested shares of common stock related to early exercised stock options in connection with employee terminations during the years ended December 31, 2022, 2021 and 2020. There were no proceeds from the early exercise of the unvested stock options reflected in accounts payable, accrued expenses and other current liabilities on our consolidated balance sheets as of December 31, 2022 and 2021. We account for stock-based compensation options based on the fair value of the award as of the grant date. We recognize stock-based compensation expense using the 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 value our stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the risk-free interest rate, expected term, expected stock price volatility and dividend yield. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistent with the expected term of our stock options. 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. The expected volatility for options granted is based on historical volatilities of our stock over the estimated expected term of the stock options. There were 184,500 , 143,700 and 143,650 stock options granted during the years ended December 31, 2022, 2021 and 2020, respectively. We declared and paid dividends in June 2015 in anticipation of our IPO, which we closed on July 1, 2015. Subsequent to the IPO, we do not expect to declare or pay dividends on a recurring basis. As such, we assume that the dividend rate is 0 %. The following table summarizes the assumptions used for estimating the fair value of stock options granted: Year Ended December 31, 2022 2021 2020 Volatility 40.2 - 41.8 % 41.8 - 42.6 % 39.2 - 42.3 % Expected term 5.2 - 5.3 years 6.2 - 6.7 years 6.2 - 6.7 years Risk-free interest rate 2.9 - 3.9 % 1 .0 - 1.2 % 0.4 - 1.8 % Dividend rate — % — % — % 118 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 The following table summarizes stock option activity: Number of Options Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2021 1,167,481 $ 35.99 5.7 $ 57,129 Granted 184,500 60.80 Exercised ( 122,664 ) 20.35 5,725 Forfeited ( 41,316 ) 61.90 Expired ( 1,350 ) 2.95 Outstanding as of December 31, 2022 1,186,651 $ 40.60 5.6 $ 18,309 Vested and expected to vest as of December 31, 2022 1,186,651 $ 40.60 5.6 $ 18,309 Exercisable as of December 31, 2022 758,291 $ 29.05 4.1 $ 17,347 The weighted average grant date fair value for our stock options granted during the years ended December 31, 2022, 2021 and 2020 was $ 24.68 , $ 36.63 and $ 16.79 , respectively. The total fair value of stock options vested during the years ended December 31, 2022, 2021 and 2020 was $ 3.3 million, $ 3.4 million and $ 3.6 million, respectively. The aggregate intrinsic value of stock options exercised during the years ended December 31, 2022, 2021 and 2020 was $ 5.7 million, $ 21.9 million and $ 33.4 million, respectively. As of December 31, 2022, the total compensation cost related to nonvested awards not yet recognized was $ 5.6 million, which will be recognized over a weighted average period of 2.4 years. Cash received from exercises of stock options was $ 2.5 million, $ 4.2 million and $ 10.2 million during the years ended December 31, 2022, 2021 and 2020, respectively. Restricted Stock Units There was an aggregate of 1,123,076 , 837,576 and 498,416 RSUs without performance conditions granted to certain of our employees and directors during the years ended December 31, 2022, 2021 and 2020, respectively. There was an aggregate of 168,223 , 120,314 and 66,000 RSUs with performance conditions granted to certain of our employees during the years ended December 31, 2022, 2021 and 2020, respectively. The time-based RSUs vest over a five-year period from the vesting commencement date, which is generally the grant date. The performance-based RSUs vest when the related performance conditions are met. Vested RSUs include the amount of shares withheld to satisfy tax withholding requirements to be paid by us on behalf of our employees, when applicable. We account for RSUs based on the fair value of the award as of the grant date. We recognize stock-based compensation expense for time-based RSUs using the accelerated attribution method, net of actual forfeitures, in which compensation cost for each vesting tranche in an award is recognized ratably from the grant date to the vesting date for that tranche. The condition for vesting of the RSUs is based on continued employment. We recognize stock-based compensation expense for performance-based RSUs based on management’s determination of the probable outcome of the performance conditions and