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, 2024 2023 Revenue: SaaS and license revenue $ 150,344 $ 135,394 Hardware and other revenue 72,939 74,322 Total revenue 223,283 209,716 Cost of revenue (1) : Cost of SaaS and license revenue 20,428 19,583 Cost of hardware and other revenue 56,087 56,589 Total cost of revenue 76,515 76,172 Operating expenses: Sales and marketing 25,454 26,645 General and administrative 29,296 28,499 Research and development 65,956 61,908 Amortization and depreciation 7,337 7,673 Total operating expenses 128,043 124,725 Operating income 18,725 8,819 Interest expense ( 796 ) ( 868 ) Interest income 8,540 5,182 Other expense, net ( 318 ) ( 148 ) Income before income taxes 26,151 12,985 Provision for / (benefit from) income taxes 2,747 ( 1,222 ) Net income 23,404 14,207 Net loss attributable to redeemable noncontrolling interests 191 209 Net income attributable to common stockholders $ 23,595 $ 14,416 Per share information attributable to common stockholders: Net income per share: Basic $ 0.47 $ 0.29 Diluted $ 0.44 $ 0.28 Weighted average common shares outstanding: Basic 49,963,265 49,584,890 Diluted 55,047,087 54,296,321 _______________ (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, 2024 2023 Net income $ 23,404 $ 14,207 Other comprehensive (loss) / income Foreign currency translation adjustment ( 147 ) 170 Total other comprehensive (loss) / income ( 147 ) 170 Comprehensive income 23,257 14,377 Comprehensive loss attributable to redeemable noncontrolling interests 191 209 Comprehensive income attributable to common stockholders $ 23,448 $ 14,586 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, 2024 December 31, 2023 Assets Current assets: Cash and cash equivalents $ 747,877 $ 696,983 Accounts receivable, net of allowance for credit losses of $ 4,054 and $ 3,864 , and net of allowance for product returns of $ 2,595 and $ 2,279 as of March 31, 2024 and December 31, 2023, respectively 128,451 130,626 Inventory 85,723 96,140 Other current assets, net 35,812 33,031 Total current assets 997,863 956,780 Property and equipment, net 55,365 54,164 Intangible assets, net 74,358 78,564 Goodwill 154,433 154,498 Deferred tax assets 145,258 131,815 Operating lease right-of-use assets 24,324 24,242 Other assets, net of allowance for credit losses of $ 4,003 and $ 5 as of March 31, 2024 and December 31, 2023, respectively 35,381 39,500 Total assets $ 1,486,982 $ 1,439,563 Liabilities, redeemable noncontrolling interests and stockholders’ equity Current liabilities: Accounts payable, accrued expenses and other current liabilities $ 137,551 $ 124,475 Accrued compensation 20,418 28,626 Deferred revenue 11,125 10,193 Operating lease liabilities 12,101 12,043 Total current liabilities 181,195 175,337 Deferred revenue 13,087 12,692 Convertible senior notes, net 494,305 493,515 Operating lease liabilities 20,886 20,468 Other liabilities 11,703 12,697 Total liabilities 721,176 714,709 Commitments and contingencies (Note 12) Redeemable noncontrolling interests 37,712 36,308 Stockholders’ equity Preferred stock, $ 0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2024 and December 31, 2023 — — Common stock, $ 0.01 par value, 300,000,000 shares authorized; 52,113,344 and 51,888,838 shares issued; and 50,092,681 and 49,868,175 shares outstanding as of March 31, 2024 and December 31, 2023, respectively 521 519 Additional paid-in capital 547,832 531,734 Treasury stock, at cost; 2,020,663 shares as of March 31, 2024 and December 31, 2023 ( 111,291 ) ( 111,291 ) Accumulated other comprehensive income 1,251 1,398 Retained earnings 289,781 266,186 Total stockholders’ equity 728,094 688,546 Total liabilities, redeemable noncontrolling interests and stockholders’ equity $ 1,486,982 $ 1,439,563 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 from / (used in) operating activities: 2024 2023 Net income $ 23,404 $ 14,207 Adjustments to reconcile net income to net cash flows from / (used in) operating activities: Provision for credit losses on accounts receivable 254 540 Reserve for product returns 1,149 1,151 Provision for credit losses on notes receivable 3,998 — Amortization on patents and tooling 220 316 Amortization and depreciation 7,337 7,673 Amortization of debt issuance costs 790 784 Amortization of operating leases 2,976 2,750 Deferred income taxes ( 13,443 ) ( 26,895 ) Change in fair value of contingent liability 31 13 Stock-based compensation 11,268 12,686 Changes in operating assets and liabilities (net of business acquisitions): Accounts receivable 826 ( 1,843 ) Inventory 10,382 377 Other current and non-current assets ( 962 ) ( 689 ) Accounts payable, accrued expenses and other current liabilities 4,524 ( 9,617 ) Deferred revenue 1,327 1,899 Operating lease liabilities ( 3,221 ) ( 3,362 ) Other liabilities ( 1,007 ) ( 3,511 ) Cash