Alarm.com Holdings, Inc. 10-Q

Item 1. FINANCIAL STATEMENTS (unaudited) ALARM.COM HOLDINGS, INC. Condensed Consolidated Statements of Operations (in thousands, except share and per share data) (unaudited) Three Months Ended March 31, 2023 2022 Revenue: SaaS and license revenue $ 135,394 $ 123,225 Hardware and other revenue 74,322 82,212 Total revenue 209,716 205,437 Cost of revenue (1) : Cost of SaaS and license revenue 19,583 16,894 Cost of hardware and other revenue 56,589 73,193 Total cost of revenue 76,172 90,087 Operating expenses: Sales and marketing 26,645 23,192 General and administrative 28,499 23,994 Research and development 61,908 51,490 Amortization and depreciation 7,673 7,761 Total operating expenses 124,725 106,437 Operating income 8,819 8,913 Interest expense ( 868 ) ( 784 ) Interest income 5,182 143 Other (expense) / income, net ( 148 ) 13 Income before income taxes 12,985 8,285 Benefit from income taxes ( 1,222 ) ( 618 ) Net income 14,207 8,903 Net loss attributable to redeemable noncontrolling interests 209 176 Net income attributable to common stockholders $ 14,416 $ 9,079 Per share information attributable to common stockholders: Net income per share: Basic $ 0.29 $ 0.18 Diluted $ 0.28 $ 0.18 Weighted average common shares outstanding: Basic 49,584,890 50,206,179 Diluted 54,296,321 55,170,781 _______________ (1) Exclusive of amortization and depreciation shown in operating expenses below. See accompanying notes to the condensed consolidated financial statements. 2 ALARM.COM HOLDINGS, INC. Condensed Consolidated Statements of Comprehensive Income (in thousands) (unaudited) Three Months Ended March 31, 2023 2022 Net income $ 14,207 $ 8,903 Other comprehensive income Foreign currency translation adjustment 170 — Total other comprehensive income 170 — Comprehensive income 14,377 8,903 Comprehensive loss attributable to redeemable noncontrolling interests 209 176 Comprehensive income attributable to common stockholders $ 14,586 $ 9,079 See accompanying notes to the condensed consolidated financial statements. 3 ALARM.COM HOLDINGS, INC. Condensed Consolidated Balance Sheets (in thousands, except share and per share data) (unaudited) March 31, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 606,428 $ 622,165 Accounts receivable, net of allowance for credit losses of $ 3,199 and $ 2,835 , and net of allowance for product returns of $ 1,869 and $ 1,551 as of March 31, 2023 and December 31, 2022, respectively 125,885 124,283 Inventory 117,874 115,584 Other current assets, net of allowance for credit losses of $ 0 as of March 31, 2023 and December 31, 2022 30,676 29,056 Total current assets 880,863 891,088 Property and equipment, net 57,100 57,172 Intangible assets, net 85,645 82,458 Goodwill 155,287 148,183 Deferred tax assets 111,232 84,185 Operating lease right-of-use assets 30,491 28,933 Other assets, net of allowance for credit losses of $ 2 as of March 31, 2023 and December 31, 2022 36,912 37,356 Total assets $ 1,357,530 $ 1,329,375 Liabilities, redeemable noncontrolling interests and stockholders’ equity Current liabilities: Accounts payable, accrued expenses and other current liabilities $ 120,634 $ 119,657 Accrued compensation 19,577 25,582 Deferred revenue 8,776 7,540 Operating lease liabilities 12,243 12,157 Total current liabilities 161,230 164,936 Deferred revenue 11,455 10,792 Convertible senior notes, net and other long-term debt 492,000 490,370 Operating lease liabilities 28,279 27,380 Other liabilities 13,345 13,050 Total liabilities 706,309 706,528 Commitments and contingencies (Note 12) Redeemable noncontrolling interests 25,840 23,988 Stockholders’ equity Preferred stock, $ 0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2023 and December 31, 2022 — — Common stock, $ 0.01 par value, 300,000,000 shares authorized; 51,255,389 and 50,985,454 shares issued; and 49,722,644 and 49,452,709 shares outstanding as of March 31, 2023 and December 31, 2022, respectively 513 510 Additional paid-in capital 509,132 497,199 Treasury stock, at cost; 1,532,745 shares as of March 31, 2023 and December 31, 2022 ( 83,993 ) ( 83,993 ) Accumulated other comprehensive income 170 — Retained earnings 199,559 185,143 Total stockholders’ equity 625,381 598,859 Total liabilities, redeemable noncontrolling interests and stockholders’ equity $ 1,357,530 $ 1,329,375 See accompanying notes to the condensed consolidated financial statements. 4 ALARM.COM HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Three Months Ended March 31, Cash flows used in operating activities: 2023 2022 Net income $ 14,207 $ 8,903 Adjustments to reconcile net income to net cash flows used in operating activities Provision for credit losses on accounts receivable 540 54 Reserve for product returns 1,151 798 Recovery of credit losses on notes receivable — ( 78 ) Amortization on patents and tooling 316 353 Amortization and depreciation 7,673 7,761 Amortization of debt issuance costs 784 780 Amortization of operating leases 2,750 2,473 Deferred income taxes ( 26,895 ) ( 10,650 ) Change in fair value of contingent liability 13 — Stock-based compensation 12,686 12,110 Changes in operating assets and liabilities (net of business acquisitions): Accounts receivable ( 1,843 ) 1,629 Inventory 377 ( 11,161 ) Other current and non-current assets ( 689 ) ( 3,225 ) Accounts payable, accrued expenses and other current liabilities ( 9,617 ) ( 21,450 ) Deferred revenue 1,899 782 Operating lease liabilities ( 3,362 ) ( 2,975 ) Other liabilities ( 3,511 ) ( 65 ) Cash flows used in operating activities ( 3,521 ) ( 13,961 ) Cash flows used in investing activities: Business acquisition, net of cash acquired ( 9,696 ) — Additions to property and equipment ( 2,398 ) ( 2,171 ) Issuances of notes receivable ( 300 ) — Receipt of payments on notes receivable 13 16 Capitalized software development costs ( 362 ) — Purchase of investment in unconsolidated entity ( 200 ) — Cash flows used in investing activities ( 12,943 ) ( 2,155 ) Cash flows from / (used in) financing activities: Purchases of treasury stock — ( 23,331 ) Payments of acquired debt ( 469 ) — Issuances of common stock from equity-based plans 1,311 1,080 Cash flows from / (used in) financing activities 842 ( 22,251 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash 13 — Net decrease in cash, cash equivalents and restricted cash ( 15,609 ) ( 38,367 ) Cash, cash equivalents and restricted cash at beginning of the period 622,879 710,621 Cash, cash equivalents and restricted cash at end of the period $ 607,270 $ 672,254 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 606,428 $ 671,753 Restricted cash included in other current assets and other assets 842 501 Total cash, cash equivalents and restricted cash $ 607,270 $ 672,254 See accompanying notes to the condensed consolidated financial statements. 