we record a cumulative adjustment in periods in which there is a change in the estimated number of shares expected to vest. As of December 31, 2022, the total unrecognized compensation expense related to RSUs without performance conditions was $ 82.9 million, which is expected to be recognized over a weighted average period of 2.5 years. As of December 31, 2022, the total unrecognized compensation expense related to RSUs with performance conditions was $ 12.3 million, which is expected to be recognized over a weighted average period of 2.9 years. The following table summarizes RSU activity: RSUs without Performance Conditions RSUs with Performance Conditions Number of RSUs Weighted Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) Number of RSUs Weighted Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2021 1,797,899 $ 64.71 $ 152,480 129,718 $ 76.64 $ 11,001 Granted 1,123,076 63.76 168,223 71.64 Vested ( 429,892 ) 56.46 27,907 — — — Forfeited ( 223,229 ) 66.15 ( 3,019 ) 62.38 Outstanding as of December 31, 2022 2,267,854 $ 65.67 $ 112,213 294,922 $ 73.94 $ 14,593 Vested and expected to vest as of December 31, 2022 2,267,854 $ 65.67 $ 112,213 279,267 $ 73.17 $ 13,818 119 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 The weighted average grant date fair value for our RSUs without performance conditions granted during the years ended December 31, 2022, 2021 and 2020 was $ 63.76 , $ 86.35 and $ 50.61 , respectively. The weighted average grant date fair value for our RSUs with performance conditions granted during the years ended December 31, 2022, 2021 and 2020 was $ 71.64 , $ 87.53 and $ 56.83 , respectively. The total fair value of RSUs without performance conditions vested during the years ended December 31, 2022, 2021 and 2020 was $ 24.3 million, $ 20.9 million and $ 9.0 million, respectively. The total fair value of RSUs with performance conditions vested during the years ended December 31, 2022, 2021 and 2020 was zero , $ 1.1 million and zero , respectively. Employee Stock Purchase Plan Our board of directors adopted our 2015 ESPP in June 2015. As of December 31, 2022, 1,929,629 shares have been reserved for future grant under the 2015 ESPP, with provisions established to increase the number of shares available on January 1 of each subsequent year for nine years . The annual automatic increase in the number of shares available for issuance under the 2015 ESPP is the lesser of 1 % of each class of common stock outstanding as of December 31 of the preceding fiscal year, 1,500,000 shares of common stock, or such lesser number as determined by the board of directors. There was no increase to the number of shares of common stock reserved for issuance under the 2015 ESPP in any of 2020, 2021 or 2022 nor will the number of shares be increased in 2023. The 2015 ESPP allows eligible employees to purchase shares of our common stock at 90 % of the fair market value, rounded up to the nearest cent, based on the closing price of our common stock on the purchase date. The maximum number of shares of our common stock that a participant may purchase during any calendar year shall not exceed such number of shares having a fair market value equal to the lesser of $ 15,000 or 10 % of the participant's base compensation for that year. The 2015 ESPP is considered compensatory for purposes of share-based compensation expense due to the 10 % discount on the fair market value of the common stock. An aggregate of 24,994 , 19,628 and 29,933 shares were purchased by employees for the years ended December 31, 2022, 2021 and 2020, respectively, for which we recognized $ 0.2 million of compensation expense during each of those years. Compensation expense is recognized for the amount of the discount, net of actual forfeitures and voluntary withdrawals, over the six-month purchase period. Note 16. Earnings Per Share Basic and Diluted Earnings Per Share The components of basic and diluted earnings per share are as follows (in thousands, except share and per share amounts): Year Ended December 31, Numerator: 2022 2021 2020 Net income $ 55,631 $ 51,175 $ 76,660 Net loss attributable to redeemable noncontrolling interests 707 1,084 1,193 Net income attributable to common stockholders - basic (A) $ 56,338 $ 52,259 $ 77,853 Add back interest expense, net of tax, attributable to convertible senior notes 2,352 — — Net income attributable to common stockholders - diluted (B) $ 58,690 $ 52,259 $ 77,853 Denominator: Weighted average common shares outstanding — basic (C) 49,926,236 49,869,857 48,950,328 Dilutive effect of convertible senior notes, stock