flows from / (used in) operating activities 49,853 ( 3,521 ) Cash flows used in investing activities: Business acquisition, net of cash acquired — ( 9,696 ) Additions to property and equipment ( 3,066 ) ( 2,398 ) Issuances of notes receivable ( 500 ) ( 300 ) Receipt of payments on notes receivable 13 13 Capitalized software development costs ( 408 ) ( 362 ) Purchase of investment in unconsolidated entity — ( 200 ) Cash flows used in investing activities ( 3,961 ) ( 12,943 ) Cash flows from financing activities: Payments of acquired debt — ( 469 ) Issuances of common stock from equity-based plans 6,356 1,311 Cash flows from financing activities 6,356 842 Effect of exchange rate changes on cash, cash equivalents and restricted cash ( 180 ) 13 Net increase / (decrease) in cash, cash equivalents and restricted cash 52,068 ( 15,609 ) Cash, cash equivalents and restricted cash at beginning of the period 701,079 622,879 Cash, cash equivalents and restricted cash at end of the period $ 753,147 $ 607,270 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 747,877 $ 606,428 Restricted cash included in other current assets and other assets 5,270 842 Total cash, cash equivalents and restricted cash $ 753,147 $ 607,270 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 / (Loss) Retained Earnings Total Stockholders’ Equity Common Stock Treasury Stock Shares Amount Shares Amount Balance as of December 31, 2023 $ 36,308 51,889 $ 519 $ 531,734 2,021 $ ( 111,291 ) $ 1,398 $ 266,186 $ 688,546 Common stock issued in connection with equity-based plans — 224 2 6,354 — — — — 6,356 Stock-based compensation expense — — — 11,339 — — — — 11,339 Accretion adjustments of redeemable noncontrolling interest to redemption value 1,595 — — ( 1,595 ) — — — — ( 1,595 ) Net income / (loss) attributable to common stockholders ( 191 ) — — — — — — 23,595 23,595 Other comprehensive loss — — — — — — ( 147 ) — ( 147 ) Balance as of March 31, 2024 $ 37,712 52,113 $ 521 $ 547,832 2,021 $ ( 111,291 ) $ 1,251 $ 289,781 $ 728,094 Redeemable Noncontrolling Interests Common Stock Additional Paid-In Capital Treasury Stock Accumulated Other Comprehensive Income Retained Earnings Total Stockholders’ Equity 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 See accompanying notes to the condensed consolidated financial statements. 6 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) March 31, 2024 and 2023 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. 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, 2023 included in our Annual Report on Form 10-K filed with the SEC on February 22, 2024, or the Annual Report. The condensed consolidated balance sheet as of December 31, 2023 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, and geopolitical upheaval, such as Russia’s incursion into Ukraine and the conflict between Israel and regional adversaries, 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, 2024 are not necessarily indicative of the results that can be expected for our entire fiscal year ending December 31, 2024, 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, goodwill, intangible assets and other long-lived assets. Significant Accounting Policies There have been no material changes to our significant accounting policies during the three months ended March 31, 2024 from those disclosed in our Annual Report. 7 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 2023 Recent Accounting Pronouncements Adopted During the three months ended March 31, 2024, we did not adopt any new accounting pronouncements. Not Yet Adopted On November 27, 2023, the Financial Accounting Standards Board, or FASB, issued ASU 2023-07, "Segment Reporting (Topic 280),” which revises the disclosure requirements about a public entity’s reportable segments and a reportable segment’s expenses. This amendment requires a public entity to (i) disclose significant segment expense that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, (ii) disclose an amount for other segment items by reportable segment and a description of its composition and (iii) provide annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods. The amendment is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. This amendment is required to be applied retrospectively to all prior periods presented. We are currently assessing the impact this pronouncement will have on our consolidated financial statement disclosures. On December 14, 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740)," which requires additional annual disclosures regarding specific categories in the income tax rate reconciliation as well additional information for reconciling items that meet a quantitative threshold. This amendment also requires annual disclosures regarding the amount of income taxes paid, including income taxes paid disaggregated