5 ALARM.COM HOLDINGS, INC. Condensed Consolidated Statements of Equity (in thousands) (unaudited) Redeemable Noncontrolling Interests Additional Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings Total Stockholders’ Equity Common Stock Treasury Stock Shares Amount Shares Amount Balance as of December 31, 2022 $ 23,988 50,985 $ 510 $ 497,199 1,533 $ ( 83,993 ) $ — $ 185,143 $ 598,859 Common stock issued in connection with equity-based plans — 270 3 1,308 — — — — 1,311 Stock-based compensation expense — — — 12,686 — — — — 12,686 Accretion adjustments of redeemable noncontrolling interest to redemption value 2,061 — — ( 2,061 ) — — — — ( 2,061 ) Net income / (loss) attributable to common stockholders ( 209 ) — — — — — — 14,416 14,416 Other comprehensive income — — — — — — 170 — 170 Balance as of March 31, 2023 $ 25,840 51,255 $ 513 $ 509,132 1,533 $ ( 83,993 ) $ 170 $ 199,559 $ 625,381 Redeemable Noncontrolling Interests Common Stock Additional Paid-In Capital Treasury Stock Retained Earnings Total Stockholders’ Equity Shares Amount Shares Amount Balance as of December 31, 2021 $ 12,888 50,407 $ 504 $ 498,979 147 $ ( 5,149 ) $ 118,833 $ 613,167 Adoption of accounting standard on debt with conversion and other options — — — ( 56,515 ) — — 9,972 ( 46,543 ) Common stock issued in connection with equity-based plans — 85 1 1,079 — — — 1,080 Purchase of treasury stock — — — — 354 ( 23,331 ) — ( 23,331 ) Stock-based compensation expense — — — 12,110 — — — 12,110 Accretion adjustments of redeemable noncontrolling interest to redemption value 2,569 — — ( 2,569 ) — — — ( 2,569 ) Net income / (loss) attributable to common stockholders ( 176 ) — — — — — 9,079 9,079 Balance as of March 31, 2022 $ 15,281 50,492 $ 505 $ 453,084 501 $ ( 28,480 ) $ 137,884 $ 562,993 See accompanying notes to the condensed consolidated financial statements. 6 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) March 31, 2023 and 2022 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 addressing 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. 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. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements include our accounts and those of our majority-owned and controlled subsidiaries after elimination of intercompany accounts and transactions. These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all the information and footnotes required by GAAP for annual financial statements. They should be read together with our audited consolidated financial statements and related notes thereto for the year ended December 31, 2022 included in our Annual Report on Form 10-K filed with the SEC on February 24, 2023, or the Annual Report. The condensed consolidated balance sheet as of December 31, 2022 was derived from our audited financial statements but does not include all disclosures required by GAAP for annual financial statements. In the opinion of management, these condensed consolidated financial statements include all normal recurring adjustments necessary for a fair statement of the results of operations, financial position and cash flows for the periods presented. However, the global economy, credit markets and financial markets have and may continue to experience significant volatility as a result of significant worldwide events, including public health crises, such as the COVID-19 pandemic, and geopolitical upheaval, such as Russia’s incursion into Ukraine, disruptions to global supply chains, rising interest rates, risk of recession and inflation (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. It remains difficult to assess or predict the ultimate duration and economic impact of the Macroeconomic Conditions. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2023, which is increasingly true in periods of extreme uncertainty, such as the uncertainty caused by the Macroeconomic Conditions. Prolonged uncertainties could cause further economic slowdown or cause other unpredictable events, each of which could adversely affect our business, results of operations or financial condition. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. As of the date of issuance of these financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, assumptions and judgments or revise the carrying value of our assets or liabilities. However, our estimates, judgments and assumptions are continually evaluated based on available information and experience and may change as new events occur and additional information is obtained. Because of the use of estimates inherent in the financial reporting process and in light of the continuing uncertainty arising from the Macroeconomic Conditions, actual results could differ from those estimates and any such differences may be material. Estimates are used when accounting for revenue recognition, allowances for credit losses, allowance for hardware returns, estimates of obsolete inventory, long-term incentive compensation, the lease term and incremental borrowing rates for leases, stock-based compensation, income taxes, legal reserves and goodwill, intangible assets and other long-lived assets. Significant Accounting Policies Other than those disclosed herein, there have been no other material changes to our significant accounting policies during the three months ended March 31, 2023 from those disclosed in our Annual Report. 