options and restricted stock units 5,006,521 2,050,045 2,012,862 Weighted average common shares outstanding — diluted (D) 54,932,757 51,919,902 50,963,190 Net income per share: Basic (A/C) $ 1.13 $ 1.05 $ 1.59 Diluted (B/D) $ 1.07 $ 1.01 $ 1.53 120 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 The following securities have been excluded from the calculation of diluted weighted average common shares outstanding as the inclusion of these securities would have an anti-dilutive effect: Year Ended December 31, 2022 2021 2020 Stock options 393,042 142,660 158,515 Restricted stock units 242,842 11,630 62,194 Our redeemable noncontrolling interests relate to our 85 % equity ownership interest in OpenEye and Noonlight. See Note 2 and Note 7 for details on the put options and call options contained in the OpenEye and Noonlight stockholder agreements. Prior to the adoption of ASU 2020-06, since we expected to settle the principal amount on our outstanding 2026 Notes in cash and any excess in cash or shares of our common stock, we used the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread had a dilutive impact on diluted net income per share of common stock when the average market price of our common stock for a given period exceeded the conversion price of $ 147.19 per share for the 2026 Notes. Based on the initial conversion price and the average market price of our common stock for the year ended December 31, 2021, there was no dilutive effect of the 2026 Notes on our earnings per share during the year ended December 31, 2021. Upon adoption of ASU 2020-06 on January 1, 2022, we began using the if-converted method when calculating the dilutive impact of the 2026 Notes on net income per share. As a result, we included 3,396,950 shares related to the 2026 Notes within the weighted average shares outstanding when calculating the diluted net income per share for the year ended December 31, 2022. Additionally, we included $ 2.4 million of debt issuance cost amortization, net of tax, within the numerator of the diluted net income per share for the year ended December 31, 2022. Note 17. Significant Service Providers and Distributors During the years ended December 31, 2022, 2021 and 2020, our 10 largest revenue service provider partners or distributors accounted for 49 %, 47 % and 48 % of our consolidated revenue. One of our service provider partners within the Alarm.com segment individually represented greater than 15 % but not more than 20 % of our revenue for the years ended December 31, 2022, 2021 and 2020. Two service provider partners or distributors in the Alarm.com segment represented more than 10% of accounts receivable as of December 31, 2022. One service provider partner in the Alarm.com segment represented more than 10% of accounts receivable as of December 31, 2021. Note 18. Income Taxes The components of our income tax expense are as follows (in thousands): Year Ended December 31, 2022 2021 2020 Current Federal $ 44,591 $ 2,678 $ 3,583 State 10,730 1,437 2,735 Foreign 680 894 438 Total Current 56,001 5,009 6,756 Deferred Federal ( 45,609 ) ( 9,295 ) ( 3,628 ) State ( 9,271 ) ( 820 ) 372 Foreign ( 159 ) — — Total Deferred ( 55,039 ) ( 10,115 ) ( 3,256 ) Total $ 962 $ ( 5,106 ) $ 3,500 121 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 The difference between the income tax expense at the federal statutory rate and income tax expense in the consolidated statements of operations is as follows: Year Ended December 31, 2022 2021 2020 Federal statutory rate 21.0 % 21.0 % 21.0 % State income tax expense, net of federal benefits 1.0 ( 1.0 ) 1.4 Nondeductible meals and entertainment 0.9 0.5 0.1 Foreign-derived intangible income deduction ( 7.0 ) ( 1.7 ) ( 1.4 ) Valuation allowance 0.4 1.1 1.3 Research and development tax credits ( 16.5 ) ( 17.7 ) ( 9.4 ) Tax windfall benefits ( 3.0 ) ( 18.8 ) ( 8.8 ) Foreign withholding tax 1.2 1.9 0.5 Nondeductible compensation 1.8 1.9 — Other 1.9 1.7 ( 0.3 ) Effective rate 1.7 % ( 11.1 ) % 4.4 % 122 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 The components of our net deferred tax assets (liabilities) are as follows (in thousands): December 31, 2022 2021 Deferred tax assets, non-current Provision for credit losses on accounts receivable $ 1,073 $ 847 Depreciation 445 281 Accrued expenses 5,288 4,749 Deferred revenue 2,274 2,061 Operating lease liabilities 9,757 10,619 Stock-based compensation 22,191 15,461 Acquisition costs 2,363 2,627 Subsidiary unit compensation — 804 Inventory reserve 654 439 Debt issuance costs — 402 Net operating losses 3,492 1,262 Tax credits 3,085 9,405 