by (i) federal, state and foreign taxes as well as (ii) individual jurisdictions in which income taxes paid is equal to or greater than five percent of total income taxes paid. Additionally, this amendment requires annual disclosures for income from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign as well as income tax expense (or benefit) disaggregated between federal, state and foreign. The amendment is effective for annual periods beginning after December 15, 2024, and early adoption is permitted. This amendment should be applied on a prospective basis, but retrospective application is permitted. We are currently assessing the impact this pronouncement will have on our consolidated financial statement disclosures. 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, 2024 2023 Beginning of period balance $ 9,099 $ 13,975 Commission costs and upfront payments to a customer capitalized in period 3,112 1,673 Amortization of contract assets ( 1,745 ) ( 1,769 ) End of period balance $ 10,466 $ 13,879 Contract Liabilities The changes in our contract liabilities are as follows (in thousands): Three Months Ended March 31, 2024 2023 Beginning of period balance $ 22,885 $ 18,332 Revenue deferred in period 6,424 5,940 Revenue recognized from amounts included in contract liabilities ( 5,097 ) ( 4,041 ) End of period balance $ 24,212 $ 20,231 8 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 2023 Note 4. Accounts Receivable, Net The components of accounts receivable, net are as follows (in thousands): March 31, 2024 December 31, 2023 Accounts receivable $ 135,100 $ 136,769 Allowance for credit losses ( 4,054 ) ( 3,864 ) Allowance for product returns ( 2,595 ) ( 2,279 ) Accounts receivable, net $ 128,451 $ 130,626 For the three months ended March 31, 2024, we recorded a provision for credit losses of $ 0.3 million, as compared to $ 0.5 million for the same period in the prior year. For the three months ended March 31, 2024, we recorded a reserve for product returns of $ 1.1 million in our hardware and other revenue, as compared to $ 1.2 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, 2024, 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, 2024, 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, 2024 and 2023, we recorded credit loss expense for accounts receivable and notes receivable of $ 4.0 million and $ 0.5 million, respectively, 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, 2024 Three Months Ended March 31, 2023 Alarm.com and Certain Subsidiaries All Other Subsidiaries Alarm.com and Certain Subsidiaries All Other Subsidiaries Beginning of period balance $ ( 3,723 ) $ ( 141 ) $ ( 2,755 ) $ ( 80 ) (Provision for) / recovery of expected credit losses ( 287 ) 33 ( 506 ) ( 34 ) Write-offs 44 20 159 17 End of period balance $ ( 3,966 ) $ ( 88 ) $ ( 3,102 ) $ ( 97 ) 9 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 2023 Note 5. Inventory The components of inventory are as follows (in thousands): March 31, 2024 December 31, 2023 Raw materials $ 28,237 $ 30,452 Work-in-process 699 275 Finished goods 56,787 65,413 Total inventory $ 85,723 $ 96,140 Inventory values are net of a write-down of $ 1.4 million during the year ended December 31, 2023, which is reflected in cost of hardware and other revenue within our condensed consolidated statements of operations. The inventory write-down was the result of a lower of cost or net realizable value adjustment for finished goods. Note 6. Acquisitions Asset Acquisition On April 21, 2023, Alarm.com Incorporated, one of our wholly-owned subsidiaries, acquired certain assets of Vintra, Inc., or Vintra. Substantially all of the acquired assets consisted of developed technology. We believe the acquisition of the developed technology will expand Alarm.com's learning program and accelerate deployment of advanced video analytics solutions for the Alarm.com and OpenEye platforms. In consideration for the purchase of the acquired assets, we paid $ 5.5 million in cash on April 21, 2023, after deducting $ 0.3 million related to the settlement of an outstanding loan issued to Vintra during March 2023 and $ 1.0 million related to an agreed holdback provision. The holdback is expected to be paid by the third quarter of 2024, subject to offset for any indemnification obligations. Additionally, we incurred $ 0.4 million in direct transaction costs related to legal fees during 2023 that were capitalized as a component of the consideration transferred. The $ 7.1 million purchase price consideration allocated 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 five years . The remaining $ 0.1 million purchase price consideration was allocated to property and equipment. 