7 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 Comprehensive Income Comprehensive income consists of net income and other comprehensive income. Other comprehensive income refers to gains and losses that are recorded as an element of stockholders' equity and excluded from net income. Our other comprehensive income consists of foreign currency translation adjustments. Foreign Currency For foreign operations where substantially all monetary transactions are in the local currency, we use the local currency as our functional currency. For these foreign operations, assets and liabilities are translated at period-end exchange rates and revenue and expense items are translated at weighted-average exchange rates prevailing during the periods being reported. The effects of translating financial statements of foreign operations into our reporting currency are recognized as a cumulative translation adjustment within accumulated other comprehensive income, a separate component of stockholders’ equity. Gains or losses from foreign currency remeasurements that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in our results of operations. Note 3. Revenue from Contracts with Customers Contract Assets The changes in our contract assets are as follows (in thousands): Three Months Ended March 31, 2023 2022 Beginning of period balance $ 13,975 $ 4,520 Commission costs and upfront payments to a customer capitalized in period 1,673 806 Amortization of contract assets ( 1,769 ) ( 846 ) End of period balance $ 13,879 $ 4,480 Contract Liabilities The changes in our contract liabilities are as follows (in thousands): Three Months Ended March 31, 2023 2022 Beginning of period balance $ 18,332 $ 14,837 Revenue deferred in period 5,940 3,990 Revenue recognized from amounts included in contract liabilities ( 4,041 ) ( 3,208 ) End of period balance $ 20,231 $ 15,619 Note 4. Accounts Receivable, Net The components of accounts receivable, net are as follows (in thousands): March 31, 2023 December 31, 2022 Accounts receivable $ 130,953 $ 128,669 Allowance for credit losses ( 3,199 ) ( 2,835 ) Allowance for product returns ( 1,869 ) ( 1,551 ) Accounts receivable, net $ 125,885 $ 124,283 For the three months ended March 31, 2023, we recorded a provision for credit losses of $ 0.5 million, as compared to $ 0.1 million for the same period in the prior year. 8 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 For the three months ended March 31, 2023, we recorded a $ 1.2 million reserve for product returns in our hardware and other revenue, as compared to $ 0.8 million for the same period in the prior year. Historically, we have not experienced write-offs for uncollectible accounts or sales returns that have differed significantly from our estimates. Allowance for Credit Losses - Accounts Receivable The allowance for credit losses is a valuation account that is deducted from the accounts receivable and notes receivable amortized cost basis (see Note 8) to present the net amount expected to be collected. We estimate the allowance balance by applying the loss-rate method using relevant available information from internal and external sources, including historical write-off activity, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in economic conditions, such as changes in unemployment rates. We use projected economic conditions over a period no more than twelve months based on data from external sources. For periods beyond the twelve-month reasonable and supportable forecast period, we revert to historical loss information immediately. The allowance for credit losses is measured on a pooled basis when similar risk characteristics exist. When assessing whether to measure certain financial assets on a pooled basis, we considered various risk characteristics, including the financial asset type, size and the historical or expected credit loss pattern. We identified the following two portfolio segments for our accounts receivable: (i) outstanding accounts receivable balances within Alarm.com and certain subsidiaries and (ii) outstanding accounts receivable balances within all other subsidiaries. There were no changes to our portfolio segments for our accounts receivable during the three months ended March 31, 2023, and no changes to our policies or practices that influenced our estimate of expected credit losses for accounts receivable. Additionally, there were no significant changes in the amount of accounts receivable write-offs during the three months ended March 31, 2023, as compared to historical periods. Expected credit losses are estimated over the contractual term of the financial assets and we adjust the term for expected prepayments when appropriate. For the three months ended March 31, 2023, we recorded credit loss expense for accounts receivable and notes receivable of $ 0.5 million in general and administrative expense in our condensed consolidated statements of operations. For the three months ended March 31, 2022, we recorded a reduction of credit loss expense of $ 0.1 million in general and administrative expense in our condensed consolidated statements of operations. The contractual term excludes expected extensions, renewals and modifications because extension and renewal options are unconditionally cancelable by us. Write-offs of the amortized cost basis are recorded to the allowance for credit losses. Any subsequent recoveries of previously written off balances are recorded as a reduction to credit loss expense. The changes in our allowance for credit losses for accounts receivable are as follows (in thousands): Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 Alarm.com and Certain Subsidiaries All Other Subsidiaries Alarm.com and Certain Subsidiaries All Other Subsidiaries Beginning of period balance $ ( 2,755 ) $ ( 80 ) $ ( 2,035 ) $ ( 133 ) (Provision for) / recovery of expected credit losses ( 506 ) ( 34 ) ( 155 ) 101 Write-offs 159 17 68 1 End of period balance $ ( 3,102 ) $ ( 97 ) $ ( 2,122 ) $ ( 31 ) Note 5. Inventory The components of inventory are as follows (in thousands): March 31, 2023 December 31, 2022 Raw materials $ 38,684 $ 38,098 Work-in-process 489 — Finished goods 78,701 77,486 Total inventory $ 117,874 $ 115,584 9 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 Note 6. Acquisitions Acquisition of a Business - EBS On January 18, 2023, one of our wholly-owned subsidiaries acquired 100 % of the issued and outstanding shares of capital stock of EBS Spółka z ograniczoną odpowiedzialnością, or EBS, an international producer of universal smart communicator devices, headquartered in Warsaw, Poland. We believe this acquisition will assist in the continued expansion of our international operations as well as benefit our supply chain operations. In consideration for the purchase of EBS, we paid $ 9.8 million in cash on January 18, 2023, after deducting $ 2.2 million related to agreed holdback provisions. An earn-out up to an additional $ 2.5 million is payable if certain performance targets are met, which was recorded at the acquisition date fair value of $ 2.0 million. The acquisition was accounted for as a business combination within our Alarm.com segment. The purchase price allocation was not finalized as of the filing date of this Quarterly Report on Form 10-Q and is pending the final determination of the working capital adjustment as well as tax adjustments. The overall impacts to our condensed consolidated financial statements were not considered material for the three months ended March 31, 2023. 