Capitalized research and development expenditures 53,901 — Other 786 577 Total deferred tax assets, non-current prior to valuation allowance 105,309 49,534 Valuation allowance ( 2,591 ) ( 2,209 ) Total deferred tax assets, non-current, net of valuation allowance 102,718 47,325 Deferred tax liabilities, non-current Intangible assets and prepaid patent licenses ( 4,354 ) ( 2,905 ) Operating lease right-of-use assets ( 7,134 ) ( 7,534 ) Depreciation ( 5,828 ) ( 6,446 ) Sales commissions ( 1,138 ) ( 896 ) Internally developed software — ( 147 ) Equity investments ( 79 ) ( 92 ) Convertible debt discount — ( 15,758 ) Total deferred tax liabilities, non-current ( 18,533 ) ( 33,778 ) Net deferred tax assets, non-current $ 84,185 $ 13,547 A reconciliation of the beginning and ending amounts of unrecognized tax benefits (without related interest expense) is as follows (in thousands): Year Ended December 31, 2022 2021 2020 Beginning balance $ 5,541 $ 4,228 $ 3,065 Additions based on tax positions of the current year 1,881 1,526 1,166 Additions based on tax positions of prior year 225 15 656 Decreases based on tax positions of prior year ( 51 ) ( 10 ) ( 259 ) Decreases due to lapse of applicable statute of limitations — ( 218 ) ( 400 ) Ending balance $ 7,596 $ 5,541 $ 4,228 Our effective income tax rates were 1.7 %, ( 11.1 )% and 4.4 % for the years ended December 31, 2022, 2021 and 2020, respectively. Our effective tax rates were below the 21.0% statutory rate primarily due to research and development tax credits claimed, foreign derived intangible income deductions and tax windfall benefits from employee stock-based payment transactions, partially offset by the impact of nondeductible expenses, foreign withholding taxes and state taxes. 123 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 We recognize a valuation allowance if, based on the weight of available evidence, both positive and negative, it is more likely than not that some portion, or all, of net deferred tax assets will not be realized. Due to the uncertainty of realization of certain deferred tax assets acquired in 2017 related to our Canadian net operating losses and research and development tax credits, we established a valuation allowance of $ 0.3 million during the second quarter of 2019, which remained at $ 0.3 million as of December 31, 2021 and, due to evidence indicating it was more likely than not that the Canadian tax attributes would be realized prior to expiration, the Canadian valuation allowance was reduced to zero as of December 31, 2022. During 2020, we established a valuation allowance of $ 1.3 million for state research and development tax credit carryforwards, which increased to $ 1.9 million as of December 31, 2021 and increased to $ 2.6 million as of December 31, 2022. We apply guidance for uncertainty in income taxes that requires the application of a more likely than not threshold to the recognition and de-recognition of uncertain tax positions. If the recognition threshold is met, this guidance permits us to recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is more likely than not to be realized upon settlement. We recorded an increase to the unrecognized tax benefits liability of $ 2.1 million, $ 1.4 million and $ 1.1 million primarily for research and development tax credits claimed during the years ended December 31, 2022, 2021 and 2020, respectively. We believe that it is reasonably possible within the next 12 months that a decrease of up to $ 0.7 million in unrecognized tax benefits may be recognized as a result of a lapse of the statute of limitations. Our unrecognized tax benefits as of December 31, 2022 and 2021 includes unrecognized tax benefits of $ 7.4 million and $ 5.4 million, respectively, that if recognized, would reduce our income tax expense and effective tax rate. As of December 31, 2022 and 2021, we accrued $ 0.3 million and $ 0.2 million of total interest expense related to unrecognized tax benefits, respectively. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2022, we had gross U.S. federal net operating loss carryforwards of $ 15.1 million, which will begin to expire in 2031 and we had Canadian Federal net operating loss carryforwards of $ 0.6 million, which are scheduled to begin to expire in 2034. As of December 31, 2022, we had state net operating loss carryforwards of $ 2.0 million, which will begin to expire in 2034. As of December 31, 2022, we had no federal research and development tax credit carryforwards. As of December 31, 2022, we had state research and development tax credit carryforwards of $ 3.5 million, which will begin to expire in 2030. The federal net operating loss carryforward arose in connection with the 2013 acquisition of EnergyHub and the 2022 acquisition of Noonlight. Utilization of the acquired EnergyHub and Noonlight net operating loss carryforwards may be subject to annual limitations due to ownership change limitations as provided by the Internal Revenue Code of 1986, as amended. Our tax returns are subject to on-going review and examination by various tax authorities. Tax authorities may not agree with the treatment of items reported in our tax returns, and therefore the outcome of tax reviews and examinations can be unpredictable. On October 13, 2021, the Internal Revenue Service commenced an examination of our federal income tax return for 2018 and on August 12, 2022, the Internal Revenue Service expanded the examination to include our federal income tax return for 2019, both of which are ongoing. The anticipated completion date of the Internal Revenue Service examinations cannot be estimated at this time. In August 2022, the Inflation Reduction Act of 2022 was enacted in the United States which, among other provisions, includes a minimum 15.0% tax on companies that have a three-year average annual adjusted financial statement income of more than $1.0 billion and a 1.0% excise tax on the value of net corporate stock repurchases. Both provisions are effective for tax years beginning after December 31, 2022. We do not currently believe the 15.0% corporate minimum tax or the 1.0% tax on net corporate stock repurchases will have a material impact on our financial condition or results of operations. Note 19. Segment Information We have two reportable segments: • Alarm.com segment • Other segment Our chief operating decision maker is our chief executive officer. Management determined the operational data used by the chief operating decision maker is that of the two reportable segments. Management bases strategic goals and decisions on these segments and the data presented below is used to measure financial results. Our Alarm.com segment represents our cloud-based and Software platforms for the intelligently connected property and related solutions that contributed 94 %, 95 % and 94 % of our revenue, net of intersegment eliminations, for the years ended December 31, 2022, 2021 and 2020, respectively. Our Other segment is focused on researching, developing and offering 124 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 residential and commercial automation solutions and energy management products and services in adjacent markets. Inter-segment revenue includes sales of hardware between our segments. Management evaluates the performance of its segments and allocates resources to them based on operating income / (loss) as compared to prior periods and current performance levels. The reportable segment operational data is presented in the tables below (in thousands): Year Ended December 31, 2022 Alarm.com Other Intersegment Alarm.com Intersegment Other Total SaaS and license revenue $ 478,134 $ 42,243 $ — $ — $ 520,377 Hardware and other revenue 317,937 9,097 ( 4,067 ) ( 785 ) 322,182 Total revenue 796,071 51,340 ( 4,067 ) ( 785 ) 842,559 Operating income / (loss) 66,744 ( 16,255 ) 417 131 51,037 Assets 1,366,343 53,927 ( 90,929 ) 34 1,329,375 Year Ended December 31, 2021 Alarm.com Other Intersegment Alarm.com Intersegment Other Total SaaS and license revenue $ 426,823 $ 33,549 $ — $ — $ 460,372 Hardware and other revenue 284,721 9,275 ( 3,089 ) ( 2,310 ) 288,597 Total revenue 711,544 42,824 ( 3,089 ) ( 2,310 ) 748,969 Operating income / (loss) 70,646 ( 9,590 ) 766 ( 250 ) 61,572 Assets 1,264,416 37,198 ( 69,595 ) ( 4 ) 1,232,015 Year Ended December 31, 2020 Alarm.com Other Intersegment Alarm.com Intersegment Other Total SaaS and license revenue $ 366,815 $ 26,442 $ — $ — $ 393,257 Hardware and other revenue 219,826 14,254 ( 3,093 ) ( 6,241 ) 224,746 Total revenue 586,641 40,696 ( 3,093 ) ( 6,241 ) 618,003 Operating income / (loss) 59,194 ( 2,908 ) 393 ( 381 ) 56,298 Our SaaS and license revenue for the Alarm.com segment included software license revenue of $ 26.8 million, $ 32.3 million and $ 38.