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 initially 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 finalized during the third quarter of 2023. The overall impacts to our condensed consolidated financial statements were not considered material during the year of the 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, 2024 $ 154,498 $ — $ 154,498 Foreign currency translation adjustment ( 65 ) — ( 65 ) Balance as of March 31, 2024 $ 154,433 $ — $ 154,433 10 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 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, 2024 $ 39,294 $ 37,174 $ 1,217 $ 879 $ 78,564 Intangible assets acquired — — — — — Capitalized software development costs — — — 479 479 Amortization ( 2,417 ) ( 2,053 ) ( 207 ) ( 8 ) ( 4,685 ) Balance as of March 31, 2024 $ 36,877 $ 35,121 $ 1,010 $ 1,350 $ 74,358 We recorded $ 4.7 million of amortization related to our intangible assets for the three months ended March 31, 2024, as compared to $ 4.6 million for the same period in the prior year. There were no impairments of long-lived intangible assets during the three months ended March 31, 2024 and 2023. During the three months ended March 31, 2024, $ 0.3 million of fully amortized developed technology intangible assets previously acquired were written-off in the Alarm.com segment as the technology was no longer in use. 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, 2024 Gross Carrying Amount Accumulated Amortization Net Carrying Value Weighted- Average Remaining Life (in years) Customer relationships $ 128,280 $ ( 91,403 ) $ 36,877 5.9 Developed technology 69,731 ( 34,610 ) 35,121 4.5 Trade name 4,474 ( 3,464 ) 1,010 2.6 Capitalized software development costs 1,361 ( 11 ) 1,350 3.2 Total intangible assets $ 203,846 $ ( 129,488 ) $ 74,358 5.2 December 31, 2023 Gross Carrying Amount Accumulated Amortization Net Carrying Value Weighted- Average Remaining Life (in years) Customer relationships $ 128,280 $ ( 88,986 ) $ 39,294 6.2 Developed technology 70,061 ( 32,887 ) 37,174 4.7 Trade name 4,474 ( 3,257 ) 1,217 2.6 Capitalized software development costs 882 ( 3 ) 879 3.3 Total intangible assets $ 203,697 $ ( 125,133 ) $ 78,564 5.4 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, or the Affiliate. The amended subordinated credit agreement with the Affiliate 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. In March 2024, the Affiliate was in default on a loan arrangement with one of its third party secured lenders. Based on this information from the Affiliate, during the three months ended March 31, 2024, we recorded a credit loss expense of $ 4.0 million in general and administrative expense and recorded a reduction to our interest income of $ 0.5 million related to the reversal of payable in kind interest associated with the subordinated credit agreement. We placed this loan in nonaccrual status as of March 31, 2024. As of March 31, 2024, the $ 4.0 million outstanding notes receivable balance had a full allowance for credit losses. As of December 31, 2023, $ 4.5 million of the notes receivable balance related to the subordinated credit agreement was included in other assets in our condensed consolidated balance sheet. 11 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 2023 For the three months ended March 31, 2024, we recognized $ 0.7 million of revenue from the distribution partner associated with this loan, as compared to $ 0.8 million for the same period in the prior year. 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, 2024 and December 31, 2023, $ 1.0 million of principal was outstanding from the service provider partner under the loan agreement. For the three months ended March 31, 2024 and 2023, 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, 2024 and December 31, 2023, $ 1.5 million of principal was outstanding from the technology partner under the convertible promissory note. For the three months ended March 31, 2024 and 2023, 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, 2024 and December 31, 2023, 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, 2024 and December 31, 2023, 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, 2024 and December 31, 2023, our investment in the technology partner was $ 5.1 million. Allowance for Credit Losses - Notes Receivable We identified one portfolio segment, loan receivables, for our notes receivable. We previously disclosed a hardware financing receivable portfolio segment; however, there has been no activity within that portfolio segment since 2022. There were 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 during the three months ended March 31, 2024. 