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, Inc., or 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. The working capital adjustment was finalized during the first quarter of 2023 and $ 0.4 million will be paid during the second quarter of 2023. 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 quarte r of 2024, subject to off set for any indemnification obligations. 10 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 The table below sets forth the purchase consideration and the fair value allocation of the tangible and intangible net assets acquired (in thousands): September 23, 2022 Calculation of Purchase Consideration: Cash paid, net of working capital adjustment $ 31,805 Outstanding principal and interest of loan provided to Noonlight 1,537 Holdback consideration 4,910 Total consideration $ 38,252 Tangible and Intangible Net Assets: Cash $ 188 Accounts receivable 291 Other current and non-current assets 200 Property and equipment 45 Deferred tax assets 424 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 35,095 Total tangible and intangible net assets $ 38,252 Goodwill of $ 35.1 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 Accounting Standards Codification, or ASC 805, " Business Combinations ," the assets and liabilities were recorded at their respective fair values as of September 23, 2022. We developed 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 . 11 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 Redeemable Noncontrolling Interest We have a redeemable noncontrolling interest related 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. This 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 condensed 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 March 31, 2023. Business Combinations in Operations - Noonlight The operations of the Noonlight business combination discussed above were included in the condensed 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 condensed consolidated financial statements in the year of acquisition. Note 7. Goodwill and Intangible Assets, Net The changes in goodwill by reportable segment are outlined below (in thousands): Alarm.com Other Total Balance as of January 1, 2023 $ 148,183 $ — $ 148,183 Goodwill acquired 7,200 — 7,200 Measurement period adjustment ( 187 ) — ( 187 ) Foreign currency translation adjustment 91 — 91 Balance as of March 31, 2023 $ 155,287 $ — $ 155,287 On January 18, 2023, we acquired 100 % of the issued and outstanding shares of capital stock of EBS and initially recorded $ 7.2 million of goodwill in the Alarm.com segment. The measurement period adjustment relates to the finalization of the Noonlight working capital adjustment as well as the tax adjustment during the three months ended March 31, 2023. The following table reflects changes in the net carrying amount of the components of intangible assets (in thousands): Customer Relationships Developed Technology Trade Name Capitalized Software Development Costs Total Balance as of January 1, 2023 $ 47,522 $ 33,553 $ 1,383 $ — $ 82,458 Intangible assets acquired 2,395 4,516 537 — 7,448 Capitalized software development costs — — — 362 362 Amortization ( 2,670 ) ( 1,776 ) ( 177 ) — ( 4,623 ) Balance as of March 31, 2023 $ 47,247 $ 36,293 $ 1,743 $ 362 $ 85,645 We recorded $ 4.6 million of amortization related to our intangible assets for each of the three months ended March 31, 2023 and 2022. There were no impairments of long-lived intangible assets during the three months ended March 31, 2023 and 2022. During the three months ended March 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. 12 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 The following tables reflect the weighted average remaining life and carrying value of finite-lived intangible assets (in thousands, except weighted-average remaining life): March 31, 2023 Gross Carrying Amount Accumulated Amortization Net Carrying Value Weighted- Average Remaining Life (in years) Customer relationships $ 128,280 $ ( 81,033 ) $ 47,247 6.8 Developed technology 62,994 ( 26,701 ) 36,293 5.5 Trade name 4,474 ( 2,731 ) 1,743 3.0 Capitalized software development costs 362 — 362 5.0 Total intangible assets $ 196,110 $ ( 110,465 ) $ 85,645 6.2 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 Note 8. Other Assets Loan to a Distribution Partner In December 2022, we amended a subordinated credit agreement with the affiliated entity of one of our distribution partners. The amended subordinated credit agreement with the affiliated entity of the distribution partner 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. As of March 31, 2023 and December 31, 2022, $ 4.1 million and $ 4.0 million of the notes receivable balance related to the subordinated credit agreement was included in other assets in our condensed consolidated balance sheets, respectively. For the three months ended March 31, 2023, we recognized $ 0.8 million of revenue from the distribution partner associated with this loan, as compared to $ 0.6 million for the same period in the prior year. 13 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 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 March 31, 2023 and December 31, 2022, $ 1.1 million of principal was outstanding from the service provider partner under the loan agreement. For three months ended March 31, 2023 and 2022, we recognized less than $ 0.1 million of revenue from the service provider partner associated with this loan. 