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. There was no software license revenue recorded for the Other segment during the years ended December 31, 2022, 2021 and 2020. Depreciation and amortization expense was $ 29.6 million, $ 29.3 million and $ 27.2 million for the Alarm.com segment for the years ended December 31, 2022, 2021 and 2020, respectively. Depreciation and amortization expense was $ 1.2 million, $ 0.4 million and $ 0.3 million for the Other segment for the years ended December 31, 2022, 2021 and 2020, respectively. Additions to property and equipment were $ 28.4 million, $ 9.7 million and $ 16.4 million for the Alarm.com segment for the years ended December 31, 2022, 2021 and 2020, respectively. Additions to property and equipment were $ 0.3 million, $ 0.5 million and $ 1.1 million for the Other segment for the years ended December 31, 2022, 2021 and 2020, respectively. We derived substantially all revenue from North America for the years ended December 31, 2022, 2021 and 2020. Substantially all of our long-lived assets were in North America as of December 31, 2022 and 2021. 125 ALARM.COM HOLDINGS, INC. Notes to the Consolidated Financial Statements — (Continued) December 31, 2022, 2021 and 2020 Note 20. Quarterly Financial Data (unaudited) The following table shows selected unaudited quarterly consolidated statement of operations data for each of our eight most recently completed quarters. In the opinion of management, the information for each of these quarters has been prepared on the same basis as our audited financial statements and include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair statement of financial information in accordance with GAAP. However, the global economy, credit markets and financial markets have and may continue to experience significant volatility as a result of 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. Additionally, increases in freight shipment and inventory component costs have resulted in an increase to our cost of hardware revenue during 2021 and portions of 2022. Information about current period and prior period acquisitions that may affect the comparability of the selected financial information presented below is included in Note 7. Information about the 2026 Notes issued in January 2021 and the related interest expense, which may affect the comparability of the quarterly financial data presented below, is included in Note 13. Information about the adoption of ASU 2020-06 and the elimination of non-cash interest expense related to the amortization of the debt discount associated with the equity component for the 2026 Notes, which may affect the comparability of the quarterly financial data presented below, is included in Note 2. The selected consolidated statements of operation data in amounts are presented below (in thousands, except per share data): Three Months Ended Mar. 31, 2021 June 30, 2021 Sept. 30, 2021 Dec. 31, 2021 Mar. 31, 2022 June 30, 2022 Sept. 30, 2022 Dec. 31, 2022 Total revenue $ 172,498 $ 188,857 $ 192,324 $ 195,290 $ 205,437 $ 212,845 $ 216,138 $ 208,139 Total cost of revenue 65,762 77,367 80,384 82,386 90,087 87,336 85,586 79,572 Net income 14,550 14,490 13,294 8,841 8,903 10,828 18,110 17,790 Net income attributable to common stockholders 14,830 14,745 13,538 9,146 9,079 10,842 18,332 18,085 Net income per share attributable to common stockholders Basic $ 0.30 $ 0.30 $ 0.27 $ 0.18 $ 0.18 $ 0.22 $ 0.37 $ 0.36 Diluted $ 0.29 $ 0.28 $ 0.26 $ 0.18 $ 0.18 $ 0.21 $ 0.35 $ 0.34 126 Schedule II – Valuation and Qualifying Accounts and Reserves Alarm.com Holdings, Inc. Schedule II Valuation and Qualifying Accounts and Reserves (In thousands) Description Balance at Beginning of Year Additions Charged Against Revenue Additions Charged to Other Accounts Deductions Balance at End of Year Year Ended December 31, 2022 Allowance for credit losses on accounts receivable $ 2,168 $ — $ 1,156 $ ( 489 ) $ 2,835 Allowance for product returns 1,181 4,746 — ( 4,376 ) 1,551 Allowance for credit losses on notes receivable 80 — ( 78 ) — 2 Deferred tax valuation allowance 2,209 — 1,337 ( 955 ) 2,591 Year Ended December 31, 2021 Allowance for credit losses on accounts receivable $ 4,696 $ — $ ( 775 ) $ ( 1,753 ) $ 2,168 Allowance for product returns 1,480 2,494 — ( 2,793 ) 1,181 Allowance for credit losses on notes receivable 89 — ( 9 ) — 80 Deferred tax valuation allowance 1,568 — 641 — 2,209 Year Ended December 31, 2020 Allowance for credit losses on accounts receivable $ 2,584 $ — $ 2,530 (1) $ ( 418 ) $ 4,696 Allowance for product returns 1,075 1,795 — ( 1,390 ) 1,480 Allowance for credit losses on notes receivable 16 — 90 (1) ( 17 ) 89 Deferred tax valuation allowance 322 — 1,246 — 1,568 _______________ (1) Includes the 2020 impact of the adoption of Topic 326 of $ 0.4 million for the allowance for credit losses on accounts receivable and $ 0.4 million for the allowance for credit losses on note receivable. 127 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.