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 12 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 2023 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 March 31, 2024 and December 31, 2023 was $ 0.1 million, and is reflected in other current assets and other assets within our condensed consolidated balance sheets and excluded from the amortized cost basis of the notes receivable . During the three months ended March 31, 2024, we recorded a reduction to our interest income of $ 0.5 million related to the reversal of payable in kind interest associated with a subordinated credit agreement with the Affiliate. We did not write-off any accrued interest receivable during the three months ended March 31, 2023. There were no purchases or sales of financial assets during the three months ended March 31, 2024 and 2023. There were no significant changes in the amount of note receivable write-offs during the three months ended March 31, 2024, 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, 2024 Three Months Ended March 31, 2023 Beginning of period balance $ ( 5 ) $ ( 2 ) Provision for expected credit losses ( 3,998 ) — Write-offs — — End of period balance $ ( 4,003 ) $ ( 2 ) 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, 2024 Loan Receivables: 2024 2023 2022 2021 2020 Prior Total Current $ 500 $ 150 $ 1,500 $ — $ 1,027 $ 4,000 $ 7,177 30-59 days past due — — — — — — — 60-89 days past due — — — — — — — 90-119 days past due — — — — — — — 120+ days past due — — — — — — — Total $ 500 $ 150 $ 1,500 $ — $ 1,027 $ 4,000 $ 7,177 December 31, 2023 Loan Receivables: 2023 2022 2021 2020 2019 Prior Total Current $ 150 $ 1,500 $ — $ 1,039 $ — $ 4,524 $ 7,213 30-59 days past due — — — — — — — 60-89 days past due — — — — — — — 90-119 days past due — — — — — — — 120+ days past due — — — — — — — Total $ 150 $ 1,500 $ — $ 1,039 $ — $ 4,524 $ 7,213 There was one note receivable placed on nonaccrual status as of March 31, 2024 in the amount of $ 4.0 million. There were no notes receivable placed on nonaccrual status as of December 31, 2023. During the three months ended March 31, 2024 and 2023, there was no interest income recognized related to notes receivable that were in nonaccrual status. As of March 31, 2024 and December 31, 2023, there were no notes receivable placed in nonaccrual status for which there was not a related allowance for credit losses. As of March 31, 2024 and December 31, 2023, there were no notes receivable that were 90 days or greater past due for which we continued to accrue interest income. 13 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 2023 Prepaid Expenses As of March 31, 2024 and December 31, 2023, $ 16.9 million and $ 14.6 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 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, 2024 $ 723,877 $ — $ — $ 723,877 Money market accounts as of December 31, 2023 679,734 — — 679,734 Liabilities: Contingent consideration liability from acquisition as of March 31, 2024 $ — $ — $ 2,092 $ 2,092 Contingent consideration liability from acquisition as of December 31, 2023 — — 2,061 2,061 The following table summarizes the change in fair value of the Level 3 contingent consideration liability with significant unobservable inputs (in thousands): Three Months Ended March 31, 2024 2023 Beginning of period balance $ 2,061 $ — Acquired liabilities — 1,993 Changes in fair value included in earnings 31 13 End of period balance $ 2,092 $ 2,006 As of March 31, 2024, $ 718.7 million of our money market accounts was included in cash and cash equivalents, $ 4.0 million was included in other assets and $ 1.2 million was included in other current assets in our condensed consolidated balance sheets. As of December 31, 2023, $ 675.6 million was included in cash and cash equivalents and $ 4.1 million was included in other assets in our condensed consolidated balance sheets. Our assets from money market accounts 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, 2024 and December 31, 2023. 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. The fair value of the contingent consideration liability is included within accounts payable, accrued expenses and other current liabilities as well as other liabilities within our condensed consolidated balance sheets. 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, 2024, the contingent consideration liability did not materially change from the acquisition date fair value of $ 2.0 million as there were minor changes in the expected probability of achievement for the performance targets. The unobservable inputs used in the valuation as of March 31, 2024 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 5.5 %, weighted by the probability of achievement of the performance targets at various dates, including a range of 5.4 % to 5.7 %. 