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 March 31, 2023 and December 31, 2022, $ 1.5 million of principal was outstanding from the technology partner under the convertible promissory note. For the three months ended March 31, 2023 and 2022, 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 from orderly transactions for identical or similar investments. As of March 31, 2023 and December 31, 2022, our investment in the hardware supplier was $ 5.6 million. Investments in Technology Partners In February 2021, we paid $ 5.0 million in cash to purchase 1,000,000 shares of Series B-2 Preferred Stock from a 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. As of March 31, 2023 and December 31, 2022, our investment in the technology partner was $ 5.7 million. 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 March 31, 2023 and December 31, 2022, our investment in the technology partner was $ 5.1 million. Allowance for Credit Losses - Notes Receivable 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 for our notes receivable during the three months ended March 31, 2023, 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 for notes receivable. There were no hardware financing receivables outstanding as of March 31, 2023 and December 31, 2022. 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 14 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 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 March 31, 2023 and December 31, 2022 was less than $ 0.1 million, and is reflected in other current assets within our condensed 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 three months ended March 31, 2023 and 2022. There were no purchases or sales of financial assets during the three months ended March 31, 2023 and 2022. There were no significant changes in the amount of note receivable write-offs during the three months ended March 31, 2023, as compared to historical periods. The changes in our allowance for credit losses for notes receivable are as follows (in thousands): Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 Loan Receivables Hardware Financing Receivables Loan Receivables Hardware Financing Receivables Beginning of period balance $ ( 2 ) $ — $ ( 79 ) $ ( 1 ) Recovery of expected credit losses — — 78 — Write-offs — — — — End of period balance $ ( 2 ) $ — $ ( 1 ) $ ( 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): March 31, 2023 Loan Receivables: 2023 2022 2021 2020 2019 Prior Total Current $ 300 $ 1,500 $ — $ 1,079 $ 1 $ 4,134 $ 7,014 30-59 days past due — — — — — — — 60-89 days past due — — — — — — — 90-119 days past due — — — — — — — 120+ days past due — — — — — — — Total $ 300 $ 1,500 $ — $ 1,079 $ 1 $ 4,134 $ 7,014 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 There were no notes receivable placed on nonaccrual status as of March 31, 2023 and December 31, 2022. During the three months ended March 31, 2023 and 2022, there was no interest income recognized related to notes receivable that were in nonaccrual status. As of March 31, 2023 and December 31, 2022, there were no notes receivable placed in nonaccrual status for which there was not a related allowance for credit losses. As of March 31, 2023 and December 31, 2022, there were no notes receivable that were 90 days or greater past due for which we continued to accrue interest income. Prepaid Expenses As of March 31, 2023 and December 31, 2022, $ 16.4 million and $ 14.5 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. 15 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 Note 9. 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 Assets: Level 1 Level 2 Level 3 Total Money market accounts as of March 31, 2023 $ 593,730 $ — $ — $ 593,730 Money market accounts as of December 31, 2022 510,326 — — 510,326 Liabilities: Contingent consideration liability from acquisition as of March 31, 2023 $ — $ — $ 2,006 $ 2,006 Contingent consideration liability from acquisition as of December 31, 2022 — — — — The following table summarizes the change in fair value of the Level 3 liabilities with significant unobservable inputs (in thousands): Three Months Ended March 31, 2023 2022 Contingent Consideration Liability from Acquisition Subsidiary Long-Term Incentive Plan Beginning of period balance $ — $ 3,351 Acquired liabilities 1,993 — Changes in fair value included in earnings 13 ( 247 ) End of period balance $ 2,006 $ 3,104 As of March 31, 2023, $ 592.9 million of our money market accounts was included in cash and cash equivalents and $ 0.8 million was included in other assets in our condensed consolidated balance sheets. As of December 31, 2022, $ 509.6 million was included in cash and cash equivalents and $ 0.7 million was included in other assets in our condensed consolidated balance sheets. Our money market assets are valued using quoted prices in active markets. See Note 12 for the carrying amount and estimated fair value of our convertible senior notes as of March 31, 2023 and December 31, 2022. 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. 16 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 The contingent consideration liability consists of the potential earn-out payment related to our acquisition of 100 % of the issued and outstanding capital stock of EBS on January 18, 2023. The earn-out payment is contingent on the satisfaction of certain performance targets related to the integration of EBS's hardware into the Alarm.com platform by December 31, 2025 and has a maximum potential payment of up to $ 2.5 million. We account for the contingent consideration using fair value and established a liability for the future earn-out payment based on an estimation of the probability of the future achievement of the performance targets. The contingent consideration liability was valued with Level 3 unobservable inputs, including the probability of expected achievement of the performance targets. At January 18, 2023, the fair value of the liability was $ 2.0 million. At each reporting date until December 31, 2025, or the achievement of the performance targets, we will remeasure the liability, using the same valuation approach. Changes in fair value resulting from information that existed subsequent to the acquisition date are recorded in general and administrative expense in the condensed consolidated statements of operations. During the three months ended March 31, 2023, the contingent consideration liability did not materially change from the acquisition date fair value of $ 2.0 million as there were no changes in the expected probability of achievement for the performance targets. The unobservable inputs used in the valuation as of March 31, 2023 included a weighted average expected achievement percentage of 89.5 %, weighted by the potential payout of the performance targets, including a range of 80.0 % to 99.0 %. The valuation also included a weighted average discount rate of 5.9 %, weighted by the probability of achievement of the performance targets at various dates, including a range of 5.7 % to 6.1 %. Selecting another probability of expected achievement or discount rate within an acceptable range would not result in a significant change to the fair value of the contingent consideration liability. We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. There were no transfers in or out of Level 3 during the three months ended March 31, 2023 and 2022. We also monitor the value of the investments for other-than-temporary impairment on a quarterly basis. No other-than-temporary impairments occurred during the three months ended March 31, 2023 and 2022. Note 10. Leases We lease office space, data centers and office equipment under non-cancelable operating leases with various expiration dates through 2030. 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): Three Months Ended March 31, 2023 2022 Operating lease cost $ 2,750 $ 2,473 Cash paid for amounts included in the measurement of operating lease liabilities 3,362 2,975 Operating lease right-of-use assets obtained in exchange for new operating lease liabilities 3,927 1,782 March 31, 2023 December 31, 2022 Weighted-average remaining lease term — operating leases 3.6 years 3.4 years Weighted-average discount rate — operating leases 4.5 % 3.9 % 17 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 Maturities of lease liabilities are as follows (in thousands): Year Ended December 31, Operating Leases (1) Remainder of 2023 $ 10,337 2024 12,690 2025 10,780 2026 6,531 2027 1,612 2028 and thereafter 2,387 Total lease payments 44,337 Less: imputed interest (2) 3,815 Present value of lease liabilities $ 40,522 _______________ (1) There are no legally binding minimum lease payments for leases executed but not yet commenced and no options to extend lease terms that were reasonably certain of being exercised included in these balances. (2) Imputed interest was calculated using the incremental borrowing rate applicable for each lease. We did no t have any finance leases or subleases as of March 31, 2023 or December 31, 2022. Our lease agreements do not contain any material residual value guarantees, restrictive covenants or variable lease payments. Short-term lease costs were immaterial for the three months ended March 31, 2023 and 2022. Note 11. Liabilities The components of accounts payable, accrued expenses and other current liabilities are as follows (in thousands): March 31, 2023 December 31, 2022 Accounts payable $ 59,050 $ 53,121 Accrued expenses 16,716 17,539 Income taxes payable 31,445 43,576 Holdback liability from business combinations and asset acquisition 6,263 — Other current liabilities 7,160 5,421 Accounts payable, accrued expenses and other current liabilities $ 120,634 $ 119,657 The components of other liabilities are as follows (in thousands): March 31, 2023 December 31, 2022 Holdback liability from business combinations $ 1,800 $ 4,560 Contingent consideration liability from acquisition 2,006 — Other liabilities 9,539 8,490 Other liabilities $ 13,345 $ 13,050 Note 12. 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. 18 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 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. 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 five 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, 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, which was terminated effective January 20, 2021. 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. 19 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 We account for the 2026 Notes as a liability. The debt 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 %. As of March 31, 2023 and December 31, 2022, the fair value of our 2026 Notes was $ 421.6 million and $ 411.5 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 $ 50.28 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 March 31, 2023. The net carrying amount of the liability component of the 2026 Notes is as follows (in thousands): March 31, 2023 December 31, 2022 Principal $ 500,000 $ 500,000 Unamortized debt issuance costs ( 8,846 ) ( 9,630 ) Net carrying amount $ 491,154 $ 490,370 Interest expense related to the 2026 Notes is as follows (in thousands): Three Months Ended March 31, 2023 2022 Amortization of debt issuance costs $ 784 $ 780 Total interest expense $ 784 $ 780 Acquired Debt - EBS On January 18, 2023, one of our wholly-owned subsidiaries acquired 100 % of the issued and outstanding shares of capital stock of EBS. As part of this acquisition we acquired $ 2.9 million of outstanding debt, which decreased to $ 2.5 million as of March 31, 2023. As of March 31, 2023, $ 1.6 million of the acquired debt was included in accounts payable, accrued expenses and other current liabilities and $ 0.9 million was included in convertible senior notes, net and other long-term debt within our condensed consolidated balance sheets. 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. 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 has closed with respect to seven claims in three of the asserted patents. Vivint has moved for partial summary judgment and Alarm.com has moved for summary judgment as to those seven claims; both motions are pending decision. Claim construction and expert discovery as to nine other patent claims from two patents that were previously stayed has not yet been completed. 