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 14 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 2023 financial instruments from one fair value level to another. There were no transfers into or out of Level 3 or reclassifications between levels of the fair value hierarchy during the three months ended March 31, 2024 and 2023. No other-than-temporary impairments occurred during the three months ended March 31, 2024 and 2023. Note 10. Leases As of March 31, 2024, we leased 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, 2024 2023 Operating lease cost $ 2,976 $ 2,750 Cash paid for amounts included in the measurement of operating lease liabilities 3,221 3,362 Operating lease right-of-use assets obtained in exchange for new operating lease liabilities 2,643 3,927 March 31, 2024 December 31, 2023 Weighted-average remaining lease term — operating leases 3.1 years 3.0 years Weighted-average discount rate — operating leases 5.2 % 4.9 % Maturities of lease liabilities are as follows (in thousands): Year Ended December 31, Operating Leases (1) Remainder of 2024 $ 10,561 2025 12,454 2026 7,827 2027 2,500 2028 1,841 2029 and thereafter 1,904 Total lease payments 37,087 Less: imputed interest (2) 4,100 Present value of lease liabilities $ 32,987 _______________ (1) Excludes $ 3.6 million of legally binding minimum lease payments for leases executed but not yet commenced. There are 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, 2024 or December 31, 2023. 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, 2024 and 2023. 15 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 2023 Note 11. Liabilities The components of accounts payable, accrued expenses and other current liabilities are as follows (in thousands): March 31, 2024 December 31, 2023 Accounts payable $ 42,458 $ 39,038 Accrued expenses 16,563 21,559 Income taxes payable 60,133 42,501 Holdback liability from business combinations and asset acquisitions 7,340 7,340 Contingent consideration liability from acquisition 1,181 — Other current liabilities 9,876 14,037 Accounts payable, accrued expenses and other current liabilities $ 137,551 $ 124,475 The components of other liabilities are as follows (in thousands): March 31, 2024 December 31, 2023 Contingent consideration liability from acquisition $ 911 $ 2,061 Other liabilities 10,792 10,636 Other liabilities $ 11,703 $ 12,697 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. 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 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. 16 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 2023 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. 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, 2024 and December 31, 2023, the fair value of our 2026 Notes was $ 461.2 million and $ 444.8 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 $ 72.47 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, 2024. The net carrying amount of the liability component of the 2026 Notes is as follows (in thousands): March 31, 2024 December 31, 2023 Principal $ 500,000 $ 500,000 Unamortized debt issuance costs ( 5,695 ) ( 6,485 ) Net carrying amount $ 494,305 $ 493,515 Interest expense related to the 2026 Notes is as follows (in thousands): Three Months Ended March 31, 2024 2023 Amortization of debt issuance costs $ 790 $ 784 Total interest expense $ 790 $ 784 17 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 2023 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 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 a permanent injunction, enhanced damages and attorneys' fees. 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. We moved to dismiss the Oregon case for failure to state a claim on March 28, 2022. Three of the asserted patents are in ex parte reexamination proceedings at the PTO, and ex parte reexamination of a fourth patent concluded on August 23, 2023 after the claims were amended. On April 18, 2022, all claims of a fifth patent were found unpatentable by the U.S. Patent Trial and Appeal Board, or PTAB, in an inter partes review, and all claims were canceled on February 1, 2024. On April 18, 2022, the district court stayed the case at the request of the parties pending the disposition of PTAB and 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. Causam did not appeal the ITC decision with respect to Alarm.com and EnergyHub. 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 incur costs associated with the indemnification of our service provider Central Security Group – Nationwide, Inc. (d/b/a Alert 360), or CSG, in an ongoing patent litigation. In 2018, Ubiquitous Connectivity, LP, or Ubiquitous, brought suit against CSG in U.S. District Court, Northern District of Oklahoma, alleging infringement of two U.S. patents. The case was stayed by agreement of the parties for several years while the patents in suit were challenged before the PTAB. In January 2021, the PTAB deemed 42 out of 46 claims of the two asserted patents unpatentable. Ubiquitous appealed a portion of the PTAB’s findings to the United States Court of Appeals for the Federal Circuit. The Federal Circuit affirmed the PTAB’s ruling on August 8, 2023. As a result, only four patent claims remain at issue and the Northern District of Oklahoma case is no longer stayed. The case is currently in the discovery phase. A claim construction hearing is scheduled for December 12, 2024. A hearing on dispositive motions, including for summary judgment, is scheduled for April 15, 2026. A trial is scheduled for June 22, 2026. 