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. Additionally, as to unexpired patents asserted by Vivint in the Eastern District of Texas case, we 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. While we believe we have 20 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 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 had been paying 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 continue to be lowered by approximately $ 6.0 million on a quarterly basis. We also believe that quarterly earnings and cash flow will continue to be impacted by the aforementioned $ 6.0 million, 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. Since then, we have voluntarily dismissed without prejudice the infringement claims with respect to one of the patents, leaving 14 asserted 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 filed a partial motion to dismiss the complaint on February 27, 2023 which we have opposed. On March 8, 2023, Vivint filed counterclaims in the action alleging that Alarm.com’s products and services directly and indirectly infringe 14 patents owned by Vivint. Most of Vivint’s counterclaims also name our service provider ADT LLC as a defendant. Vivint is seeking permanent injunctions, enhanced damages and attorneys' fees. We answered the complaint on April 28, 2023. Among other things, we asserted defenses based on non-infringement and invalidity of Vivint’s patents. While we believe we have valid defenses to Vivint’s counterclaims, 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 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. Four of the asserted patents are in ex parte reexamination proceedings at the PTO, and all claims of the fifth 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. 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 filed an appeal of the ITC decision on April 14, 2023. 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 21 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 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. The PTAB granted inter partes review of two of the asserted patents at ADT's request. 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. In decisions issued in February and March 2023, the PTAB found all challenged claims of the two patents under review unpatentable. Vivint filed an appeal of the first PTAB decision on April 13, 2023. Vivint has until May 30, 2023 to appeal the second PTAB decision. 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. We are also incurring costs associated with the indemnification of our service provider Monitronics International, Inc. d/b/a Brinks in ongoing patent infringement suits. On November 4, 2022, January 13, 2023 and April 18, 2023, IOT Innovations LLC, or IOT, sued Monitronics in U.S. District Court, Eastern District of Texas, alleging patent infringement of certain products and services sold by Monitronics. Together, IOT has asserted infringement of 26 patents and is seeking permanent injunctions, enhanced damages and attorneys' fees. Monitronics filed a Motion to Dismiss the first-filed case for lack of venue on January 24, 2023 and the second-filed case on March 24, 2023. Should IOT 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 13. Stockholders' Equity Stock Repurchase Programs On December 3, 2020, our board of directors authorized a stock repurchase program, under which we were 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. No shares of our common stock were repurchased under this program during the three months ended March 31, 2023. During the three months ended March 31, 2022, we repurchased 354,123 shares of our common stock under this program for $ 23.3 million, which includes applicable commissions and fees. On February 15, 2023, our board of directors authorized the cancellation of the balance under the stock repurchase program ending December 3, 2023 and also authorized a stock repurchase program, effective February 23, 2023, 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. No shares were repurchased under this program during the three months ended March 31, 2023. 22 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 Note 14. Stock-Based Compensation Stock-based compensation expense is included in the following line items in the condensed consolidated statements of operations (in thousands): Three Months Ended March 31, 2023 2022 Sales and marketing $ 1,032 $ 1,058 General and administrative 3,145 3,235 Research and development 8,509 7,817 Total stock-based compensation expense $ 12,686 $ 12,110 The following table summarizes the components of non-cash stock-based compensation expense (in thousands): Three Months Ended March 31, 2023 2022 Stock options $ 912 $ 778 Restricted stock units 11,722 11,284 Employee stock purchase plan 52 48 Total stock-based compensation expense $ 12,686 $ 12,110 Tax (shortfall) / windfall benefit from stock-based awards $ ( 22 ) $ 529 We granted 21,400 and no stock options pursuant to our 2015 Equity Incentive Plan during the three months ended March 31, 2023 and 2022, respectively. There were 70,951 stock options exercised during the three months ended March 31, 2023, as compared to 14,020 stock options for the same period in the prior year. There was an aggregate of 82,875 restricted stock units without performance conditions granted to certain of our employees during the three months ended March 31, 2023, as compared to an aggregate of 156,543 restricted stock units without performance conditions for the same period in the prior year. There were no restricted stock units with performance conditions granted to certain of our employees during the three months ended March 31, 2023, as compared to 71,934 restricted stock units with performance conditions for the same period in the prior year. There were 167,085 restricted stock units without performance conditions that vested during the three months ended March 31, 2023, as compared to 57,497 restricted stock units without performance conditions vested during the same period in the prior year. There were 9,000 restricted stock units with performance conditions that vested during the three months ended March 31, 2023, as compared to no restricted stock units with performance conditions vested for the same period in the prior year. 23 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 Note 15. 