18 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 2023 Should Ubiquitous prevail on its infringement claims, we could be required to indemnify CSG for damages in the form of a reasonable royalty or of Ubiquitous’s lost profits. CSG 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 if we are unable to design around such patents, and we could be 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 February 15, 2023, our board of directors 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, 2024 and 2023. Beginning January 1, 2023, we are subject to a 1.0% excise tax on the value of net corporate stock repurchases under the Inflation Reduction Act of 2022. When applicable, the excise tax will be included as part of the cost basis of shares acquired and is presented within stockholders’ equity in the condensed consolidated balance sheets. 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, 2024 2023 Cost of hardware and other revenue $ 1 $ — Sales and marketing 755 1,032 General and administrative 3,181 3,145 Research and development 7,331 8,509 Total stock-based compensation expense $ 11,268 $ 12,686 The following table summarizes the components of non-cash stock-based compensation expense (in thousands): Three Months Ended March 31, 2024 2023 Stock options $ 987 $ 912 Restricted stock units 10,230 11,722 Employee stock purchase plan 51 52 Total stock-based compensation expense $ 11,268 $ 12,686 Tax windfall benefit / (shortfall) from stock-based awards $ 486 $ ( 22 ) 19 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 2023 We granted 6,000 and 21,400 stock options pursuant to our 2015 Equity Incentive Plan during the three months ended March 31, 2024 and 2023, respectively. There were 128,526 stock options exercised during the three months ended March 31, 2024, as compared to 70,951 stock options for the same period in the prior year. There was an aggregate of 88,150 restricted stock units without performance conditions granted to certain of our employees during the three months ended March 31, 2024, as compared to an aggregate of 82,875 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 our employees during the three months ended March 31, 2024 and 2023. There were 81,696 restricted stock units without performance conditions that vested during the three months ended March 31, 2024, as compared to 167,085 restricted stock units without performance conditions vested during the same period in the prior year. There were no restricted stock units with performance conditions that vested during the three months ended March 31, 2024, as compared to 9,000 restricted stock units with performance conditions vested for the same period in the prior year. 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: 2024 2023 Net income $ 23,404 $ 14,207 Net loss attributable to redeemable noncontrolling interests 191 209 Net income attributable to common stockholders - basic (A) 23,595 14,416 Add back interest expense, net of tax, attributable to convertible senior notes 594 590 Net income attributable to common stockholders - diluted (B) $ 24,189 $ 15,006 Denominator: Weighted average common shares outstanding — basic (C) 49,963,265 49,584,890 Dilutive effect of convertible senior notes, stock options and restricted stock units 5,083,822 4,711,431 Weighted average common shares outstanding — diluted (D) 55,047,087 54,296,321 Net income per share: Basic (A/C) $ 0.47 $ 0.29 Diluted (B/D) $ 0.44 $ 0.28 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, 2024 2023 Stock options 329,749 431,052 Restricted stock units 61,150 355,047 Our redeemable noncontrolling interests are related to our 86 % equity ownership interests in OpenEye, and our 85 % equity ownership interest in Noonlight. 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, 2024 and 2023. 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 the three months ended March 31, 2024 and 2023. We use the treasury stock method when calculating the dilutive impact of the stock options and restricted stock units on net income per share. 20 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 2023 Note 16. Significant Service Providers and Distributors During the three months ended March 31, 2024, our 10 largest revenue service provider partners or distributors accounted for 48 % of our consolidated revenue, as compared to 50 % for the same period in the prior year. 