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): Three Months Ended March 31, Numerator: 2023 2022 Net income $ 14,207 $ 8,903 Net loss attributable to redeemable noncontrolling interests 209 176 Net income attributable to common stockholders - basic (A) 14,416 9,079 Add back interest expense, net of tax, attributable to convertible senior notes 590 586 Net income attributable to common stockholders - diluted (B) $ 15,006 $ 9,665 Denominator: Weighted average common shares outstanding — basic (C) 49,584,890 50,206,179 Dilutive effect of convertible senior notes, stock options and restricted stock units 4,711,431 4,964,602 Weighted average common shares outstanding — diluted (D) 54,296,321 55,170,781 Net income per share: Basic (A/C) $ 0.29 $ 0.18 Diluted (B/D) $ 0.28 $ 0.18 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: Three Months Ended March 31, 2023 2022 Stock options 431,052 172,500 Restricted stock units 355,047 320,352 Our redeemable noncontrolling interests are related to our 85 % equity ownership interests in PC Open Incorporated, doing business as OpenEye, and Noonlight. See Note 6 for details on the put option and call option contained in the Noonlight stockholder agreement. We use 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 each of the three months ended March 31, 2023 and 2022. Additionally, we included $ 0.6 million of debt issuance cost amortization, net of tax, within the numerator of the diluted net income per share for each of the three months ended March 31, 2023 and 2022 . Note 16. Significant Service Providers and Distributors During each of the three months ended March 31, 2023 and 2022, our 10 largest revenue service provider partners or distributors accounted for 50 % 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 three months ended March 31, 2023 and 2022. One service provider partner in the Alarm.com segment represented more than 10% of accounts receivable as of March 31, 2023. Two service provider partners or distributors in the Alarm.com segment each represented greater than 10% of accounts receivable as of December 31, 2022. 24 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 Note 17. Income Taxes For purposes of interim reporting, our annual effective income tax rate is estimated in accordance with ASC 740-270, "Interim Reporting." This rate is applied to the pre-tax book income of the entities expected to be benefited during the year. Discrete items that impact the tax provision are recorded in the period incurred. For the three months ended March 31, 2023, we recorded a benefit from income taxes of $ 1.2 million, resulting in an effective income tax rate of ( 9.4 )%. For the three months ended March 31, 2022, we recorded a benefit from income taxes of $ 0.6 million resulting in an effective income tax rate of ( 7.5 )%. For the three months ended March 31, 2023, our effective tax rate was below the 21.0% statutory rate primarily due to research and development tax credits claimed and the foreign derived intangible income deduction, partially offset by the impact of state income taxes and other nondeductible expenses. For the three months ended March 31, 2022, our effective tax rate was below the 21.0% statutory rate primarily due to research and development tax credits claimed, tax windfall benefits from employee stock-based payment transactions and the foreign derived intangible income deduction, partially offset by the impact of state taxes, foreign withholding taxes and other nondeductible expenses. 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. Our valuation allowance for state research and development tax credit carryforwards was $ 2.6 million as of December 31, 2022 and increased to $ 2.7 million as of March 31, 2023. 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 $ 0.7 million primarily for research and development tax credits claimed during the three months ended March 31, 2023. We recorded an increase to the unrecognized tax benefits liability of $ 0.6 million for research and development tax credits claimed during the three months ended March 31, 2022. 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. As of March 31, 2023 and December 31, 2022, our condensed consolidated balance sheets included a $ 0.3 million accrual for total interest expense related to unrecognized tax benefits. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. 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 became effective on January 1, 2023 and the provisions did not have a material impact on our financial condition or results of operations as of March 31, 2023. Note 18. 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 95 % of our revenue, net of intersegment eliminations, for each of the three months ended March 31, 2023 and 2022. Our Other segment is focused on researching, developing and offering residential and commercial 25 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2023 and 2022 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): Three Months Ended March 31, 2023 Alarm.com Other Intersegment Alarm.com Intersegment Other Total SaaS and license revenue $ 125,652 $ 9,742 $ — $ — $ 135,394 Hardware and other revenue 73,496 1,718 ( 777 ) ( 115 ) 74,322 Total revenue 199,148 11,460 ( 777 ) ( 115 ) 209,716 Operating income / (loss) 13,931 ( 5,192 ) 5 75 8,819 Three Months Ended March 31, 2022 Alarm.com Other Intersegment Alarm.com Intersegment Other Total SaaS and license revenue $ 115,348 $ 7,877 $ — $ — $ 123,225 Hardware and other revenue 81,221 2,304 ( 899 ) ( 414 ) 82,212 Total revenue 196,569 10,181 ( 899 ) ( 414 ) 205,437 Operating income / (loss) 12,754 ( 4,004 ) 185 ( 22 ) 8,913 Alarm.com Other Intersegment Alarm.com Intersegment Other Total Assets as of March 31, 2023 $ 1,404,483 $ 41,994 $ ( 88,949 ) $ 2 $ 1,357,530 Assets as of December 31, 2022 1,366,343 53,927 ( 90,929 ) 34 1,329,375 Our SaaS and license revenue for the Alarm.com segment included software license revenue of $ 6.2 million for the three months ended March 31, 2023, as compared to $ 7.1 million for the same period in the prior year. There was no software license revenue recorded for the Other segment during the three months ended March 31, 2023 and 2022. Amortization and depreciation expense was $ 7.4 million for the Alarm.com segment for the three months ended March 31, 2023, as compared to $ 7.5 million for the same period in the prior year. Amortization and depreciation expense was $ 0.3 million for the Other segment for each of the three months ended March 31, 2023 and 2022. Additions to property and equipment were $ 3.0 million for the Alarm.com segment for the three months ended March 31, 2023, as compared to $ 1.6 million for the same period in the prior year. Additions to property and equipment were less than $ 0.1 million for the Other segment for the three months ended March 31, 2023, as compared to $ 0.1 million for the same period in the prior year. We derived substantially all revenue from North America for the three months ended March 31, 2023 and 2022. Substantially all of our long-lived assets were in North America as of March 31, 2023 and December 31, 2022. 26