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, 2024 and 2023. One service provider partner in the Alarm.com segment represented more than 10% of accounts receivable as of March 31, 2024 and December 31, 2023. 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, 2024, we recorded a provision for income taxes of $ 2.7 million, resulting in an effective income tax rate of 10.5 %. 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, 2024, our effective tax rate was below the 21.0% statutory rate primarily due to research and development tax credits claimed, the foreign derived intangible income deduction, the release of an unrecognized tax benefit liability due to the closure of the 2018 and 2019 Internal Revenue Service federal income tax examination and tax windfall benefits from employee stock-based compensation, partially offset by the impact of state taxes, federal estimated tax payment interest expense and other nondeductible expenses. 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. 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 and net deferred tax assets of our EBS subsidiary was $ 3.8 million as of December 31, 2023 and decreased to $ 3.7 million as of March 31, 2024. 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 a net decrease to the unrecognized tax benefits liability of $ 1.9 million primarily due to the closure of the 2018 and 2019 Internal Revenue Service federal income tax return examination, partially offset by a liability for research and development tax credits claimed during the three months ended March 31, 2024. 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. Our condensed consolidated balance sheets included an accrual for total interest expense related to unrecognized tax benefits of $ 0.8 million as of December 31, 2023, which decreased to $ 0.6 million as of March 31, 2024. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. 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. On January 25, 2024, the Internal Revenue Service notified us that the income tax examination of our 2018 and 2019 federal income tax returns has been closed. As a result, we owe $ 0.6 million in additional federal taxes, including interest, and recognized a net income tax benefit of $ 1.7 million during the three months ended March 31, 2024. As of March 31, 2024, we did not have material undistributed foreign earnings. We have not recorded a deferred tax liability on the undistributed earnings from our foreign subsidiaries, as such earnings are considered to be indefinitely reinvested. 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 for the periods presented. 21 ALARM.COM HOLDINGS, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) — (Continued) March 31, 2024 and 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 94 % of our revenue, net of intersegment eliminations, for the three months ended March 31, 2024, as compared to 95 % for the same period in the prior year. Our Other segment is focused on researching, developing and offering 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): Three Months Ended March 31, 2024 Alarm.com Other Intersegment Alarm.com Intersegment Other Total SaaS and license revenue $ 137,859 $ 12,485 $ — $ — $ 150,344 Hardware and other revenue 72,364 1,398 ( 686 ) ( 137 ) 72,939 Total revenue 210,223 13,883 ( 686 ) ( 137 ) 223,283 Operating income / (loss) 23,574 ( 4,742 ) ( 135 ) 28 18,725 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 Alarm.com Other Intersegment Alarm.com Intersegment Other Total Assets as of March 31, 2024 $ 1,538,429 $ 64,350 $ ( 115,786 ) $ ( 11 ) $ 1,486,982 Assets as of December 31, 2023 1,477,674 73,621 ( 111,725 ) ( 7 ) 1,439,563 Our SaaS and license revenue for the Alarm.com segment included software license revenue of $ 5.2 million for the three months ended March 31, 2024, as compared to $ 6.2 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, 2024 and 2023. Amortization and depreciation expense was $ 7.1 million for the Alarm.com segment for the three months ended March 31, 2024, as compared to $ 7.4 million for the same period in the prior year. Amortization and depreciation expense was $ 0.2 million for the Other segment for the three months ended March 31, 2024, as compared to $ 0.3 million for the same period in the prior year. Additions to property and equipment were $ 3.9 million for the Alarm.com segment for the three months ended March 31, 2024, as compared to $ 3.0 million the same period in the prior year. Additions to property and equipment were less than $ 0.1 million for the Other segment for each of the three months ended March 31, 2024 and 2023. We derived substantially all revenue from North America for the three months ended March 31, 2024 and 2023. Substantially all of our long-lived assets were in North America as of March 31, 2024 and December 31, 2023. 22